GATT inventory rules meet with strong opposition.

As the Clinton administration scrambles to finance the estimated $12 billion in lower tariff collections under the General Agreement on Tariffs and Trade, its proposed inventory tax accounting changes have come under heavy fire. The administration has recommended the repeal of the lower of cost or market (LCM) inventory method, the prohibition of using components of cost in determining last-in-first-out (LIFO) inventory and a greatly simplified price index computation for taxpayers currently using LIFO.

Most changes have met with strong opposition from the American Institute of CPAs tax division. In a letter to members and staff of the two congressional tax-writing committees, senior Treasury officials and the chief of staff of the Joint Committee on Taxation, the tax executive committee stated, "We are strongly opposed to the repeal of the LCM inventory method, and we believe the process by which this major policy change has been initiated is a particularly unfortunate illustration of how tax policy should not be developed."

LCM has been a part of tax laws since 1918, is used by a broad cross section of taxpayers in virtually every industry and is an essential part of generally accepted accounting principles. "It is amazing," said Harvey Coustan, chairman of the tax executive committee and a senior partner of Ernst & Young in Chicago, that LCM's repeal was proposed "with no discussion, no congressional hearings and very little time for thoughtful comment by the private sector."

Small businesses, currently able to use their financial statement inventory numbers on their tax returns, would have to segregate market write-downs for proper reporting as a book-tax difference, creating a disproportionate additional cost of compliance on top of the added tax cost for not having LCM. Because of this, the committee recommended the small business gross receipts exemption be set at least at the $10 million level over a three-year period, rather than the $5 million level proposed.

The committee also opposed a legislative repeal of the components-of-cost method. Tax practitioners, the Treasury Department and the Internal Revenue Service have been involved in ongoing discussions designed to find a regulatory solution for certain taxpayers using components of cost, and for a simplification of the LIFO method of accounting. "We believe," said the committee, "it is an error to end the dialogue by a unilateral decision to legislate away the entire method."

The proposal to simplify LIFO indices was supported by the committee. It recognized the liberalization of inventory price index computations as the "laudable goal" of simplifying computations under the LIFO method. However, the committee suggested that although the provision reflects good tax policy, "this may not be the bill for implementing it."

It is believed that more organizations have not officially opposed the proposals because it is to their economic advantage to obtain the overall benefits of GATT and small business organizations are not as concerned about inventory issues as they are about the health care debate.