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THIS BOOKLET CONTAINS BOTH
FILING INSTRUCTIONS AND PUBLICATION UPDATE
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Federal Income Taxation of
Inventories
Publication 304
Release 46
HIGHLIGHTS
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Volume 1 has been completely updated to reflect the most current information regarding federal income taxation of inventories including the
addition of a new chapter 14A devoted specifically to retail, Inventory
Price Index Computation (“IPIC"),
and simplified LIFO pricing methods.
Volume 2 has been updated to include
the complete text of Revenue Procedures 2002-9, 2002-17, 2002-18, and
2002-19.
This release includes a Special Legislative Alert Pamphlet which provides
a summary and in-depth analysis of
Public Law 107-47, The Job Creation
and Worker Assistance Act of 2002.
Author Leslie J. Schneider continues his
thorough coverage of new developments in
the field of federal income taxation of inventories with this Release Number 46. Topics
covered include:
u IPIC ELIGIBILITY RULES
Under the prior IPIC regulations, the election
September 2002
of IPIC was an “all or nothing" choice for
each taxpayer. Thus, if a taxpayer elected to
use the IPIC method for a portion of its LIFO
inventories, it was required to use IPIC for
all of its LIFO inventories. The new IPIC
regulations issued in 2002 permit a more selective use of IPIC. Thus, under the new
IPIC regulations, a taxpayer may limit its use
of IPIC to all dollar-value LIFO inventories
within one trade or business. However, a taxpayer may continue to use an internal price
index method for dollar-value LIFO inventories contained in a separate trade or business.
(See § 14A.02[2].)
u ASSIGNMENT OF ITEMS TO BLS INDEX
CATEGORIES
The previous version of the IPIC regulations
provided for a complex series of rules that
a taxpayer was required to follow in assigning items of inventory to particular BLS
index categories. These rules led to considerable confusion and negative comments concerning the IPIC method. In the proposed
IPIC regulations issued in 2000, these rules
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would have been totally eliminated. However, commentators indicated to the Service
that certain industries found the prior item
assignment rules helpful and asked that such
rules be reinstated for use on an optional
basis. The Service agreed and reinstated
these rules as an optional method in the 2002
final IPIC regulations. These optional rules
are described in the 2002 regulations as the
10 percent method. (See § 14A.04.)
u COMPUTATION OF INDEXES
Under the prior IPIC regulations, it was
unclear whether the computation of the annual IPIC indexes should be based on double-extension or link-chain principles. However, the final regulations make it clear that
taxpayers may choose either approach.
Moreover, use of the link-chain method under IPIC does not require the same showing
of impracticability of the double-extension
method as under an internal indexing method.
(See § 14A.05.)
u IPIC POOLING RULES
A number of election considerations should
be taken into account in deciding whether
a taxpayer using or adopting the IPIC
method should also adopt the IPIC pooling
rules. In the case of retailers, the alternative
to the special IPIC pooling rules is the multiple pooling rules applicable to retailers using
an internal indexing method. For the most
part, considerations similar to those for retailers ought to be equally applicable to
wholesalers. The pooling considerations applicable to manufacturers are generally more
complex. (See § 14A.06.)
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Copyright © 2002 Matthew Bender & Company, Inc., a member of the LexisNexis Group.
Publication 304, Release 46, September 2002
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