2002 IPIC LIFO REGULATIONS:

The IRS issued modified IPIC Method LIFO Regulations on January 9, 2002. The paragraphs below are a synopsis of the highlights of its provisions.

GREAT NEWS

100 % inflation - I don’t believe anyone realistically expected the allowable percentage of CPI or PPI inflation to increase from 80% to 100% although everyone favored this. This should encourage greater use of the IPIC method and LIFO in general.

GOOD NEWS

Use of 10% categories and BLS weights - The use of the Ten Percent method was mandatory under the old Regulations but is now optional. Taxpayers now have the option of using only their actual FIFO inventory balances to calculate weighted average pool indexes. This reduces the complexity of pool index calculations for companies that can readily sort their inventories into most-detailed CPI or PPI categories. Taxpayers may reduce their inventory sorting task by electing to use the Ten Percent method.

Elimination of requirement to use cost complements - This is a change greatly welcomed by most companies to whom this applied under the old Regulations.

Use of CPI categories by retailers - Many retailers using CPI categories who do not use the Retail Inventory Method would have been forced to use PPI categories under the proposed Regulations. Under the final 2002 Regulations these companies can still use CPI categories and can do so without making cost complement adjustments that the old Regulations required. The use of PPI categories for these retailers is burdensome because the CPI categories correlate better with their inventory mix than the PPI categories and there are fewer CPI categories than PPI categories applicable to these retailers.

IPIC method can be used by retailers eligible to use Department Store Inventory Price Indexes - These companies can now use the IPIC method for either their entire inventory or just for those inventories for which there are no Department Store Inventory Price Indexes. These options present some significant tax savings opportunities based on calculations we have done for companies switching to the IPIC method.

NOT SO GOOD NEWS

Weighted Harmonic Mean - Since the great majority of taxpayers have used the Weighted Arithmetic Mean in the past, this will require a change for most taxpayers. The new method always produces less inflation or greater deflation than using the Weighted Arithmetic Mean method. The decrease in LIFO benefits this produces is relatively small for most taxpayers (much less than the extra benefit using 100% rather than 80% produces) however this difference will be significant for some. A likely source of confusion will be the requirement that the Weighted Harmonic Mean is to be used only for pool index FIFO dollars weighting calculations and not for the Category Index BLS weighting calculations required for calculations using the 10 percent method.

Change in definition of 10% categories - Most taxpayers who continue to use the Ten Percent method under the 2002 Regulations are required to sort their inventories in greater detail. This is because the 2002 Regulations definition of the 10% categories threshold is the sum of each pool’s FIFO inventory values. The old Regulations specified that the denominator for the 10% categories was "total inventory value" which almost all taxpayers interpreted to mean either the sum of their FIFO inventory values, the sum of their FIFO inventory values on LIFO or the sum of their FIFO inventory values for which the IPIC method was used. A small minority of taxpayers used the sum of each pool’s FIFO inventory values as the 10% categories threshold. Not only does the revised definition of 10% categories require more detailed sorting, it makes this process more complicated because instead of there being one threshold amount for all inventories there will now be as many different 10% thresholds as there are pools.

You will need the Adobe Acrobat Reader to view the pdf files listed below. If you do not have the reader you can download it by clicking on the link here:

Click on this link to view an Adobe Acrobat PDF file which contains the text of the 2002 LIFO Regulations: IPICLIFOREGS2001.pdf

A new IRS Revenue Procedure, Rev. Proc. 2002-9 was issued at the same time as the 2002 LIFO Regulations which describe the requirements for Automatic Approval changes in tax accounting methods, including LIFO method changes.

Click on this link to view an Adobe Acrobat PDF file which contains the text Rev. Proc. 2002-9:
RevProc2002-9.pdf

LIST OF CPI CATEGORIES FOR RETAIL GROCERS

We have compiled an expanded list of the minimum number of CPI Categories retail grocers must use to comply with the 2002 Regulations.

From 1983 (when the original IPIC LIFO Regulations were issued) until 1997, many retail grocers using the IPIC method relied on the guidance provided in the Handbook for LIFO Tax Valuations Inventory Price Index Computation Method (IPIC) published by the Food Marketing Institute in 1983. This handbook listed the 19 CPI category groups into which retail grocers needed to sort their year end inventory FIFO balances by to be able to use the IPIC method. These 19 groups were those required to enable the majority of these companies to comply with the 10% categories requirement of the IPIC LIFO Regulations. Retail grocers have the luxury of being able to use one standard list or CPI category groups because the make up of their inventories do not vary much from company to company. We instructed our clients to modify this list slightly and expand it to 21 groups when the BLS introduced the New 1998 CPI Series.

This revision to this standard list was required because of the change in the 10% categories definition introduced in the 2002 Regulations. Although the number of FOOD & BEVERAGES categories did not change, the total number of 10% categories most grocers must use has increased from 21 to 33--some grocers may use as few as 28, depending on which pools are used. To request a copy of this list of CPI categories required under the new Regulations send us an email at lifopro@lifopro.com. This list is only applicable to retail grocers using the Ten Percent method provisions under the 2002 Regulations. This list also includes an explanation of why the CPI Table 3 substratum categories should not be used for IPIC calculations whether the Ten Percent method is used or not. Substratum categories are those with a SS prefix in their commodity code. They can also be identified as those categories for which no BLS Weight of Relative Importance is listed in the CPI Detailed Report. An example of a substratum category is SS01031 Rice. Any FIFO balances associated with a CPI substratum category should be assigned to the less detailed CPI category which includes the substratum category--SEFA03 Rice, pasta, cornmeal in this example.