Taxpayers utilizing an impermissible last-in, first-out (LIFO) inventory method may be able to change it into a “permissible” one at a modest tax cost. Rev. Proc. 97-27 provides that the IRS is not precluded from transforming an impermissible method in an earlier year just because a taxpayer alters a submethod within the impermissible method in a later year. As a result, taxpayers should examine their LIFO method and, if permissible, alter it before the IRS challenges it and tries to include the LIFO reserves in income. Moreover, taxpayers utilizing an impermissible LIFO method or submethod that has generated large prior advantages need not recognize them under a cut-off method in the form of a Sec. 481(a) adjustment. A recent Tax Court case, Mountain State Ford Truck Sales, Inc., is discussed to illustrate the significant negative tax consequences of utilizing impermissible LIFO inventory account procedures.
Gaffney D, Davis R, Smith M. Changing an impermissible LIFO method. Tax Adviser [serial online]. April 2000;31(4):242-249. Available from: Business Abstracts with Full Text (H.W. Wilson), Ipswich, MA. Accessed June 20, 2016.