Rev. Proc. 72-29

Section 1. Purpose.

The purpose of this Revenue Procedure is to set forth the procedure to be used by the Internal Revenue Service in the examination of Federal income tax returns involving the LIFO inventory reporting requirements of subsections 472(c) and (e) of the Internal Revenue Code of 1954 in cases of certain corporate business combinations, in which inventories of an acquired company are valued in accordance with the principles set forth in Accounting Principles Board Opinion No. 16 (A.P.B. 16), issued by the Accounting Principles Board of the American Institute of Certified Public Accountants in August, 1970, generally effective for business combinations initiated after October 31, 1970.

Sec. 2. Scope.

The scope of this Revenue Procedure is limited to those corporate taxpayers that either use or elect to use the LIFO inventory method under section 472 of the Code with respect to the LIFO inventories of an acquired business. The scope of this Revenue Procedure is further limited to those business combinations in which the principles of A.P.B. 16 are utilized in assigning values to the inventories of an acquired company. Thus, for example, this Revenue Procedure would apply in a statutory merger to which the provisions of section 368(a)(1)(A) of the Code apply, but that, under A.P.B. 16, is to be treated as a "purchase" of assets by the acquiring corporation for financial accounting purposes. Similarly, it would apply to a transaction that is treated as a purchase for Federal income tax purposes, but that, under A.P.B. 16, is to be treated by the acquiring corporation as a "pooling of interests".

Sec. 3. Background.

Section 472(c) of the Code and the Income Tax Regulations issued thereunder provide, in effect, that a taxpayer may not use the LIFO inventory method unless he establishes to the satisfaction of the Secretary or his delegate that he has used no procedure other than the LIFO method for purposes of an annual report to shareholders, partners, other proprietors, beneficiaries, or for credit purposes. Section 472(e) of the Code and the regulations thereunder provide, in effect, that the same requirement shall apply to the continued use of the LIFO method. Thus, where there is a variance between the LIFO procedures used for Federal income tax purposes and for financial accounting purposes, the Secretary or his delegate may terminate the LIFO election of a taxpayer for a violation of the above requirements.

A.P.B. 16 deals with financial accounting procedures to be used in accounting for business combinations, such as stock or asset acquisitions. Such combinations, depending upon the factors set forth in A.P.B. 16, may be treated as a "purchase" wherein the acquired assets are required to be recorded by the acquiring company at their current fair market value with certain adjustments, or may be treated as a "pooling of interests" wherein the acquired assets are required to be recorded by the acquiring company at essentially the same book value as in the hands of the acquired company.

Since the factors set forth in A.P.B. 16 that determine whether for financial accounting purposes an acquisition is to be treated as a purchase or pooling of interests are not the same as those factors which determine whether an acquisition is to be taxable or tax free for Federal income tax purposes, situations can arise in which an acquisition is treated differently for tax purposes and financial accounting purposes.

If the acquired corporation has used the LIFO method for its inventories, and the acquisition is treated differently by the taxpayer for Federal income tax purposes and financial accounting purposes, there will be a difference between the LIFO procedure used by the acquiring corporation for tax and book purposes if such corporation elects to use or continues to use the LIFO method for Federal income tax purposes with respect to such inventories. For example, assume that for Federal income tax purposes a merger that is tax-free is treated as a purchase under A.P.B. 16. If the acquiring corporation uses the LIFO method, any LIFO inventories of the acquired corporation must be carried over at the same tax basis and with the same LIFO layers to such acquiring corporation. For financial accounting purposes, however, the LIFO inventories are treated as current year's purchases since the transaction is treated as a purchase. In such a transaction neither the LIFO costs nor the LIFO layers for Federal income tax purposes and financial accounting purposes will be the same with respect to the acquired inventories in the hands of the acquiring corporation. A similar result may occur where the acquisition is treated as a taxable transaction for Federal income tax purposes, but as a pooling of interests for financial accounting purposes. Sec. 4. Application.

In the examination of returns, if a corporation either uses or elects to use the LIFO inventory method with respect to LIFO inventories acquired in a business combination described in Section 2 of this Revenue Procedure, the LIFO election will not be terminated solely because of the application of the financial accounting principles of A.P.B. 16 if the disclosure requirements of Section 5 of this Revenue Procedure are met. Thus, the Service will not invoke the reporting requirements of subsection 472(c) and (e) of the Code with respect to the variation caused by the application of A.P.B. 16.

Sec. 5. Financial Disclosure Requirements.

.01 Where application of the principles of A.P.B. 16 results in a difference for any taxable year between taxable income for Federal income tax purposes and net income for financial accounting purposes due to the use of the LIFO inventory method by the acquiring corporation with respect to the LIFO inventories of the acquired corporation, such difference must be disclosed in the financial statements and in the Federal income tax returns of the acquiring corporation. Disclosure shall also be required in any taxable year in which compliance with A.P.B. 16 results in a difference between the LIFO inventories reflected in the balance sheets for Federal income tax purposes and financial accounting purposes. The disclosure in the financial statements and in the Federal income tax returns may be in the form of a footnote or a separate schedule, but must explain the amount of and the reason for the variance in the LIFO inventories.

.02 The disclosure requirements in .01 above shall apply to all taxable years in which the above differences occur, regardless of the year of acquisition, and regardless of the materiality of such differences for financial statement purposes.

.03 The disclosure requirements in .01 above shall apply to the financial statements and Federal income tax returns of any corporation in which such LIFO inventories are reflected, whether separate or consolidated.

Sec. 6. Effective Date. /*/

This Revenue Procedure shall apply to all financial statements issued after July 14, 1972 (60 days after the date of the publication of this Revenue Procedure in the Internal Revenue Bulletin), as well as to Federal income tax returns filed after July 14, 1972. Where a corporation using the LIFO inventory method has issued financial statements or filed Federal income tax returns prior to July 15, 1972, without disclosing differences in LIFO inventories caused by compliance with A.P.B. 16, such lack of disclosure will not, in and of itself, result in a termination of such LIFO election. However, statements issued or Federal income tax returns filed after July 14, 1972, shall be subject to Sections 4 and 5 above.

¹ Also released as Technical Information Release 1165, dated April 20, 1972.

/*/ The dates of July 13 and July 14 in T.I.R. 1165 should read July 14 and July 15.