Dow A. and Sandra E. Huffman, et al. - Page 12

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          of the procedure for measuring the change in the size of a pool             
          is found in section 1.472-8(a), Income Tax Regs.                            
               Under any application of the dollar-value method, it is                
          necessary to have a means for computing the base-year costs of              
          the items in a pool and for computing the value of any increment            
          in, or liquidation of, the pool.  Gertzman par. 7.04[3][b], at 7-           
          45.  As stated by the regulations, with respect to an increment:            
          “In determining the inventory value for a pool, the increment, if           
          any, is adjusted for changing unit costs or values by reference             
          to a percentage, relative to base-year cost, determined for the             
          pool as a whole.”  Sec. 1.472-8(a), Income Tax Regs.  Three                 
          methods for making those computations are authorized by section             
          1.472-8(e)(1), Income Tax Regs.: the double-extension method, an            
          index method, and a link-chain method.  The following Example               
          (1), based on an example in the regulations illustrating the                
          double-extension method,8 shows how all three methods work.                 
          Example (1) demonstrates the computation of T’s ending inventory            
          for year 1.                                                                 
               Example (1):  T elects, beginning with calendar year 1, to             
          compute its inventory by use of the dollar-value LIFO method.  T            
          creates Pool No. 1 for items A, B, and C.  The composition of the           
          inventory for Pool No. 1 at the base date, January 1 of year 1,             
          is as follows:                                                              
               Items          Units     Unit Cost     Total Cost                      
               A         1,000          $5.00          $5,000                         

               8  Sec. 1.472-8(e)(2)(v), Example (1), Income Tax Regs.                




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