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(3) LIFO recapture amount.–-For purposes of this
subsection, the term “LIFO recapture amount” means the
amount (if any) by which–-
(A) the inventory amount of the
inventory asset under the first-in, first-out
method authorized by section 471, exceeds
(B) the inventory amount of such assets
under the LIFO method.
Any increase in tax resulting from the application of section
1363(d) is required to be paid in four equal installments beginning
in the last taxable year for which the corporation was a C
corporation. See sec. 1363(d)(2).
In enacting section 1363(d), Congress was concerned that a
corporation maintaining its inventory under LIFO might circumvent
the built-in gain rules of section 1374 to the extent the
corporation did not liquidate its LIFO layers during the 10 years
following its conversion from a C corporation to an S corporation.5
5 H. Rept. 100-391 (Vol. II), at 1098 (1987), in relevant
part, states:
The committee is concerned that taxpayers
using the LIFO method may avoid the built-in
gain rules of section 1374. It believes that
LIFO method taxpayers, which have enjoyed the
deferral benefits of the LIFO method during
their status as a C corporation, should not
be treated more favorably than their FIFO
(first-in, first-out) counterparts. To
eliminate this potential disparity in
treatment, the committee believes it is
appropriate to require a LIFO taxpayer to
recapture the benefits of using the LIFO
method in the year of conversion to S status.
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