RJ Graziano's use of LIFO inventory valuation to defer taxes

¶ … actions and maneuvers of RJ Graziano and their accountants. At issue is the fact that the income tax level for the firm stands to be very high and, as a way to mitigate that, the accountants have been instructed to execute a large inventory purchase towards the end of the year so as to blunt the amount of income tax that is due. However, there are a few procedural (if not legal) issues at hand due to the other factors involved. While RJ Graziano has the right to limit their income tax burden in several ways, doing so in the way in which they are trying per this case study is less than wise, and for a number of different reasons.

A number of questions are to be answered as part of this case study. The first will be to describe the effect of the transaction on both this year\'s and next year\'s income statement and why that happens to be the case. In short, what RJ Graziano is trying to do is to defer the income tax burden that is to come. The burden will have to be absorbed at some point but the firm is trying to push the income tax burden into a future quarter/year rather than deal with it now. A complicating factor is that the cost of the inventory that is to be purchased has risen fairly sharply over the year that is about to end. Before getting into that, it does have to be noted that the income tax burden will be lesser this year but more next year, all else equal. This will be aggravated or mitigated for the firm based on whether the cost of the inventory continues to rise or if it falls. If it were to fall, it could actually hurt RJ Graziano to do what it is doing in the long run as the cost of the inventory would be expensed based on what it was worth when it was bought.

The next question pertains to whether using a First In, First Out (FIFO) method would yield the same directive from the President. The answer to that question, of course, is almost certainly no. Generally speaking, using the FIFO method leads to higher income and, thus, higher taxes to be paid. Also, since the order in which the inventory is considered is different, there would obviously be income impacts (Merritt, 2017). The next question becomes whether the accountant should order the inventory purchase with no questions asked and what the implications happen to be when it comes to the same. As noted before, the LIFO method is in place. However, an interesting wrinkle is that LIFO is typically harnessed and used as a way to defer income taxes, as partially noted earlier. For that reason, the tax authorities would have a dim view of the practice as a way to prevent (or at least defer) tax liability. Specifically, the Internal Revenue Service (IRS) specifically forbids firms using LIFO as a means to defer income tax liability unless the agency has given special permission for the firm to do so. Unless or until that is granted for RJ Graziano, it would be exceedingly unwise for the firm to execute the inventory purchase. This is especially true if the purchase is just done as a way to defer income tax. Since the cost of inventory has risen sharply over the current year about to end, it is highly unlikely that the IRS could be convinced that the purchase is anything other than subterfuge to manipulate tax due (Accounting Tools, 2017).

As for the code that could or should be used to address the situation at hand here, the answer is clear. Indeed, the Code of Federal Regulations has a section that specifically pertains to this issue. The Code, often referred to as the CFR, is a listing and summary of the federal government of the United States\' administrative law. The relevant portion that shall be focused on here is the ability and right of the government to \"recapture\" benefits from LIFO-based accounting, on part with what RJ Graziano is trying to do. Since the government will almost certainly invoke the code if they catch what RJ Graziano is trying to do, it would be extremely unwise to even attempt to execute the plan in question. Based on the above, the accountant would obviously and easily be breaching rules and codes of conduct that go all the way to the federal government, let alone involve issues that are solely ethical. Given that, the steps that should be followed are as follows:

1) Address the President and other executives and inform them that what they are requesting is not in accordance with IRS and CFR guidelines. Thus, it should not be done unless the inventory purchase can otherwise be justified

2) Cite the relevant passages and rules in the CFR and IRS code that forbid the overt manipulation of income tax burden