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Washington Tax Alert January 12, 2010

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com
January 12, 2010

The IRS National Office recently issued Chief Counsel Advice on several important inventory issues.

First, taxpayers valuing inventory at cost or lower-of-cost-or-market can value "subnormal goods" in ending inventory ( i.e. , damaged, imperfect and out-of-style goods) at bona fide selling prices less direct costs of disposition. For this purpose, bona fide selling price means actual offering of goods during a period ending not later than 30 days after the inventory date. Therefore, calendar year taxpayers must offer such subnormal goods for sale during the 30-day period ending January 30, 2010, in order to establish a bona fide selling price for the goods as of December 31, 2009.

Second, the write-down for subnormal goods is not available to taxpayers using the LIFO method.

Third, allowances received by retailers and wholesalers at the time of purchase for defective goods can be treated as trade discounts that reduce the cost of all inventory under Treas. Reg. § 1.471-3(b), even though the allowances are estimates, where the taxpayer is not required to return any defective merchandise to the vendors.

Fourth, the National Office appears to have conceded that the provision in the IRC § 263A regulations requiring resellers of property to capitalize all indirect costs listed in Treas. Reg. § 1.263A-1(e)(3)(ii), to the extent such indirect costs are properly allocable to property acquired for resale, is overbroad. The Service admitted that some of the indirect costs listed in the regulations are applicable only to producers of property.