Manufacturer receives extra time to file its LIFO election

Plain-English summary

Several related companies had used the last-in-first-out inventory method and later combined in mergers. The surviving company then transferred its manufacturing business, operating assets, and inventory to a newly formed entity in a transaction represented to qualify under section 351. The new entity continued using LIFO for tax and financial reporting but did not file Form 970 because the transferor did not realize a new election was required. After a later corporate acquisition exposed the omission, the current parent requested relief for the manufacturer. The IRS granted 45 days to file the missing Form 970 for the original year. It did not rule on whether any company had correctly used LIFO or whether the underlying mergers and asset transfer qualified for their claimed tax treatment.

Ruling snapshot

• Question: May the manufacturer file a late Form 970 to adopt the LIFO inventory method for its first year?
• Outcome: approved
• Key authorities: IRC § 472; Treas. Reg. §§ 1.472-3 and 301.9100-1 through 301.9100-3; Rev. Rul. 70-564

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 201801002                                                 Third Party Communication: None
Release Date: 1/5/2018                                            Date of Communication: Not Applicable
Index Number: 9100.11-00
                                                                  Person To Contact:

-                                                                 ---------------------, ID No. ------------------
--------------------------------------                            Telephone Number:
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--------------------------------                                  Refer Reply To:
                                                                  CC:ITA:B06
------------------------------                                    PLR-112526-17
        -----------------------------                             Date:
                                                                  October 5, 2017

LEGEND

Parent            =        --------------------------------------
                           ------------------------

Applicant         =        -----------------------------------------------------
                           ------------------------

Entity 1          =        ----------------------------
                           ------------------------

Entity 2          =        ------------------------------------
                  ------------------------

Entity 3          =        ---------------------------------------
                           ------------------------

Entity 4          =        --------------------------------
                           ------------------------

Year 1            =        -------

Year 2            =        -------

Year 3            =        -------

PLR-112526-17                                 2

Dear ----- -----------

This letter is in reply to a request for a private letter ruling made by Parent on behalf of
Applicant. Parent requests an extension of time under § 301.9100-1 and 301.9100-3 of
the Procedure and Administration Regulations to file Form 970, Application to Use LIFO
Inventory Method, on behalf of Applicant for Year 1.

                                          FACTS

Parent represents the following facts on behalf of Applicant:

Entity 1 was the common parent of a consolidated group that included Entity 2 and
Entity 3. Entity 1, Entity 2, and Entity 3 all used the last-in-first-out (LIFO) inventory
method of accounting. Parent states that each entity had attached a Form 970 to the
appropriate Federal income tax return for the taxable year the method was first used by
that entity, in accordance with § 1.472-3 of the Income Tax Regulations.

Subsequently, in Year 2, Entity 2 and Entity 3 merged with Entity 1, with Entity 1
surviving the merger. Parent states that the merger transactions qualified as non-
taxable mergers under § 368(a)(1)(A) of the Internal Revenue Code, subject to § 381.
Entity 1 continued to use the LIFO method for its own inventories and the inventories
acquired from Entity 2 and Entity 3 after the merger.

Subsequently, in Year 1, Entity 1 decided to restructure its organization and formed
Entity 4, later renamed Applicant. Entity 1 transferred its manufacturing business,
operating assets, and inventory to Entity 4 (Applicant) in Year 1 in a transaction that
Parent states qualified as a tax free transfer of assets under § 351. However, Entity 1
was unaware that it was required to file Form 970 on behalf of Entity 4 (Applicant) in
order for Entity 4 (Applicant) to use the LIFO method. See Rev. Rul. 70-564, 1970-2
C.B. 109. As a result, Entity 1 failed to file the required Form 970 on behalf of Entity 4
(Applicant) following the transfer of assets. Entity 4 (Applicant) has used the LIFO
inventory method to identify inventory for both tax and financial reporting purposes for
Year 1 and all subsequent taxable years.

Subsequently, in Year 3, Parent acquired Entity 4, which has since renamed itself
Applicant. Parent is currently the common parent of a consolidated group that includes
Applicant and Entity 1. Parent realized recently that Applicant never properly adopted
the LIFO inventory method and, as such, has filed this request for a private letter ruling.

                                  RULING REQUESTED

PLR-112526-17                                  3

Parent requests an extension of time under §§ 301.9100-1 and 301.9100-3 to file Form
970 on behalf of Applicant to adopt the LIFO method effective for Year 1.

                                   LAW AND ANALYSIS

Section 472 provides that a taxpayer may use the LIFO method in inventorying goods
specified in an application to use such method, filed at such time, and in such manner,
as the Secretary may prescribe.

Section 1.472-3 provides that the LIFO inventory method may be adopted and used
only if the taxpayer files with its income tax return for the taxable year as of the close of
which the method is first to be used a statement of its election to use such inventory
method. The statement is to be made on Form 970.

