In PLR 201034004, the National Office of the Internal Revenue Service issued a favorable ruling to the taxpayer’s proposed issuance of financial statements and supplemental information containing disclosures of a subsidiary's income on a LIFO and non-LIFO basis to the taxpayer's creditors and shareholders. Rulings requested and granted. Taxpayer plans to issue reviewed (as opposed to audited) consolidated financial statements with unique characteristics, and asked the National Office to rule that the LIFO conformity requirements wouldn't be violated under such circumstances. More specifically, The taxpayer asked for a favorable ruling that such financial disclosures will not violate the LIFO conformity rule under §472 and the corresponding regulations. The Service ruled favorably.

Background and Ruling Facts

The taxpayer submitting the request is a newly-formed limited liability company, treated as a U.S. corporation by virtue of a reverse default election under the check-the-box regulations 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 in turn is wholly owned a foreign corporation, which is a lower-tier subsidiary of 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 a foreign country.

In its ruling request, the taxpayer proposes to issue reviewed (as opposed to audited) consolidated financial statements as follows: (i) an 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; (ii) on the balance sheet, inventory and total equity will be reported on a non-LIFO basis; (iii) 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; and (iv) 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. (emphasis added).

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.

Under §472 and Treas. Reg. § 1.472-2(e)(1) , a taxpayer which elects the LIFO inventory method for federal income tax purposes must establish to the IRS's satisfaction 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 tax year for which the method is to be used, for the purpose of a report or statement covering the tax year to shareholders, partners, or other proprietors, or to beneficiaries, or for credit purposes. In general, IRS may require the taxpayer to discontinue the LIFO method if, in a later tax year, it violates the conformity requirement. §472(e). The regs carry detailed rules relating to whether or not a taxpayer is at variance with the Code Sec. 472 LIFO conformity requirement.

Under Treas. Reg. § 1.472-2(e)(1)(i) , a 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 its income, profit, or loss for a tax year in credit statements or financial reports is not considered at variance with the conformity requirement.

Under Treas. Reg. § 1.472-2(e)(1)(ii) , using 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 conformity requirement.

Under Treas. Reg. § 1.472-2(e)(4) , disclosure of the value of inventories on a balance sheet using a method other than LIFO to identify the inventories will not be considered at variance with the conformity requirement. However, the disclosure of income, profit, or loss for a tax year on a balance sheet issued to creditors, shareholders, partners, other proprietors, or beneficiaries is considered at variance with the conformity requirement if such income information is (1) ascertained using an inventory method other than LIFO and (2) is for a tax year for which the LIFO method is used for Federal income tax purposes. Thus, a balance sheet disclosing a taxpayer's net worth, determined as if income had been ascertained using an inventory method other than LIFO, may be at variance with the conformity requirement if the disclosure of net worth is made in a manner that also discloses income, profit, or loss for a tax year. But a disclosure of income, profit, or loss using an inventory method other than LIFO is not considered at variance with the conformity requirement if 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 conformity requirement if made on the face of a supplemental balance sheet labeled as a supplement to the taxpayer's primary presentation of financial position, but only if the 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 its income statement. See Treas. Regs. §1.472-2(d), 1.472-3(e)(3).

Under §472(g) , members of the same group of financially related corporations are treated as a single taxpayer for purposes of the LIFO conformity requirement. A group of financially related corporations is any affiliated group as defined in §1504(a) , determined by substituting 50% for 80% each place it appears, and any other group of corporations that consolidate or combine for purposes of financial statements.

Accordingly, the Service ruled that per §472(g), the taxpayer and its subsidiary are treated as a single taxpayer under the LIFO conformity rule. Therefore, the taxpayer is subject to the LIFO conformity requirement. After reviewing the facts, the Service ruled that the taxpayer’s proposed financial statements and supplemental information, as described below, containing disclosures of Subsidiary's income on a LIFO and non-LIFO basis to taxpayer's creditors and shareholders, are not a LIFO conformity violation under §§472(c), 472(e), 472(g) and corresponding regulations.

More specifically, the Service noted: (i) as to 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. Such treatment is consistent with Treas.Reg. § 1.472-2(e)(1); (ii) on the balance sheet, inventory and total equity will be reported on a non-LIFO basis. This is permissible under Treas. Reg. § 1.472-2(e)(1)(ii); 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 won't 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. This is permitted under Treas. Reg. § 1.472-2(e)(4) .

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. This is allowed under Treas.Reg. § 1.472-2(e)(4) .

Under Reg. § 1.472-2(d)(3) , whether or not the LIFO method, once adopted, may be continued, and the propriety of all computations incidental to using that method, are determined by IRS in connection with its examination of a taxpayer's income tax returns. Thus, in the ruling the Service cautioned that its conclusions shouldn't be construed as a ruling on whether taxpayer's or Subsidiary's use of the LIFO inventory method and relevant computations comply with §472 and corresponding regulations.