Under US generally accepted accounting principles, LIFO is one of the many ways that businesses can value their inventory on their balance sheets. The precision of accountants is clearly overrated.
The IRS has the LIFO conformity rule, which lets businesses use LIFO for federal income tax purposes only if they also value their inventory on their financial statements at LIFO.
And to show another example of how the SEC is not doing a very effective job of protecting investors, many US multinational corps value their US inventory under LIFO, but yet identical inventory located in other countries is valued under another method such as FIFO. How crazy is that?
Companies that economically benefit from using LIFO the most are ones whose inventories have increased in price the most.
Many companies using LIFO are pricing a good chunk of their inventory at prices of decades ago. Does that make any sense? I don't think so.
Just focusing on US Big Oil Companies, here are the seven which would have their inventories stepped up by more than $1 bil each at December 31, 2011 if they would change their inventories from the LIFO method which is what is used on their books to the much more relevant current cost to replace this inventory.
| 12-31-11 | |||
| Inventory | 12-31-11 | ||
| 12-31-11 | Step Up To | Inventory | |
| Inventory | Current | at Current | |
| at LIFO | Cost | Cost | |
| mils of $s | mils of $s | mils of $s | |
| Oil & Gas Corps With Inventory Step UP above $1 bil | |||
| Exxon Mobil | 11,665 | 25,600 | 37,265 |
| Chevron | 3,420 | 9,025 | 12,445 |
| ConocoPhillips | 3,633 | 8,400 | 12,033 |
| Valero Energy | 5,107 | 6,800 | 11,907 |
| Marathon Petroleum | 3,064 | 5,015 | 8,079 |
| Tesoro | 1,273 | 1,700 | 2,973 |
| Hess | 937 | 1,276 | 2,213 |
| Total Oil & Gas Corps | 29,099 | 57,816 | 86,915 |
To illustrate how the Big Oil industry is the one that is the predominate beneficiary of the LIFO Inventory tax loophole, I only found five Non-Big Oil Corps where the inventory step up from LIFO to current cost at the most recent balance sheet date is more than $1 bil each, and this total inventory step up for these five corps would be $7,945 mil, which is only 14% of the $57,816 total inventory step up of the Big Oil Corps with inventory stepups above $1 bil each.
And Exxon Mobil's inventory step up of $25,600 mil is more than three times the step up of these five Non-Big Oil Corps of $7,945 mil.
Further, both Chevron and ConocoPhillips would have inventory stepups from LIFO to Current Cost which would exceed these five Non-Big Oil Corp total inventory stepups.
Below here are the five Non-Big Oil Corps whose inventory stepup from LIFO to Current Cost would exceed $1 bil each.
| FYE 2011/12 | |
| Inventory | |
| Step Up To | |
| Current | |
| Cost | |
| mils of $s | |
| Non-Oil & Gas Corps With Inventory Step Up above $1 bil | |
| Caterpillar | 2,422 |
| Walgreens | 1,897 |
| Deere | 1,421 |
| Dow Chemical | 1,105 |
| US Steel | 1,100 |
| Total Non-Oil & Gas Corps | 7,945 |
And I only found eight other publicly-held US Corps which would have their inventory stepup of between $500 mil and $1 bil. Below here are these eight:
| FYE 2011/12 | |
| Inventory | |
| Step Up To | |
| Current | |
| Cost | |
| mils of $s | |
| Corps With Inventory Step Up Between $500 mil and $1 bil | |
| Ford Motor | 928 |
| DuPont | 901 |
| Alcoa | 801 |
| Nucor | 763 |
| Berkshire Hathaway | 759 |
| Altria Group | 600 |
| Archer Daniels Midland | 583 |
| Murphy Oil | 580 |
| Total all 8 | 5,915 |
Given that the overwhelming beneficiary with LIFO are the giant Oil Corps, my proposal here is to eliminate LIFO for all US Multinational Corps in all industries, but only those with a substantial amount of their US inventory priced at LIFO. The cutoff amount is subject to debate, but I would consider something like total inventory step up from LIFO inventory to another method of $500 mil or more. Thus only the above 20 companies would be required to switch out of LIFO for US Federal Income tax purposes. And once another company reaches an inventory stepup of at least $500 mil, then it would also have to switch out of LIFO.
So, what's the US Government additional tax revenues raised from switching the above 20 companies out of LIFO? Well, for the seven Big Oil Corps it would be 35% tax rate times $57,815 mil, or $20,235 mil. For the other 13 companies, it would be 35% tax rate times $13,860 mil, or $4,851 mil. Thus the total US Tax Revenues raised of $25.1 bil.
And over the next ten years, the total tax revenues raised would be much higher.
First, I probably didn't find all the publicly-held companies where the inventory step up is at least $500 mil.
Second, it wouldn't surprise me if foreign-owned giant Oil Corps Royal Dutch Shell and British Petroleum have both figured out a way to use LIFO for their massive amount of US inventories for US Federal Income tax purposes.
And third, and much more importantly, this inventory step up will be substantially higher in ten years than it is at the end of the most recent year end.
To illustrate this latter point, just check out how these LIFO versus Current Cost Inventory differences for just four of these seven US Big Oil Corps has grown so rapidly as oil prices have moved up so much since the end of 2008.
| 12-31-11 | 12-31-10 | 12-31-09 | 12-31-08 | |
| mils of $s | mils of $s | mils of $s | mils of $s | |
| Exxon Mobil | 25,600 | 21,300 | 17,100 | 10,000 |
| ConocoPhillips | 8,400 | 6,800 | 5,627 | 1,959 |
| Valero Energy | 6,800 | 6,100 | 4,500 | 686 |
| Marathon Petroleum | 5,015 | 4,119 | 3,115 | 777 |
| Total of all 4 | 45,815 | 38,319 | 30,342 | 13,422 |
Yeah, these 4 Oil Corps had this inventory step up from LIFO to Current Cost by 3.4 times in just these three years.
Thus logically, the most recent balance sheet date US tax revenues raised here of $25 bil will grow to between $50 bil and $100 bil, and perhaps even more, over the next ten-year CBO scoring period.
The economic damage to Big Corps from this proposal is substantially softened here.
For the US Multinational Corps that would be required to switch out of LIFO for US federal income tax purposes under my proposal here, the logical action will be for them to also switch out of LIFO for their US inventory in their in their financial statements. Thus, there will be no income tax expense charge in their income statement from this switch out of LIFO. Further, by switching out of LIFO, this should increase their Gross Margins and their Pretax earnings in their income statements, as well as significantly increase their total inventory and their total stockholders’ equity, both on their balance sheets.
To soften the near-term negative cash flow impact, I wouldn’t require the initial switch out of LIFO to be paid for in US federal income taxes immediately. Instead, I would let them pay for it equally in 7 years starting in say Year 4 and continuing to Year 10.
All of the US Tax Revenues Raised here should be used to reduce US Debt.
