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Income Tax Regs., supra, provides complex rules for allocating
indirect costs to inventory.
In valuing petitioner's inventory, respondent used the
value of petitioner's work in process as reflected on
petitioner's balance sheets. The value reflected on the
balance sheets was based on Mr. Asher's estimate of the market
value of work in process and included the expected profit from
the work.
The regulations permit the use of market value only when
that value is less than cost. Therefore, respondent's use of
the value of work in process as reflected on petitioner's
balance sheets is improper. Additionally, the regulations
require a comparison of the market value of each article on
hand at the inventory date with the cost of the article.
Respondent made no attempt to properly identify inventory items
or the direct costs of such items or to properly allocate
indirect costs associated with such items under the uniform
capitalization rules of section 263A.
We find that respondent's method of valuing petitioner's
work in process was arbitrary and without sound basis in fact
or law.
2. Respondent's Method Is Not a Proper Accrual Method
a. Accounts Receivable
Respondent reduced petitioner's gross receipts by $53,462
to account for accounts receivable. Respondent excluded from
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