Giving Life to LIFO: Adoption of the LIFO Method of Inventory Valuation by the Income Tax Code

Abstract

This paper examines the circumstances that led to the incorporation of the LIFO method of inventory valuation into the tax law in 1938 and 1939. An understanding of why the LIFO method was adopted after decades of initial opposition by revenue officials may lend perspective to the current policy debate about the method. The LIFO issue also presents a case study of the way in which interest groups, professionals, and state actors within government combine to make tax policy. Part I of this paper looks at the two decades prior to adoption of the LIFO method, defining the environment that prompted and enabled Congress to act on the issue. The roles played by business, the press, and the accounting profession are examined. Part II analyzes the legislative process during the period of 1936 through 1939, which culminated in the adoption of the LIFO method into the tax law. The importance of unique actors and the influence of economic and political events, particularly in the context of the undistributed profits tax supported by Franklin Roosevelt's administration, are explored. Part III discusses the factors contributing to the Treasury Department's reversal of its initial opposition to the LIFO method, the interplay of the LIFO method and the undistributed profits tax, and the important role played by the accounting profession in the accommodation process. Finally, Part IV highlights the expanding use of LIFO over the past 70 years.

Keywords: LIFO, Inventory Valuation, Income Tax, Tax Law, Accounting

JEL Classification: D72, D73, E62, E65, H20, H25, K34, M41, M44, N42