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article on hand at the inventory date shall be compared with the
cost of the article, and the lower of such values shall be taken
as the inventory value of the article.” Sec. 1.471-4(c), Income
Tax Regs.9
In 1992, Columbia disposed of all its then-existing
inventory. Although they subsequently acquired additional items
of inventory, petitioners incurred no direct cost (and have
established no indirect costs) for the items acquired, prior to
their purchase of some junked vehicles in April 1995.
Consequently, Columbia’s opening inventory for 1995 had a cost of
zero, which is consistent with petitioners’ reporting of a zero
ending inventory for 1994. See Steel or Bronze Piston Ring Corp.
v. Commissioner, 13 T.C. 636 (1949) (“consistency requires that
the opening inventory of each year correspond to the closing
inventory of the preceding year”).
9 The Supreme Court has summarized the lower of cost or
market approach as follows:
The taxpayer must value inventory for tax purposes at
cost unless the ‘market’ is lower. ‘Market’ is defined
as ‘replacement cost,’ and the taxpayer is permitted to
depart from replacement cost only in specified
situations. When it makes any such departure, the
taxpayer must substantiate its lower inventory
valuation by providing evidence of actual offerings,
actual sales, or actual contract cancellations. In the
absence of objective evidence of this kind, a
taxpayer’s assertions as to the ‘market value’ of its
inventory are not cognizable in computing its income
tax. [Thor Power Tool Co. v. Commissioner, 439 U.S.
522, 535 (1979).]
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