Dow A. and Sandra E. Huffman, et al. - Page 14

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                                            Ratio(as a                               
                                             percentage)                              
                         Dec. 31, yr. 1  of total                                     
                         inventory at        current-year  Dec. 31, yr. 1,            
                         Jan. 1, yr. 1,  cost to total  inventory at                  
          base-year cost   base-year cost LIFO value                                  
               Jan. 1, yr. 1,                                                         
               base cost      $14,000        100.00%        $14,000                   
               Dec. 31, yr. 1,                                                        
               increment         6,000       121.25%             7,275                
               Totals         20,000                        21,275                    
               The LIFO reserve for Pool No. 1 as of December 31, yr. 1, is           
          $2,975, computed as follows:                                                
               Dec. 31, yr. 1, inventory at current-year cost    $24,250              
               Less: LIFO value of ending inventory               21,275              
               Equals: LIFO reserve                              2,975                
               –- Link-Chain Method                                                   
               Where use of either an index or double-extension method is             
          impractical or unsuitable due to the nature of the inventory in a           
          dollar-value pool, a taxpayer may use a link-chain method of                
          computing the LIFO value of the pool.  Sec. 1.472-8(e)(1), Income           
          Tax Regs.  The regulations do not contain any examples that                 
          illustrate the computational procedures employed in using a link-           
          chain method.  Leslie J. Schneider, in his treatise, Federal                
          Income Taxation of Inventories (2006), explains the link-chain              
          method as follows:                                                          
               [T]he link-chain method is comparable to the double-                   
               extension method, except that the base year is rolled                  
               forward each year.  Thus, instead of comparing the                     
               current-year cost and the base-year cost of each item in               
               the ending inventory, under the link-chain method, the                 
               current-year cost and the preceding year’s cost                        
               (referred to as the item’s “prior-year cost”) of each                  
               item are compared.  This comparison is used to compute a               





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