PLR 1034004: Proposed mixed LIFO and non-LIFO disclosures do not violate conformity rules

Plain-English summary

The IRS considered whether a corporation could issue financial statements showing a subsidiary’s income on both LIFO and non-LIFO bases while showing certain inventory and equity information on a non-LIFO basis. The IRS ruled that the proposed financial statements and supplemental information would not violate the LIFO conformity requirements under §§ 472(c), (e), and (g). It allowed the proposed disclosures of inventory values, equity information, and supplemental footnotes under the applicable regulations. The ruling did not decide whether the taxpayer or subsidiary could continue using the LIFO method or whether their related computations were proper, because those matters would be determined during examination.

Ruling snapshot

• Question: Would the taxpayer’s proposed mixed LIFO and non-LIFO financial disclosures violate the LIFO conformity requirement?
• Outcome: Approved
• Key authorities: IRC §§ 472(c), 472(e), and 472(g); Treas. Reg. §§ 1.472-2 and 1.472-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201034004 Third Party Communication: None
Release Date: 8/27/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 472.05-00 -----------------------, ID No. ----------
Telephone Number:
---------------------
-------------------------------------------- Refer Reply To:
------------------------------------ CC:ITA:B06
--------------------------- PLR-101965-10
Date:
-------------------------------------------------- May 19, 2010

Legend:

Taxpayer = -------------------------------------------------------------------------------

Subsidiary = -------------------------------------------------------------------------------

Company = -----------------------------------------------------------
Foreign Parent = ----------------------------------------------------------------
Foreign Country = ------------

Dear --------------:

This letter is in response to the letter submitted by Taxpayer’s authorized
representatives in which a ruling was requested regarding the conformity requirements
of sections 472(c), 472(e), and 472(g) of the Internal Revenue Code. Specifically, the
ruling requested is that the proposed issuance by Taxpayer of financial statements
and supplemental information, which contains disclosures of Subsidiary’s income on a
last-in, first-out (“LIFO”) and non-LIFO basis, to Taxpayer’s shareholders and
creditors, including its foreign parent, Foreign Parent, is not a LIFO conformity violation
under I.R.C. §§ 472(c), (e), and (g) and the regulations thereunder.

Taxpayer, a newly-formed limited liability company, treated as a U.S. corporation for
U.S. federal tax purposes, is the common parent of an affiliated group of corporations
that file a consolidated federal income tax return on a calendar year basis. Taxpayer
is wholly owned by Company, a foreign corporation, which is a lower-tier subsidiary of
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Foreign Parent. Subsidiary, also a U.S. corporation, is a wholly-owned subsidiary of
Taxpayer and is a member of Taxpayer’s consolidated group. Subsidiary uses the
LIFO method to account for its inventory for U.S. federal income tax purposes.
Foreign Parent is a corporation organized under the laws of Foreign Country.

Taxpayer proposes to issue reviewed (as opposed to audited) consolidated financial
statements as follows: On the income statement the gross margin, earnings before
interest and taxes, earnings before taxes, and net income of Subsidiary will be
reported on a LIFO basis.

On the balance sheet, inventory and total equity will be reported on a non-LIFO basis.
In the equity section of the balance sheet, retained earnings will be reported on a LIFO
basis and other comprehensive income will include a LIFO offset. Other
comprehensive income will be reported as a single line item. A breakdown of other
comprehensive income will not appear on the face of the balance sheet, but will
appear in a footnote to the financial statements labeled as “Supplemental Information
– Detail of Changes in Equity.” All footnotes to the financial statements will be
presented together and will accompany the income statement in a single report.

On the statement of changes in equity, total equity will be reported on a non-LIFO
basis. Retained earnings and net income will be reported on a LIFO basis. The
change in other comprehensive income, which includes the LIFO offset, will be
reported as a single line item in the calculation of total equity instead of presenting the
components of other comprehensive income as separate line items.

Section 472(c) of the Code provides that a taxpayer that elects to use the LIFO
inventory method for federal income tax purposes must establish to the satisfaction of
the Commissioner that it has used no method other than LIFO in inventorying goods
specified in its LIFO election to ascertain income, profit, or loss for the first taxable
year for which the method is to be used, for the purpose of a report or statement
covering such taxable year to shareholders, partners, or other proprietors, or to
beneficiaries, or for credit purposes.

Section 472(e) provides:

   If a taxpayer, having complied with subsection (a), uses the method
   described in subsection (b) for any taxable year, then such method shall
   be used in all subsequent taxable years unless--

          (1) with the approval of the Secretary a change to a
          different method is authorized; or,

          (2) the Secretary determines that the taxpayer has used for
          any such subsequent taxable year some procedure other

PLR-101965-10 3

         than that specified in paragraph (1) of subsection (b) in
         inventorying the goods specified in the application to
         ascertain the income, profit, or loss of such subsequent
         taxable year for the purpose of a report or statement
         covering such taxable year (A) to shareholders, partners, or
         other proprietors, or beneficiaries, or (B) for credit
         purposes; and requires a change to a method different from
         that prescribed in subsection (b) beginning with such
         subsequent taxable year or any taxable year thereafter.

