Tax Problems in Inventories
by T. MILTON KUPFER Partner, Executive Office
Presented before state society and AICPA audiences in Boston, Chicago, Columbus, Newark, and Washington, D.C. as part of the AICPA 1965 Tax Lecture Series
THE INTERNAL REVENUE SERVICE has taken an increasingly active interest
in inventories over the past several years. This probably started before 1961, but it was brought to widespread attention in April 1961 when President Kennedy included a directive in his Tax Message to Congress to the effect that inventory matters were to be considered carefully by the Service.
The Service reacted publicly to this by including questions regarding
inventories on the tax returns for 1961. These questions in substantially
the same form appeared on the returns for all years until 1965. Although there is now only one rather innocuous question regarding
inventories, I do not think that this indicates any lessening of Service interest in inventories. Certainly examining agents, and particularly
the National Office, have been giving more and more attention to inventories.
All of this is of interest to us as accountants because in the past the Revenue Service has tended generally to accept inventory values shown in the books. In fact, inventories probably constitute the major area of taxation in which the rules developed by us as accountants have had the most influence. This, of course, is reasonable since the Code has long required only that inventories be taken on a basis that clearly reflects income in conformance with the best accounting practice of the industry. This lack of difference between book basis and tax basis should not, however, lead us to assume complacently that the best advantage is being obtained or that changes should not be suggested.
One facet of the National Office activity that should be kept in mind in considering what I have to say is that the National Office may inquire into all aspects of inventory accounting even though it may be asked to rule only on some limited aspect. The National Office has also required as a condition to changes granted to some categories of inventory accounting that changes be made in other categories that were not subject to the request.
WHEN MUST INVENTORIES BE RECOGNIZED? Code
The basic rule regarding recognition of inventories has been in the Internal Revenue Code in substantially the same form for many years.