§473 — Title 26 Internal Revenue Code | U.S. Code

§473 Qualified liquidations of LIFO inventories

Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter E— - Accounting Periods and Methods of Accounting › Part PART II— - METHODS OF ACCOUNTING › Subpart Subpart D— - Inventories › § 473

Last updated Apr 6, 2026|Official source

Summary

If a business using the LIFO inventory method has a big drop in stock because of an approved supply interruption, the business can choose special tax treatment. If the sold goods are later replaced and the replacements appear in a replacement year’s ending inventory, the business must change the liquidation year’s gross income. If the replacement cost is higher than the cost shown in the liquidation year’s opening inventory, the gross income is lowered by the difference. If the opening inventory cost is higher than the replacement cost, the gross income is raised by the difference. A “qualified liquidation” means the year when inventory fell from opening to closing mainly because of a “qualified inventory interruption.” Qualified interruptions cover things like certain energy rules or requests and big foreign trade breaks (embargoes, boycotts), but only as the Secretary decides and announces. “Liquidation year,” “replacement year,” and “replacement period” are set so replacements count for up to the next 3 tax years unless the Secretary says otherwise. The election to use these rules must follow the Secretary’s instructions, cannot be undone, and applies to related years. Replacements are treated as filling the most recently sold items and are recorded at the cost of the items they replace. The Secretary must issue rules to coordinate these steps and to handle interest and other tax details.

Title 26, §473

Internal Revenue Code — Source: USLM XML via OLRC

(a)If, for any liquidation year—

(1)there is a qualified liquidation of goods which the taxpayer inventories under the LIFO method, and

(2)the taxpayer elects to have the provisions of this section apply with respect to such liquidation,

(b)If the liquidated goods are replaced (in whole or in part) during any replacement year and such replacement is reflected in the closing inventory for such year, then the gross income for the liquidation year shall be—

(1)decreased by an amount equal to the excess of—

(A)the aggregate replacement cost of the liquidated goods so replaced during such year, over

(B)the aggregate cost of such goods reflected in the opening inventory of the liquidation year, or

(2)increased by an amount equal to the excess of—

(A)the aggregate cost reflected in such opening inventory of the liquidated goods so replaced during such year, over

(B)such aggregate replacement cost.

(c)For purposes of this section—

(1)The term “qualified liquidation” means—

(A)a decrease in the closing inventory of the liquidation year from the opening inventory of such year, but only if

(B)the taxpayer establishes to the satisfaction of the Secretary that such decrease is directly and primarily attributable to a qualified inventory interruption.

(2)(A)The term “qualified inventory interruption” means a regulation, request, or interruption described in subparagraph (B) but only to the extent provided in the notice published pursuant to subparagraph (B).

(B)Whenever the Secretary, after consultation with the appropriate Federal officers, determines—

(i)that—

(I)any Department of Energy regulation or request with respect to energy supplies, or

(II)any embargo, international boycott, or other major foreign trade interruption,

(ii)that the application of this section to that class of goods and taxpayers is necessary to carry out the purposes of this section,

(d)For purposes of this section—

(1)The term “liquidation year” means the taxable year in which occurs the qualified liquidation to which this section applies.

(2)The term “replacement year” means any taxable year in the replacement period; except that such term shall not include any taxable year after the taxable year in which replacement of the liquidated goods is completed.

(3)The term “replacement period” means the shorter of—

(A)the period of the 3 taxable years following the liquidation year, or

(B)the period specified by the Secretary in a notice published in the Federal Register with respect to that qualified inventory interruption.

(4)The term “LIFO method” means the method of inventorying goods described in section 472.

(5)(A)An election under subsection (a) shall be made subject to such conditions, and in such manner and form and at such time, as the Secretary may prescribe by regulation.

(B)An election under this section shall be irrevocable and shall be binding for the liquidation year and for all determinations for prior and subsequent taxable years insofar as such determinations are affected by the adjustments under this section.

(e)For purposes of this chapter—

(1)If the closing inventory of the taxpayer for any replacement year reflects an increase over the opening inventory of such goods for such year, the goods reflecting such increase shall be considered, in the order of their acquisition, as having been acquired in replacement of the goods most recently liquidated (whether or not in a qualified liquidation) and not previously replaced.

(2)In the case of any qualified liquidation, any goods considered under paragraph (1) as having been acquired in replacement of the goods liquidated in such liquidation shall be taken into purchases and included in the closing inventory of the taxpayer for the replacement year at the inventory cost basis of the goods replaced.

(f)(1)If—

(A)an adjustment is required under this section for any taxable year by reason of the replacement of liquidated goods during any replacement year, and

(B)the assessment of a deficiency, or the allowance of a credit or refund of an overpayment of tax attributable to such adjustment, for any taxable year, is otherwise prevented by the operation of any law or rule of law (other than section 7122, relating to compromises),

(2)Solely for purposes of determining interest on any overpayment or underpayment attributable to an adjustment made under this section, such overpayment or underpayment shall be treated as an overpayment or underpayment (as the case may be) for the replacement year.

(g)The Secretary shall prescribe such regulations as may be necessary to coordinate the provisions of this section with the provisions of section 472.

Notes & Related Subsidiaries

Statutory Notes and Related Subsidiaries

Effective Date

Pub. L. 96–223, title IV, § 403(a)(3), Apr. 2, 1980, 94 Stat. 304, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “The

Amendments

made by paragraphs (1) and (2) [enacting this section] shall apply to qualified liquidations (within the meaning of section 473(c) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) in taxable years ending after October 31, 1979.”