Maggie LyonsMaggie Lyons, the Director of Government Relations for LIFO Coalition member National Grocers Association, has written a guest post for Petro Primer:

On October 27, Steve Wamhoff at Citizens for Tax Justice (CTJ) wrote a post entitled “Senators Defend LIFO, a Tax Break that Obama and Camp Want to Repeal” on the Tax Justice Blog that both mischaracterizes LIFO and makes some erroneous misstatements about the LIFO method. As one of the many trade associations in the LIFO Coalition, who represents member companies who rely on this accounting method, we wanted to set the record straight with CTJ on LIFO and explain why more than 125 members of Congress and Senators have publicly backed the LIFO accounting method in the past few months. 
The following are the mischaracterizations perpetrated in the CTJ post:

CTJ CLAIM: The LIFO inventory method is an unwarranted tax subsidy that permits companies to understate income from sales of merchandise that the companies report to the Internal Revenue Service (IRS) compared with the income that companies report to their shareholders.

FACT: LIFO users are actually subject to the conformity rule that requires a company using the LIFO method for federal income tax purposes to use that same method in the company’s financial reports to shareholders and creditors. 

  • CTJ’s claim is a complete misunderstanding of the requirements of LIFO. If one of National Grocers Association’s (NGA) members reports higher earnings from sales of goods in its financial statements compared with its federal income tax returns, because the net income for financial reporting purposes was computed without using LIFO, the company would be barred from using the LIFO method in calculating its income for federal income tax purposes.  

CTJ CLAIM: The LIFO method complicates tax law.

FACT: There is absolutely no basis for CTJ to make this assertion.  

  • The LIFO method is no more complicated than the FIFO method, which is the alternative inventory accounting method that is mostly used by businesses that have deflationary costs in their inventory. LIFO and FIFO do the same thing in different economic environments.  
  • I am confused as to why CTJ would make this claim when there have been very few court rulings or decisions dealing with the LIFO method, it is not a source of controversy with the IRS and LIFO Coalition members spend very little of their time complying with the rules for applying the LIFO method. 

CTJ CLAIM: Because the LIFO method is prohibited under International Financial Reporting Standards (IFRS), the LIFO method and, in particular, the requirement for users of LIFO to use that method for financial reports, is an obstacle to the adoption of IFRS in the U.S.

FACT: The Securities and Exchange Commission has made it clear that if it ever approves the use of IFRS, which remains a big ‘if’, the SEC would follow a “condorsement” approach that has been adopted elsewhere in the world where IFRS has been accepted.

  • I would like to first point out that CTJ’s argument is completely inconsistent with its first assertion that users of LIFO for tax purposes are reporting their earnings to shareholders using a different method than LIFO. 
  • Second, under the “condorsement” approach, while many of the rules in IFRS would be accepted for U.S. financial reporting purposes, deviations from the European version of IFRS would be accepted in the U.S. version of IFRS in order to accommodate differences between U.S. generally accepted accounting principles (GAAP) and IFRS.  
  • LIFO would undoubtedly be one of the areas where the U.S. would diverge from what is permitted under IFRS.  In fact, the Financial Accounting Standards Board (FASB) recently issued an exposure draft proposing to revise US GAAP in the area of accounting for inventories. In that draft, the FASB looked to narrow the differences between US GAAP and IFRS. While the draft proposed significant changes to bring the U.S. into closer conformity with IFRS in accounting for inventories, the FASB endorses the continued use of the LIFO method under US GAAP.  

CTJ CLAIM: LIFO repeal is not retroactive.

FACT: LIFO repeal is undeniably an unfair retroactive tax.

  • This argument is near and dear to all LIFO users’ hearts. Users of the LIFO method acknowledge that when they adopted such method, it was with the expectation that they would eventually have to repay the tax savings from using it. There is no disagreement that the LIFO method is a deferral method, but it not an exclusionary method.  
  • However, users of the LIFO method also understood that the time when they would have to repay the tax savings from the use of LIFO would coincide with their ability to repay that tax savings either because their inventory levels were reduced, deflation occurred or the user went out of business and sold all of its LIFO inventory. If LIFO were to be repealed and users of LIFO were forced to pay tax on their prior LIFO reserve while hopefully remaining in business and maintaining inventory levels, users would be forced to find additional money that is not tied up in their inventories to pay the taxes. 
  • In CTJ’s blog, they overlook the critical reason for the need for LIFO. LIFO enables a user to reinvest in replacement inventory the portion of its profits that results from inflation in order to maintain the same level of inventory and to remain in business without having to raise additional capital.  

This post originally ran in Save LIFO.

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