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use of the LIFO method generally results in lower taxes because
ending inventory will be lower, and therefore COGS will be
higher. Amity Leather Prods. Co. v. Commissioner, 82 T.C. 726,
731 (1984). “The theory behind LIFO is that income may be more
accurately determined by matching current costs against current
revenues, thereby eliminating from earnings any artificial
profits resulting from inflationary increases in inventory
costs.” Id. at 732.
In computing LIFO inventory values, two basic approaches are
used: The specific-goods method and the dollar-value method.
Hamilton Indus., Inc. & Sub. v. Commissioner, supra at 130; see
secs. 1.472-2, 1.472-8, Income Tax Regs. We have previously
compared the specific-goods LIFO method with the dollar-value
LIFO method:
Under the specific-goods method, the physical quantity
of homogeneous items of inventory at the end of the taxable
year is compared with the quantity of like items in the
beginning inventory to determine whether there has been an
increase or decrease during the year. Because the
specific-goods method requires the matching of physical
units, practically speaking, it is only used as a method for
valuing inventories in those industries with inventories
which contain a limited number of items with quantities that
are easily measured in units. In contrast to the
specific-goods method, the dollar-value method measures
increases or decreases in inventory quantities, not in terms
of physical units, but in terms of total dollars. Thus, to
determine whether there has been an increase or decrease in
the inventory during the year, the ending inventory is
valued in terms of total dollars that are equivalent in
value to the dollars used to value the beginning inventory.
Because it is not predicated upon the matching of specific
items, use of the dollar-value method permits the
application of the LIFO principle in those industries with
complex inventories containing a vast number of items. * * *
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