LIFO v. FIFO

To many a U.S. corporation, LIFO is a magic formula in times of inflation. It cuts their profits for tax purposes without taking a penny out of their coffers. Under LIFO--pronounced lie-fo and standing for "last in, first out"--the Government permits inventory to be figured by the cost of the last stock bought during the year, on the theory that it is the first to be sold. Thus the profit on an item costing $2 in January and $3 in December is figured on the basis of the higher cost, thus a lower tax. Though designed (in 1938) for industries that handle only a few materials, LIFO has long been eyed by big department stores as a possible taxsaver. Last week Manhattan's R. H. Macy & Co. won a test case in court against the Government that reaffirmed its right to use LIFO, entitled it to tax refunds that may total $9,000,000.

Like most department stores, Macy's at first used FIFO--first in, first out--which computes the year's profits on the basis of the first stock bought during the year. Though FIFO is less advantageous during inflation, when costs are steadily rising, many stores prefer it because it guards them against higher taxes should inventory costs begin to fall. Companies cannot switch back and forth; Government permission is needed to do so. Gambling on continued price rises, Macy's asked permission to use LIFO in 1942. The Government refused, but in 1947 allowed a Baltimore department store, Hutzler Brothers, to file under LIFO after the store won its case in federal tax court. Soon after, Macy's began paying taxes under LIFO, won the Government's O.K. in 1951. But in 1954 the Government ruled that Macy's had not been eligible to file under LIFO for the 1942-47 period, and Macy's brought the case to court. If this week's ruling by a Manhattan federal court is upheld, Macy's hopes to collect refunds for each year from fiscal 1942 through 1947. Alarmed by the possibility that other department stores may jump on the LIFO bandwagon, the Government announced that it will appeal the case to the Supreme Court if necessary.

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