Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-17

1969-1 C.B. 143

IRS Headnote

An affiliated group may use the FIFO method of valuing the inventory of one of its members in preparing consolidated financial statements for certain purposes even though that member used the LIFO method for income tax purposes.

Full Text

Rev. Rul. 69-17

Advice has been requested whether, under the circumstances described below, the fact that the inventories of a subsidiary corporation are valued under the last-in, first-out (LIFO) inventory method for Federal income tax purposes will prevent the use of the first-in, first-out (FIFO) inventory method, using the lower of cost or market, as the basis for valuing such inventories in preparing consolidated financial statements for credit purposes or for reporting to stockholders of the parent corporation of the affiliated group of which the subsidiary corporation is a member.

X and its subsidiaries Y and Z are an affiliated group of corporations filing consolidated returns for Federal income tax purposes. In filing the consolidated Federal income tax returns of the affiliated group, X and Y value their inventories on the FIFO inventory method using the lower of cost or market and Z values its inventories under the LIFO inventory method. For credit purposes, as well as for reports to its own stockholders, Z prepares its own financial statements by valuing its inventories on the LIFO inventory method. However, in preparing the financial statements of the consolidated group for credit purposes as well as for the purpose of reporting to the stockholders of X, all of the inventories of the consolidated group are valued on the FIFO inventory method using the lower of cost or market.

Section 472(c) of the Internal Revenue Code of 1954 requires the use of the LIFO inventory method for the purpose of financial statements and reports where such method is used for Federal income tax purposes.

Section 1.472-2(e) of the Income Tax Regulations provides that the taxpayer shall establish to the satisfaction of the Commissioner that the taxpayer, in ascertaining income, profit, or loss for the taxable year for which the LIFO inventory method is first used or for any subsequent taxable years, for credit purposes or for the purpose of reports to shareholders, partners, or other proprietors, or to beneficiaries, has not used any inventory method other than that referred to in section 1.472-1 of the regulations or at variance with the requirement referred to in section 1.472-2(c) of the regulations.

While the requirements of section 472(c) of the Code have application to the statements of Z, using the LIFO inventory method of valuing its inventories, they do not require that the consolidated statements of the affiliated group be restricted in the same manner. Since Z used the LIFO inventory method for the purposes of its own financial statements and reports to its stockholders, consistent with the method used for Federal income tax purposes, the provisions of section 472(c) of the Code are considered to have been satisfied.

Accordingly, in the instant case, the use of the LIFO inventory method by Z, for Federal income tax purposes, does not require that the consolidated group use the LIFO inventory method of valuing the inventories of Z in preparing consolidated financial statements to be issued for credit purposes or for reporting to stockholders.