- 17 -
method because it had used that method prior to adopting the LIFO
method and because that was the method used by the heavy truck
dealer industry. In using replacement cost in valuing its parts
inventory under the LIFO method, Mountain State Ford was not
attempting to, and did not, determine or approximate the invoice
prices of the parts that it purchased.
On May 22, 1995, respondent issued a notice of final S
corporation administrative adjustment (notice or FSAA) for 1991
to Mr. O'Meara, the tax matters person. In the notice, respon-
dent did not terminate the elections that Mountain State Ford
made in the Form 970 to value its parts inventory under the
dollar-value, link-chain LIFO method and to use the most recent
purchases method in determining the current-year cost of its
parts pool. However, respondent determined in the notice that
the cost of goods sold reported in Mountain State Ford's 1991
return should be reduced, and the ordinary income reported in
that return should be increased, by $463,515.3 The amount of
that reduction and that increase was equal to the amount of the
LIFO reserve that Mountain State Ford had calculated over the
period 1980 through 1991 (LIFO reserve). The adjustment at issue
in the notice thus was based on restoring to Mountain State
Ford's income the amount of that LIFO reserve. In making that
adjustment, respondent was unable to, and did not, recompute
Mountain State Ford's non-LIFO inventory value under a method
3 The parties settled the remaining adjustments in the
notice.
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