LIFO adjustments under ACE.
While the regulations generally are prospective, taxpayers may elect to apply them retroactively. Corporate taxpayers who previously limited their recognition of negative ACE-LIFO adjustments should consider retroactive election of the new rules to recover AMT paid in earlier years.
The ACE-LIFO adjustment requires that the net change in a corporate taxpayer's LIFO reserve be included as an adjustment in calculating ACE. The legislative history and the proposed regulations indicated a negative adjustment could be included only to the extent of prior positive adjustments. However, the final regulations dropped this limitation, creating a refund opportunity for AMT taxpayers who had limited their negative ACE-LIFO adjustments in prior years.
An additional modification to the proposed ACE-LIFO regulations addresses changes in the LIFO recapture amount arising as a result of a contribution of inventory under Secs. 351 and 721 (Regs. Sec. 1.56(g)-1(f)(3)(iv)). Generally, an entity receiving inventory in a Sec. 351 or 721 transfer is not required to report the increase in its LIFO recapture amount resulting from such a transaction as an ACE adjustment, and the contributing entity is not allowed to reduce its ACE-LIFO adjustment by a similar amount.
A taxpayer may elect to have the ACE-LIFO portion of the final regulations apply to all tax years beginning after 1989.
As previously noted, the final regulations provide procedures for taxpayers to elect to use their regular tax inventory amounts in computing preadjustment AMTI and ACE or, alternatively, to use their preadjustment AMTI inventory amounts in computing ACE (Regs. Sec. 1.56(g)-1(r)).
Taxpayers who have consistently used either of these elective simplified methods in all prior years for which the AMT affected liability may make a prospective election. This election will have the effect of obtaining IRS approval for the use of the taxpayer's method in prior years.
Although these simplified methods may reduce a taxpayer's recordkeeping burden, they also generally increase the taxpayer's AMT exposure. The elective simplified methods require current recognition of adjustment and preference items normally recognized only when inventory is sold (such as absorbed depreciation). Experience indicates that deferring the recognition of such adjustments until inventory is sold may result in a substantial benefit.
Taxpayers who have already developed systems to account for differences in regular tax, preadjustment AMTI and ACE inventories should consider the additional AMT costs resulting from the election. In addition, taxpayers who have not been calculating different inventory amounts should consider whether the potential AMT savings available through recalculation outweighs the cost of performing such calculations. Such taxpayers may be better served by applying for a change in accounting method to use the different preadjustment AMTI and ACE inventory amounts.
Caution: Retroactive application of the final AMT regulations requires amending prior year tax returns and may result in an AMT net operating loss (NOL). Unless the taxpayer made a valid election to forgo an NOL carryback in the prior year's return (now being amended), the NOL must be carried back. Carrying the AMT NOL back to prior years may result in the loss of some or all of the potential benefits desired from retroactively adopting the AMT regulations.
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|Title Annotation:||last-in-first-out, adjusted current earnings|
|Author:||Keefe, Patrick T.|
|Publication:||The Tax Adviser|
|Date:||Jul 1, 1993|
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