Section 301.9100-1(c) provides that the Commissioner has the discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3
to make certain regulatory elections. Section 301.9100-1(b) defines a regulatory
election as an election whose due date is prescribed by a regulations published in the
Federal Register, or in a revenue ruling, revenue procedure, notice, or announcement
published in the Internal Revenue Bulletin.

Section 301.9100-2 provides automatic extension of time for making certain elections.
Section 301.9100-3 provides extensions of time for making elections that do not meet
the requirements of § 301.9100-2.

The requested election is a regulatory election as defined under § 301.9100-1(b)
because the due date of the election is prescribed in § 1.472-3. Parent’s request is
analyzed under the requirements of § 301.9100-3 because the automatic provisions of
§ 301.9100-2 are not applicable.

Requests for relief under § 301.9100-3 will be granted when a taxpayer provides
evidence to establish to the satisfaction of the Commissioner (1) that the taxpayer acted
reasonably and in good faith, and (2) that granting relief will not prejudice the interests
of the government. See § 301.9100-3(a).

Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably
and in good faith if the taxpayer: (i) requests relief before the failure to make the
regulatory election is discovered by the Internal Revenue Service; (ii) failed to make the
election because of intervening events beyond the taxpayer’s control; (iii) failed to make
the election because, after exercising reasonable diligence, the taxpayer was unaware
of the necessity for the election; (iv) reasonably relied on the written advice of the
Service; or (v) reasonably relied on a qualified tax professional, including a tax
professional employed by the taxpayer, and the tax professional failed to make, or
advise the taxpayer to make, the election.

PLR-112526-17                                 4

Section 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted
reasonably and in good faith if the taxpayer: (i) seeks to alter a return position for which
an accuracy-related penalty was or could be imposed under § 6662 at the time the
taxpayer requests relief and the new position requires or permits a regulatory election
for which relief is requested; (ii) was informed in all material respects of the required
election and related tax consequences and chose not to file the election; or (iii) uses
hindsight in requesting relief.

Section 301.9100-3(c)(1)(i) provides, that the interests of the government are prejudiced
if granting relief would result in the taxpayer having a lower tax liability in the aggregate
for all taxable years affected by the election than the taxpayer would have had if the
election had been timely made (taking into account the time value of money). The
section also provides that, if the tax consequences of more than one taxpayer are
affected by the election, the government’s interests are prejudiced if extending the time
for making the election may result in the affected taxpayers, in the aggregate, having a
lower tax liability than if the election had been timely made.

Further, § 301.9100-3(c)(1)(ii) provides, in part, that the interests of the government are
ordinarily prejudiced if the taxable year in which the regulatory election should have
been made, or any taxable years that would have been affected by the election had it
been timely made, are closed by the period of limitations on assessment under
§ 6501(a) before the taxpayer’s receipt of a ruling granting relief under this section.

                                      CONCLUSION

On the basis of Parent’s representations, we conclude that the requirements of
§ 301.9100-3 have been satisfied. Accordingly, we hereby grant an extension of time
for Parent to file the missing Form 970 on behalf of Applicant for Year 1. This extension
shall be for a period of 45 days from the date of this ruling. Please attach a copy of this
ruling to the Form 970 filed pursuant to this private letter ruling request.

Except as expressly set forth above, this office neither expresses nor implies any
opinion concerning the tax consequences of the facts described above under any other
provision of the Code or regulations. Specifically, we have no opinion, either expressed
or implied, as to whether Applicant, Entity 1, Entity 2, Entity 3, or Entity 4 have correctly
used or are correctly using the LIFO inventory method. We have no opinion as to the
propriety of the merger between Entity 1, Entity 2, and Entity 3 in Year 2; specifically,
whether such merger constituted a non-taxable merger for purposes of §§ 368 and 381.
We have no opinion as to whether Entity 1 was required to file Form 970 to continue to
use the LIFO inventory method following the Year 2 merger. Finally, we have no
opinion as to the propriety of the restructuring activities between Entity 1 and Applicant
in Year 1; specifically, whether such transfer of assets between Entity 1 and Applicant
constituted a tax-free transfer of assets under § 351.

PLR-112526-17                                5

The ruling contained in this letter ruling is based upon facts and representations
submitted by Parent on behalf of Applicant, with accompanying penalties of perjury
statements executed by appropriate parties. While this office has not verified any of the
material submitted in support of this request for an extension of time to file the required
Form 970, all material is subject to verification on examination.

This ruling is directed only to Parent, who requested it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

In accordance with the power of attorney on file with our office, we are sending copies
of this letter to Parent’s authorized representatives.

                                      Sincerely,

                                      CHERYL L. OSEEKEY
                                      Senior Counsel, Branch 6
                                      Office of Associate Chief Counsel
                                      (Income Tax & Accounting)

Enc.: Copy for § 6110 purposes

cc: