Consolidated Manufacturing Inc. v. Commissioner
May 08, 2001OUTCOME: Victory on appeal.
Consolidated Manufacturing Inc. is in the business of producing remanufactured automobile parts. The case involved the determination of the inventory value of certain raw material inventory, namely, th ... e broken parts used to produce a remanufactured part, and the validity of Consolidated’s election to use the last-in first-out (LIFO) method of inventory identification. At the time Consolidated sells a remanufactured part to a customer, Consolidated collects a deposit from its customer (in addition to the price for the purchased part) that is returned to the customer when he or she delivers to Consolidated the broken part being replaced, referred to in the industry as a “core.” Consolidated values the cores received in its inventory at fair market value, an amount substantially less than the deposit. In addition, Consolidated elected to include in its LIFO election all of its inventory costs, except the cost of cores. At trial, the Internal Revenue Service argued that Consolidated purchased cores from its customers for a price equal to the deposit and that Consolidated could not exclude the cost of cores from its LIFO election. The United States Tax Court held in favor of the IRS on both issues and Consolidated appealed the decision to the Tenth Circuit Court of Appeals. On appeal, the Tenth Circuit Court of Appeals reversed the Tax Court on the core valuation issue but affirmed the Tax Court’s decision regarding Consolidated’s LIFO election. Specifically, the Tenth Circuit ruled that Consolidated may value its core inventory at an amount equal to the price paid by Consolidated to purchase the same cores from commercial core suppliers, an amount that is significantly less than the deposit amount. The case was closely watched by the remanufacturing industry because of its far-reaching financial impact for remanufacturers in all industries, not just the automobile remanufacturing industry.
