The AICPA seeks taxpayer relief under Sec. 473 of the Tax Code

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The American Institute of CPAs (AICPA) has comments submitted seek relief under Section 473 of the Internal Revenue Code that would allow qualified taxpayers to mitigate unexpected substantial increases in taxable income due to involuntary last-in, first-out (LIFO) inventory liquidations caused by government actions made necessary by global public health concerns due to the COVID-19 pandemic.

Foreign trade disruptions due to the COVID-19 pandemic have prevented many businesses and individual sellers from replacing their inventory – these disruptions meet the definition of a ‘qualified inventory disruption’ under Section 473 (c ) (2). These disruptions have created challenges for taxpayers who use the LIFO method of accounting to keep their inventory operational.

Without relief, many taxpayers will incur significant tax obligations for the 2020 tax year. The AICPA is seeking relief for taxpayers who:

  • Account for their stocks according to the LIFO accounting method; and
  • Experienced a decrease in their closing stocks caused by government actions in response to COVID-19

Section 473 was enacted to provide taxpayer relief in similar situations and the AICPA is requesting that the Treasury Department and the Internal Revenue Service (IRS) apply this relief measure due to foreign trade disruptions. and provide Section 473 relief to taxpayers who have experienced a LIFO inventory liquidation. The proposed notice should state the following:

  • A taxpayer may choose section 473 relief if they have experienced a qualifying wind-up for a wind-up year.
  • The election is made by attaching an election return to their original federal income tax return (including any extensions) filed in a timely manner for the first tax year following the wind up year (i.e. the first replacement period tax year), unless the taxpayer chooses the safe harbor method described below.
  • The declaration of election must include statements that: (i) the taxpayer makes an irrevocable election under section 473; (ii) the taxpayer has experienced a liquidation in his LIFO inventory during the liquidation year; and (iii) the liquidation was attributable to the qualified inventory outage described in the Notice.
  • A qualifying wind up year includes taxation years ending March 31, 2020 through taxation years ending June 30, 2021.
  • The applicable replacement period is the three taxable years following the year of liquidation.

The AICPA recommends that the Notice be issued immediately followed by further guidance to provide a safe-haven method under which a taxpayer:

  • Disregard liquidation for the liquidation year and keep the LIFO layers related to the opening inventory for the liquidation year. Under this safe-haven method, the taxpayer would not recognize the income attributable to the liquidation of these LIFO diapers if he completely replaces the inventory at the end of the replacement period.
  • Attach a return of election to their original federal income tax return (including any extension) filed in a timely manner for the liquidation year. This statement of choice must include the statements listed above and a statement that the taxpayer chooses the section 473 safe harbor method.
  • In cases where a taxpayer has already filed his federal income tax return for an eligible wind-up year, provide that the taxpayer can make a late election to use the safe harbor method in section 473 by filing an amended return for the qualifying wind-up year within 90 days of the date the guidelines are published in the Federal Register, or by filing Form 3115 for its 2021 tax year. A partnership that has already filed its return will be allowed to file an amended return for the wind-up year reflecting the late election rather than an administrative adjustment request (AAR), similar to the relief provided in Rev. Proc. 2020-23, or by completing Form 3115 for its 2021 tax year.


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