LIFO Layer Liquidations: Some Empirical Evidence

The LIFO inventory valuation method has received a great deal of attention as a means of postponing taxes. At the same time the tax consequences of a LIFO inventory liquidation have been virtually ignored. This research indicates that LIFO layer liquidations do occur and can, therefore, cause cash flow problems for corporations in the form of higher federal income tax payments. A hypothesis that LIFO layer liquidations is specific to certain cyclical industries was tested and affirmed. A survey indicated that two factors, cost of capital and income tax expense, were the more critical in the LIFO layer liquidation decision.