United States

Proposed regulations on IPIC pooling for dollar-value LIFO


On Nov. 25, the IRS and Treasury Department (hereinafter, the government) issued proposed regulations for dollar-value last-in, first-out (LIFO) inventory pools that use the inventory price index computation (IPIC) pooling method. In general, the regulations formalize the government’s position that taxpayers may not combine manufactured inventory and inventory purchased for resale into one inventory pool, regardless of the pooling method.

The government indicated that it became aware of confusion concerning how the IPIC pooling rules applied in circumstances when a taxpayer is engaged in both manufacturing or processing and wholesaling or retailing activities.

The proposed regulations contain the following items:

  • Taxpayers may not comingle IPIC pools for manufacturing activities and for retail, wholesale and distribution activities, consistent with the general LIFO pooling rules.
  • The 5-percent rule contained within the LIFO regulations is applied separately in establishing a miscellaneous IPIC inventory pool for manufactured goods and a miscellaneous IPIC pool for resale goods, if applicable.
  • Taxpayers apply the 5-percent rule according to whether their trade or business is manufacturing with some reselling activity (e.g., a manufacturer who purchases similar goods to cover a production shortage) or is reselling with some manufacturing activity (e.g., a reseller who manufactures similar goods to cover a shipment shortage).
    • From the perspective of a manufacturer with some resale activity, if the miscellaneous IPIC pool for manufactured goods is less than 5 percent of the total inventory value of all dollar-value pools, the miscellaneous IPIC pool for manufactured goods may be combined with the largest IPIC pool for manufactured goods. However, the miscellaneous IPIC pool of resale goods may not be combined with any other IPIC pool.
    • The opposite is true from the perspective of a reseller with some manufacturing activity. In this case, the reseller may combine IPIC pools for resale goods twice—once to form a miscellaneous pool and once more to combine that miscellaneous pool with the largest IPIC pool for resale goods. However, the reseller may only combine IPIC pools for manufactured goods once to form a miscellaneous pool.
  • In addition, the proposed regulations make minor updates to the current regulations to reflect changes in the Bureau of Labor Statistics table numbers and to remove an obsolete exception relating to the discontinued Department Store Inventory Price Indexes.

The proposed regulations impact taxpayers with both reselling and manufacturing activities who elected IPIC pooling and combined similar inventories into one pool. Moreover, the proposed regulations likely impact resellers more than manufacturers, since manufacturers generally prefer natural business pooling over IPIC pooling.

As part of the proposed regulations, the government is requesting comments. Potential comments should focus on the 5-percent rule as it is a method of accounting and since the 5-percent rule must be redetermined every three years, whether the government should permit taxpayers to use the automatic method change procedures to secure consent of the commissioner in the event that they fail to meet the 5-percent rule in a subsequent redetermination year.

As a practical matter, the 5-percent rule may present potential risks to taxpayers who do not carefully monitor their inventory mix on a regular basis. Therefore, if taxpayers are considering the adoption of an IPIC method or submethod, such as the 5-percent rule, they should contact their tax advisors and discuss their options.


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