26 U.S.C. § 473 — Qualified liquidations of LIFO inventories
submitted 46 years ago by Pub. L. 96-223 to r/title-26-INTERNAL-REVENUE-CODE · 952 words · no verdicts yet
This law helps LIFO businesses whose inventory drops because of a shortage. A shortage might be an energy crisis or a trade embargo. If the business replaces the goods within a few years, its taxable income gets adjusted.
(a) General rule -- If, in a "liquidation year," (1) a taxpayer's LIFO inventory of certain goods shrinks because of a "qualified liquidation," and (2) the taxpayer* chooses to use this section for that shrinkage, then the taxpayer's gross income for that year gets adjusted as described in subsection (b).
(b) Adjustment for replacements -- If the taxpayer replaces the liquidated goods -- fully or partly -- during a "replacement year," and that replacement shows up in the closing inventory for that year, then the taxpayer adjusts gross income for the liquidation year this way: (1) decrease it by the amount that the replacement goods' cost that year is more than what those same goods cost in the liquidation year's opening inventory; or (2) increase it by the amount that the liquidation year's opening inventory cost is more than the replacement cost.
(c) Qualified liquidation defined -- (1) In general -- A "qualified liquidation" means (A) the closing inventory for the liquidation year is lower than the opening inventory for that year, but only if (B) the taxpayer proves to the Secretary* that the drop is directly and mainly caused by a "qualified inventory interruption." (2) Qualified inventory interruption defined -- (A) In general -- This term means a regulation, request, or interruption described in (B), but only as much as a published notice says. (B) Determination by Secretary -- After talking with the right federal officials, if the Secretary finds that (i)(I) a Department of Energy energy-supply regulation or request, or (II) an embargo, international boycott, or other major trade interruption has made it hard or impossible to replace some class of goods during the liquidation year, and (ii) applying this section to that class of goods and taxpayers is needed to fulfill the section's purpose, the Secretary must publish a notice of that finding in the Federal Register, stating the time period it covers.
(d) Other definitions and special rules -- (1) "Liquidation year" means the tax year when the qualified liquidation happens. (2) "Replacement year" means any tax year in the replacement period, except any year after the goods are fully replaced. (3) "Replacement period" means whichever is shorter: (A) the three tax years after the liquidation year, or (B) the period the Secretary sets in a Federal Register notice about that specific interruption -- which the Secretary can later change in another notice. (4) "LIFO method" means the method described in section 472. (5) Election -- (A) In general -- A taxpayer elects to use this section following whatever conditions, manner, form, and timing the Secretary sets by regulation. (B) Irrevocable election -- Once made, this election cannot be undone. It binds the liquidation year and every earlier or later year that this section's adjustments affect.
(e) Replacement; inventory basis -- (1) Replacements -- If a replacement year's closing inventory shows more goods than its opening inventory, the extra goods count, in the order bought, as replacing the most recently liquidated goods that haven't been replaced yet (whether or not that liquidation was "qualified"). (2) Amount at which replacement goods taken into account -- For a qualified liquidation, any goods counted under paragraph (1) as replacements get added to purchases and the closing inventory at the same cost as the goods they replaced.
(f) Special rules for application of adjustments -- (1) Period of limitations -- If (A) this section requires an adjustment for a tax year because of a later replacement, and (B) the normal deadline to assess a tax deficiency*, or to allow a credit or refund, has already passed, then the government can still assess that deficiency -- or allow that credit or refund -- within the deadline that applies to the replacement year, as long as a deficiency notice or refund claim is filed within that time. (2) Interest -- For figuring interest only, any overpayment or underpayment caused by this section's adjustment counts as happening in the replacement year, not the liquidation year.
(g) Coordination with section 472 -- The Secretary must write regulations to make sure this section works properly together with section 472.
If, for any liquidation year—
there is a qualified liquidation of goods which the taxpayer* inventories under the LIFO method, and
the taxpayer elects to have the provisions of this section apply with respect to such liquidation,
then the gross income of the taxpayer for such taxable year* shall be adjusted as provided in subsection (b).
