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concluded that under either theory, there was an increase in
petitioner’s tax liability, payable in four equal annual
installments.4
OPINION
Use of LIFO, vis-a-vis FIFO, often allows a taxpayer the
benefit of income deferral, particularly in periods of rising
inventory costs and stable or growing inventory stock. The amount
of cumulative income deferral obtained through the use of the LIFO
method of accounting is represented in a taxpayer’s LIFO reserve.
Section 1363(d) mandates recapture of the LIFO reserve upon
the conversion of a C corporation to an S corporation. In relevant
part, section 1363(d) provides:
SEC. 1363(d). Recapture of LIFO Benefits.--
(1) In general.–-If–-
(A) an S corporation was a C corporation
for the last taxable year before the first
taxable year for which the election under
section 1362(a) was effective, and
(B) the corporation inventoried goods
under the LIFO method for such last taxable
year,
the LIFO recapture amount shall be included in the gross
income of the corporation for such last taxable year (and
appropriate adjustments to the basis of the inventory
shall be made to take into account the amount included in
gross income under this paragraph).
4 Pursuant to respondent’s alternative position, the tax
deficiency for the 4 taxable years under consideration is
$408,300.
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