  If paragraph (1) or (2) of this subsection applies, the change to, and the
  use of, the different method shall be in accordance with such regulations
  as the Secretary may prescribe as necessary in order that the use of
  such method may clearly reflect income.

Section 472(g) provides that all members of the same group of financially related
corporations are treated as a single taxpayer for purposes of sections 472(c) and
(e)(2). The term “group of financially related corporations” means any affiliated group
as defined in section 1504(a), determined by substituting “50” percent for 80 percent
each place it appears, and any other group of corporations that consolidate or
combine for purposes of financial statements.

Section 1.472-2(e)(1) of the Income Tax Regulations provides, in part:

  The taxpayer must establish to the satisfaction of the Commissioner that
  the taxpayer, in ascertaining the income, profit, or loss for the taxable
  year for which the LIFO inventory method is first used, or for any
  subsequent taxable year, for credit purposes or for purposes of reports to
  shareholders, partners, or other proprietors, or to beneficiaries, has not
  used any inventory method other than that referred to in § 1.472-1 or at
  variance with the requirement referred to in § 1.472-2(c).

Section 1.472-2(e)(1)(i) provides that the taxpayer’s “use of an inventory method other
than LIFO for purposes of ascertaining information reported as a supplement to or
explanation of the taxpayer’s primary presentation of the taxpayer’s income, profit, or
loss for a taxable year in credit statements or financial reports” is not considered at
variance with the requirements of § 1.472-2(e)(1).

Section 1.472-2(e)(1)(ii) provides that the “use of an inventory method other than LIFO
to ascertain the value of the taxpayer’s inventory of goods on hand for purposes of
reporting the value of such inventories as assets” is not considered at variance with
the requirements of § 1.472-2(e)(1).

Section 1.472-2(e)(4) provides:
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  Under paragraph (e)(1)(ii) of this section, the use of an inventory method
  other than LIFO to ascertain the value of the taxpayer’s inventories for
  purposes of reporting the value of the inventories as assets is not
  considered the ascertainment of income, profit, or loss and therefore is
  not considered at variance with the requirement of paragraph (e)(1) of
  this section. Therefore, a taxpayer may disclose the value of inventories
  on a balance sheet using a method other than LIFO to identify the
  inventories, and such a disclosure will not be considered at variance with
  the requirement of paragraph (e)(1) of this section. However, the
  disclosure of income, profit, or loss for a taxable year on a balance sheet
  issued to creditors, shareholders, partners, other proprietors, or
  beneficiaries is considered at variance with the requirement of paragraph
  (e)(1) of this section if such income information is ascertained using an
  inventory method other than LIFO and such income information is for a
  taxable year for which the LIFO method is used for Federal income tax
  purposes. Therefore, a balance sheet that discloses the net worth of a
  taxpayer, determined as if income had been ascertained using an
  inventory method other than LIFO, may be at variance with the
  requirement of paragraph (e)(1) of this section if the disclosure of net
  worth is made in a manner that also discloses income, profit, or loss for a
  taxable year.

  However, a disclosure of income, profit, or loss using an inventory
  method other than LIFO is not considered at variance with the
  requirement of paragraph (e)(1) of this section if the disclosure is made
  in the form of either a footnote to the balance sheet or a parenthetical
  disclosure on the face of the balance sheet. In addition, an income
  disclosure is not considered at variance with the requirement of
  paragraph (e)(1) of this section if the disclosure is made on the face of a
  supplemental balance sheet labelled as a supplement to the taxpayer’s
  primary presentation of financial position, but only if, consistent with the
  rules of paragraph (e)(3) of this section, such a disclosure is clearly
  identified as a supplement to or explanation of the taxpayer’s primary
  presentation of financial income as reported on the face of the taxpayer’s
  income statement.

Section 1.472-2(e)(3) provides specific rules relating to the exception to the conformity
requirement for supplemental or explanatory information.

Section 1.472-2(e)(3)(i) provides:

  Information reported on the face of a taxpayer’s financial income
  statement for a taxable year is not considered a supplement to or

PLR-101965-10 5

   explanation of the taxpayer’s primary presentation of the taxpayer’s
   income, profit, or loss for the taxable year in credit statements or
   financial reports. For purposes of paragraph (e)(3) of this section, the
   face of an income statement does not include notes to the income
   statement presented on the same page as the income statement, but
   only if all notes to the financial income statement are presented together.

Section 1.472-2(e)(3)(ii) provides, in part:

   Information reported in notes to a taxpayer’s financial income statement
   is considered a supplement to or explanation of the taxpayer’s primary
   presentation of income, profit, or loss for the period covered by the
   income statement if all notes to the financial income statement are
   presented together and if they accompany the income statement in a
   single report.

Section 1.472-2(e)(3)(iii) provides, in part:

   Information reported in an appendix or supplement to a taxpayer’s
   financial income statement is considered a supplement to or explanation
   of the taxpayer’s primary presentation of income, profit, or loss for the
   period covered by the income statement if the appendix or supplement
   accompanies the income statement in a single report and the information
   reported in the appendix or supplement is clearly identified as a
   supplement to or explanation of the taxpayer’s primary presentation of
   income, profit, or loss as reported on the face of the taxpayer’s income
   statement ...

