- 27 -
is a change in the treatment of a material item and, therefore,
constitutes a change in method of accounting. Hamilton Indus.,
Inc. & Sub. v. Commissioner, supra at 126; Wayne Bolt & Nut Co.
v. Commissioner, supra at 511.
Investments changed its definition of its items of inventory
for its new car pool from body size to model line in taxable year
1981. This change caused Investments’ annual and cumulative
indexes to be lower than they would have been had Investments
continued using a body size definition of item. For example, the
taxable year 1980 cumulative deflator index for the new car pool
under a body size definition of item would be 2.090204, while the
cumulative deflator index under a model line definition would be
1.970891. Investments’ taxable year 1980 yearend new car
inventory at actual cost was $1,437,854.95. Accordingly, under a
body size definition of item, Investments’ taxable year 1980
ending inventory for new cars at base-year cost would be
$687,889.88; in contrast, under a model line definition of item,
its ending inventory at base-year cost would be $729,545.65
(1,437,854.95/2.090204 and 1,437,854.95/1.970891, respectively).
Since the annual and cumulative indexes would be lower under
the model line definition of item, Investments’ ending inventory
at base-year cost would be higher. Although a higher base-year
cost of ending inventory will generally produce higher taxable
income, i.e., COGS will be lower, taxpayers may, nevertheless,
desire a higher base-year cost of ending inventory in a given
Page: Previous 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 NextLast modified: May 25, 2011