PLR 200327017: Oil company receives extension to elect LIFO inventory method

Plain-English summary

An oil and gas company used the last-in, first-out (LIFO) inventory method after receiving inventory from a related company, but failed to file Form 970 to elect that method. It had assumed the earlier company's LIFO method carried over automatically with the asset transfer. A later inventory review uncovered the missing form. The IRS found that the company acted reasonably and in good faith and that an extension would not prejudice the government. It granted 30 days to file Form 970 for the earlier tax year. The IRS did not decide whether the company's LIFO use was otherwise proper or whether the transfer qualified under § 351.

Ruling snapshot

• Question: May the company file Form 970 late to elect LIFO inventory accounting?
• Outcome: Approved; a 30-day extension was granted.
• Key authorities: IRC § 472; Treas. Reg. §§ 1.472-3, 301.9100-3; Rev. Rul. 70-564.

Full text (IRS public release)

INTERNAL REVENUE SERVICE
Department of the Treasury
Washington, DC 20224

Number: 200327017
Release Date: 7/3/2003
Index Numbers: 472.01-00
9100.11-00

Person to Contact:

Telephone Number:

Refer Reply to:
CC:ITA:B06/PLR-153890-02
Date:
March 20, 2003

LEGEND:

A
=

B
=

C
=

D
=

Date 1 =

Date 2 =

Date 3 =

Dear :

This letter is in reply to a request, submitted on behalf of A by A's authorized representatives, for an extension of time under § 301.9100-1(c) of the Procedure and Administration Regulations. Specifically, A has requested an extension of time to file a Form 970, Application To Use LIFO Inventory Method, for the year ended Date 1. This ruling request is made in accordance with § 301.9100-3.

A is in the business of refining and marketing oil and gas. A is a member of an affiliated group filing a consolidated Federal income tax return. B is the parent of A. B was also the parent of C, A’s predecessor.
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For the tax year ended Date 2, C properly elected the LIFO method for a portion of its inventory by filing a Form 970 with its tax return. On Date 3, B formed A and C transferred various assets, including inventory, to A in a non-taxable transfer under § 351 of the Internal Revenue Code. For its tax year ended Date 1, and for all subsequent years, A used the LIFO method to account for its inventories, excluding materials and supplies, for both financial reporting purposes and to determine federal taxable income.

Recently, A engaged D to perform a detailed review of its inventory method and to assist it in making an accounting method change to the Inventory Price Index Computation (IPIC) method. In the course of their review, D inquired as to whether the A had filed a Form 970 with its income tax return for the tax year ending Date 1. A determined that it had failed to file a Form 970 with its income tax return for the tax year ended Date 1. A has represented that it was unaware that it was required to file a Form 970 to adopt the LIFO method because it had assumed that when a § 351 transaction is involved the transferee automatically assumes the inventory method previously utilized for the transferred property by the transferor. Consequently, A requests that the Commissioner grant it an extension of time to file a Form 970 for its tax year ended Date 1.

Section 472 of the Internal Revenue Code provides that a taxpayer may use the LIFO method of inventorying goods specified in an application to use such method filed at such time and in such manner as the Secretary may prescribe.

Section 1.472-3 of the Income Tax Regulations provides that the LIFO inventory method may be adopted and used only if the taxpayer files with its income tax return for the tax year as of the close of which the method is first to be used, a statement of its election to use such inventory method. The statement shall be made on Form 970 pursuant to the instructions printed with respect thereto and to the requirements of this section, or in such other manner as may be acceptable to the Commissioner.

Rev. Rul. 70-564, 1970-1 C.B. 109, holds that a corporation that acquires inventories in a transfer under § 351 must file a Form 970 in order to adopt the LIFO inventory method.

Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of the time to make a regulatory election under all subtitles of the Code except subtitles E, G, H, and I, provided that the taxpayer acted reasonably and in good faith and granting relief will not prejudice the interests of the Government. Section 301.9100-1(b) defines a regulatory election as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin. An election includes an application for relief in respect of tax and a request to adopt, change, or retain an accounting method or accounting period.
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Section 301.9100-2 sets forth rules governing automatic extensions for regulatory elections. If the provisions of § 301.9100-2 do not apply to a taxpayer's situation, the provisions of § 301.9100-3 may apply.

Section 301.9100-3 sets forth the standards that the Commissioner will use in determining whether to grant an extension of time to make a regulatory election. It also sets forth information and representations that must be furnished by the taxpayer to enable the Internal Revenue Service to determine whether the taxpayer has satisfied these standards. The standards to be applied are whether the taxpayer acted reasonably and in good faith and whether granting relief would prejudice the interests of the Government.

Under § 301.9100-3(b)(1)(i), a taxpayer that applies for relief for failure to make an election before the failure is discovered by the Service ordinarily will be deemed to have acted reasonably and in good faith. However, pursuant to § 301.9100-3(b)(3), a taxpayer will not be considered to have acted reasonably and in good faith if the taxpayer seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under § 6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested or if the taxpayer was informed in all material respects of the required election and related tax consequences and chose not to make the election. Furthermore, a taxpayer ordinarily will not be considered to have acted reasonably and in good faith if the taxpayer uses hindsight in requesting relief.

Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all tax years affected by the regulatory election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Likewise, if the tax consequences of more than one taxpayer are affected by the election, the Government's interests are prejudiced if extending the time for making the election may result in the affected taxpayers, in the aggregate, having a lower tax liability than if the election had been timely made.

Section 301.9100-3(c)(1)(ii) provides that the interests of the Government are ordinarily prejudiced if the tax year in which the regulatory election should have been made or any tax year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment before the taxpayer receives the ruling granting relief under § 301.9100-1(c).

The information and representations furnished by A establish that it has acted reasonably and in good faith in this request. Furthermore, granting an extension will not prejudice the interests of the Government. Accordingly, an extension of time is hereby granted for A to file Form 970 for the tax year ended Date 1. This extension shall be for a period of 30 days from the date of this ruling. Please attach a copy of this ruling to the Form 970 when it is filed.
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No opinion is expressed as to the application of any other provisions of the Code or the regulations which may be applicable. Specifically, no opinion is expressed in regard to A’s use of the LIFO method and as to whether A acquired the inventory at issue in a § 351 transaction.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

Pursuant to a power of attorney on file in this office, copies of this ruling are being sent to A's authorized representatives.

Sincerely yours,

Lewis Fernandez
Acting Associate Chief Counsel
(Income Tax & Accounting)