If the liquidated goods are replaced (in whole or in part) during any replacement year and such replacement is reflected in the closing inventory for such year, then the gross income for the liquidation year shall be—
decreased by an amount equal to the excess of—
the aggregate replacement cost of the liquidated goods so replaced during such year, over
the aggregate cost of such goods reflected in the opening inventory of the liquidation year, or
increased by an amount equal to the excess of—
the aggregate cost reflected in such opening inventory of the liquidated goods so replaced during such year, over
such aggregate replacement cost.
For purposes of this section—
The term “qualified liquidation” means—
a decrease in the closing inventory of the liquidation year from the opening inventory of such year, but only if
the taxpayer establishes to the satisfaction of the Secretary* that such decrease is directly and primarily attributable to a qualified inventory interruption.
The term “qualified inventory interruption” means a regulation, request, or interruption described in subparagraph (B) but only to the extent provided in the notice published pursuant to subparagraph (B).
Whenever the Secretary, after consultation with the appropriate Federal officers, determines—
that—
any Department of Energy regulation or request with respect to energy supplies, or
any embargo, international boycott, or other major foreign trade interruption,
has made difficult or impossible the replacement during the liquidation year of any class of goods for any class of taxpayers, and
that the application of this section to that class of goods and taxpayers is necessary to carry out the purposes of this section,
he shall publish a notice of such determinations in the Federal Register, together with the period to be affected by such notice.
For purposes of this section—
The term “liquidation year” means the taxable year in which occurs the qualified liquidation to which this section applies.
The term “replacement year” means any taxable year in the replacement period; except that such term shall not include any taxable year after the taxable year in which replacement of the liquidated goods is completed.
The term “replacement period” means the shorter of—
the period of the 3 taxable years following the liquidation year, or
the period specified by the Secretary in a notice published in the Federal Register with respect to that qualified inventory interruption.
Any period specified by the Secretary under subparagraph (B) may be modified by the Secretary in a subsequent notice published in the Federal Register.
The term “LIFO method” means the method of inventorying goods described in section 472.
An election under subsection (a) shall be made subject to such conditions, and in such manner and form and at such time, as the Secretary may prescribe by regulation.
An election under this section shall be irrevocable and shall be binding for the liquidation year and for all determinations for prior and subsequent taxable years insofar as such determinations are affected by the adjustments under this section.
For purposes of this chapter—
If the closing inventory of the taxpayer for any replacement year reflects an increase over the opening inventory of such goods for such year, the goods reflecting such increase shall be considered, in the order of their acquisition, as having been acquired in replacement of the goods most recently liquidated (whether or not in a qualified liquidation) and not previously replaced.
In the case of any qualified liquidation, any goods considered under paragraph (1) as having been acquired in replacement of the goods liquidated in such liquidation shall be taken into purchases and included in the closing inventory of the taxpayer for the replacement year at the inventory cost basis of the goods replaced.
If—
an adjustment is required under this section for any taxable year by reason of the replacement of liquidated goods during any replacement year, and
the assessment of a deficiency*, or the allowance of a credit or refund of an overpayment of tax attributable to such adjustment, for any taxable year, is otherwise prevented by the operation of any law or rule of law (other than section 7122, relating to compromises),
then such deficiency may be assessed, or credit or refund allowed, within the period prescribed for assessing a deficiency or allowing a credit or refund for the replacement year if a notice for deficiency is mailed, or claim for refund is filed, within such period.
Solely for purposes of determining interest on any overpayment or underpayment attributable to an adjustment made under this section, such overpayment or underpayment shall be treated as an overpayment or underpayment (as the case may be) for the replacement year.
The Secretary shall prescribe such regulations as may be necessary to coordinate the provisions of this section with the provisions of section 472.
Source credit: (Added Pub. L. 96–223, title IV, § 403(a)(1), Apr. 2, 1980, 94 Stat. 302.)
- 1980Enacted · Pub. L. 96-223 · 94 Stat. 302
A history note hasn’t been published yet. The record shows enactment by Pub. L. 96-223 on 1980-04-02.
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