Legislative history of the allowance of LIFO for tax purposes

              The Accounting Historians Journal Vol. 16, No. 1 June 1989
Morton Pincus WASHINGTON UNIVERSITY
LEGISLATIVE HISTORY OF THE ALLOWANCE OF LIFO FOR TAX PURPOSES
Abstract: The legislative history of the allowance of LIFO for tax purposes is documented. The legislative process was structured around veto points of the law and yielded an examination of the political environment out of which the LIFO tax provisions emerged. LIFO provisions were analyzed relative to alternative tax options available to firms, administrative and judicial activities, overall tax legislation including tax rates, and general economic conditions. Production processes of firms lobbying for LIFO were examined and the views of academics and practitioners were incorporated. In addition to providing the basis for a regulatory event study by identifying the critical dates in the legsilative process, insight into the timing and choice of inventory accounting methods for financial reporting as well as for tax is gained.
INTRODUCTION
LIFO, the last-in, first-out inventory accounting method, has been a topic of interest to accounting researchers in several areas, including capital market research, financial statement analysis, inventory policy, taxation, and history. In one way or another, most of these research efforts have attempted to pro-vide evidence on the general issue of whether the use of alterna-tive accounting policies matters. Assuming it does, the next question is whether to allow managers to choose accounting methods or to impose uniform methods.
What makes LIFO such an appealing method to study in this area of research is the direct link between book and tax reporting which results from the statutory conformity rule. That is, LIFO may be used for tax purposes only if it also is used for financial reporting purposes. LIFO produces lower accounting
I gratefully acknowledge the helpful comments received at various stages of this research from Nick Dopuch, Silvia Madeo, Powell Niland, Grace Pownall, Gary Previts, Bob Virgil, Steve Zeff, participants at the Tax History Conference at the University of Mississippi, and two anonymous referees. I also wish to thank William Cooper, Gary Previts, and Alfred Roberts for providing me with unpublished materials.