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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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