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method of accounting because a taxpayer that experienced rising
acquisition costs would seldom, if ever, experience a decrement of
its LIFO reserves.7 Congress thus recognized that the deferred
built-in gain resulting from using the LIFO method might escape
taxation at the corporate level. In light of this potential for
abuse, section 1363(d) was enacted. See H. Rept. 100-391 (Vol.
II), at 1098 (1987).
After considering the legislative histories of sections 1374
and 1363(d), we conclude that the application of the aggregate
approach (as opposed to the entity approach) of partnerships in
this case better serves Congress’ intent. By enacting sections
1374 and 1363(d), Congress evinced an intent to prevent
corporations from avoiding a second level of taxation on built-in
gain assets by converting to S corporations. Application of the
aggregate approach to section 1363(d) is consistent with Congress’
rationale for enacting this section and operates to prevent a
corporate taxpayer from using the LIFO method of accounting to
permanently avoid gain recognition on appreciated assets. In
contrast, applying the entity approach to section 1363(d) would
potentially allow a corporate partner to permanently avoid paying
a second level of tax on appreciated property by encouraging
7 See, e.g., Staff of Joint Committee on Taxation,
Description of Possible Options to Increase Revenues 189 (J.
Comm. Print 1987) (“[section 1374] may be ineffective in the case
of a LIFO inventory, since a taxpayer experiencing constant
growth may never be required to invade LIFO inventory layers”).
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