Rev. Rul. 87-49

1987-1 C.B. 156, 1987-25 I.R.B. 6.

INVENTORIES; LIFO; SUBSIDIARY; CONSOLIDATED FINANCIAL STATEMENTS

Published: June 22, 1987

Section 472.-Last-In, First-Out Inventories, 26 CFR 1.472-2: Requirements incident to adoption and use of LIFO inventory method

  Inventories; LIFO; subsidiary; consolidated financial statements. For tax years beginning before July 19, 1984, the Service will not litigate the issue of whether the consolidated financial statements of an affiliated group that converts the last-in, first-out inventory identification method of accounting of a subsidiary to a different inventory identification method violate sections 472(c) and (e)(2) of the Code. Rev. Rul. 70-457 obsoleted.

ISSUE

  If the consolidated financial statements of an affiliated group that were issued for years beginning before July 19, 1984, convert the last-in, first-out inventory identification method of accounting (LIFO) of a subsidiary to a different inventory identification method, do the statements violate sections 472(c) and (e)(2) of the Internal Revenue Code? This revenue ruling obsoletes Rev. Rul. 70-457, 1970-2 C.B. 109.

FACTS

  P is a parent corporation of a affiliated group of corporations that file consolidated federal income tax returns. § and X are wholly owned subsidiares of P and join in the consolidated federal income tax returns filed by P. For tax years beginning prior to July 19, 1984, P and X used the first-in, first- out inventory identification method of accounting (FIFO) and the lower of cost or market inventory valuation method for purposes of the affiliated group's consolidated federal income tax returns. S, however, used the LIFO method for purposes of the affiliated group's consolidated federal income tax returns. § also used the LIFO method for its financial statements that were issued for purposes of reports to creditors and to P in its capacity as a shareholder of S. For the financial statements of the consolidated group that were issued for credit and stockholder report purposes, the affiliated group, including S, used the FIFO method and the lower of cost or market method.

LAW

  Section 472(c) of the Internal Revenue Code requires a taxpayer using the LIFO method to use no other procedure in inventorying its goods to ascertain the income, profit, or loss of the first tax year for which the LIFO method is to be used, for the purpose of a report or statement covering such tax year to shareholders, partners, or other proprietors, or to beneficiaries, or for credit purposes. Section 472(e) extends this conformity requirement to subsequent tax years.

  Rev. Rul. 70-457 provides that in order to comply with the conformity requirement of sections 472(c) and (e) of the Code a corporation that uses the LIFO method for federal income tax purposes must also use the LIFO method with respect to that corporation's inventories to the extent its inventories are included in the consolidated financial statements of any other corporation. Rev. Rul. 70-457 revoked Rev. Rul. 69-17, 1969-1 C.B. 143, effective for any consolidated financial statements issued on and after August 31, 1971. Rev. Rul. 69-17 had held that the use of the LIFO method by a subsidiary member of an affiliated group did not require the group to use the LIFO method for the inventories of the subsidiary in preparing consolidated financial statements.

  In Insilco Corp. v. Commissioner, 73 T.C. 589 (1979), nonacq., 1982-2 C.B. 3, nonacq. withdrawn* page 41, this Bulletin, aff'd mem., 659 F.2d 1059 (2d Cir. 1981), three subsidiaries used the LIFO inventory method to compute their income for their financial reports. The subsidiaries issued these financial reports to their parent company. The parent company, however, reported the subsidiaries' earnings in its consolidated financial statements using a non-LIFO method. The Tax Court held that this situation did not violate the LIFO conformity provisions of section 472(e) of the Code.

  Section 95(a) of the Tax Reform Act of 1984 (the Act), 1984-3 (Vol. 2) C.B. 1, added subsection (g) to section 472 of the Code. Section 472(g)(1), effective for tax years beginning after July 18, 1984, provides that all members of the same group of financially related corporations shall generally be treated as one taxpayer for purposes of section 472(c) and 472(e)(2). Section 472(g)(2) defines the term 'group of financially related corporations' as (A) any affiliated group as defined in section 1504 determined by substituting '50 percent' for '80 percent' each place it appears in section 1504(a) and without regard to section 1504(b), and (B) any other group of corporations which consolidate or combine for purposes of financial statements.

  Rev. Proc. 85-54, 1985-2 C.B. 734, provides procedures applicable to taxpayers that use the LIFO method and that issued nonconforming financial statements under section 472(g) of the Code. These taxpayers may use those procedures to automatically discontinue the use of the LIFO method for their first tax year beginning after July 18, 1984.

HOLDING

  For tax years beginning before July 19, 1984, the Internal Revenue Service will not litigate the issue presented in this revenue ruling. Accordingly, the nonacquiescence in the Insilco case has been withdrawn. See page 41 this Bulletin.

EFFECT ON OTHER DOCUMENTS

  Rev. Rul. 70-457 is obsoleted.

Rev. Rul. 87-49, 1987-1 C.B. 156, 1987-25 I.R.B. 6