   For purposes of paragraph (e)(3)(iii) of this section, information is
   considered to be clearly identified as a supplement to or explanation of
   the taxpayer’s primary presentation of income, profit, or loss as reported
   on the face of the taxpayer’s income statement if the information either--

          (A) Is reported in an appendix or supplement that contains
          a general statement identifying all such supplemental or
          explanatory information;

          (B) Is identified specifically as supplemental or explanatory
          by a statement immediately preceding or following the
          disclosure of the information;

          (C) Is disclosed in the context of making a comparison to
          corresponding information disclosed both on the face of the

PLR-101965-10 6

         taxpayer’s income statement and in the supplement or
         appendix; or

         (D) Is a disclosure of the effect on an item reported on the
         face of the taxpayer’s income statement of having used the
         LIFO method.

  For example, a restatement of cost of goods sold based on an inventory
  method other than LIFO is considered to be clearly identified as
  supplemental or explanatory information if the supplement or appendix
  containing the restatement contains a general statement that all
  information based on such inventory method is reported in the appendix
  or supplement as a supplement to or explanation of the taxpayer’s
  primary presentation of income, profit, or loss as reported on the face of
  the taxpayer’s income statement.

Under § 472(g), Taxpayer and Subsidiary are treated as a single taxpayer for
purposes of the LIFO conformity requirement contained in §§ 472(c) and (e)(2).
Consequently, since Subsidiary’s inventory is accounted for using the LIFO method for
U.S. federal income tax purposes, Taxpayer is subject to the LIFO conformity
requirements in §§ 472(c) and (e)(2) and the regulations thereunder.

On Taxpayer’s proposed income statement, the gross margin, earnings before interest
and taxes, earnings before taxes, and net income of Subsidiary will be reported on a
LIFO basis. Taxpayer’s proposed income statement reporting Subsidiary’s income,
profit, or loss on a LIFO basis is in accordance with § 1.472-2(e)(1) and does not
violate the LIFO conformity requirements.

On the balance sheet, inventory will be reported on a non-LIFO basis. Taxpayer’s
proposed balance sheet reporting the value of Subsidiary’s inventories as assets on a
non-LIFO basis is allowed under § 1.472-2(e)(1)(ii) and does not violate the conformity
requirement.

In the equity section of the balance sheet, total equity will be reported on a non-LIFO
basis; however, retained earnings will be reported on a LIFO basis and other
comprehensive income will include a LIFO offset. Other comprehensive income will
be reported as a single line item. A breakdown of other comprehensive income will
not appear on the face of the balance sheet, but will appear in a footnote to the
financial statements labeled as “Supplemental Information – Detail of Changes in
Equity.” All footnotes to the financial statements will be presented together and will
accompany the income statement in a single report. Under § 1.472-2(e)(4), the
disclosure of net worth on a non-LIFO basis “may be at variance with the requirement
of paragraph (e)(1) of this section if the disclosure of net worth is made in a manner
that also discloses income, profit, or loss for a taxable year.” However, § 1.472-2(e)(4)
PLR-101965-10 7

also provides that “a disclosure of income, profit, or loss using an inventory method
other than LIFO is not considered at variance with the requirement of paragraph (e)(1)
of this section if the disclosure is made in the form of either a footnote to the balance
sheet or a parenthetical disclosure on the face of the balance sheet.” This proposed
reporting is allowed under § 1.472-2(e)(4) and does not violate the conformity
requirement.

On the statement of changes in equity, total equity will be reported on a non-LIFO
basis. Retained earnings and net income will be reported on a LIFO basis. The
change in other comprehensive income, which includes the LIFO offset, will be
reported as a single line item in the calculation of total equity instead of presenting the
components of other comprehensive income as separate line items. As with
Taxpayer’s proposed reporting of net equity on the balance sheet, this proposed
reporting is allowed under § 1.472-2(e)(4) and does not violate the conformity
requirement.

Based upon the facts submitted, and the representations made by Taxpayer, it is ruled
that, for federal income tax purposes, Taxpayer’s proposed financial statements and
supplemental information, as described in this ruling letter, which contain disclosures
of Subsidiary’s income on a LIFO and non-LIFO basis, to Taxpayer’s creditors and
shareholders, including Foreign Parent, are not a LIFO conformity violation under
§§ 472(c), (e), (g), and the regulations thereunder.

As provided under § 1.472-3(d), whether or not the LIFO method, once adopted, may
be continued, and the propriety of all computations incidental to the use of such
method, will be determined by the Commissioner in connection with the examination of
the taxpayer's income tax returns. Accordingly, this letter should not be construed as
a ruling as to whether Taxpayer’s or Subsidiary’s use of the LIFO inventory method
and relevant computations are in accordance with § 472 and regulations thereunder.

Except as expressly provided herein, no opinion is expressed or implied concerning
the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

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

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement
by attaching a statement to their return that provides the date and control number of
the letter ruling.
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The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.

                                  Sincerely,



                                  Roy A. Hirschhorn
                                  Chief, Branch 6
                                  (Income Tax & Accounting)

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