- 20 -
Under the accountant’s method, for years in which he
determined that there had been an increment to an inventory pool,
his failure to index the increment resulted in his understating the
yearend LIFO value of the pool (assuming that the cumulative index,
expressed as a percent, was greater than 100%), which, in turn,
resulted in (1) an unwarranted increase in his computation of the
cost of the goods sold from the pool, (2) an understatement of the
gross income attributable to those sales, and (3) an overstatement
of the LIFO reserve attributable to the pool.11 For years in which
he determined that an inventory pool had been liquidated in whole
or in part, his past failures to have indexed any increments
remaining in the pool at the beginning of the year resulted in his
computing too low a cost of goods sold from the pool, which, in
turn, resulted in an overstatement of the gross income attributable
to those sales. The accountant’s error did not result in the
permanent omission of any amount of gross income by any member.
The distortion resulting from the accountant’s error can be
seen in the following example: T, a merchant, elects to compute
her LIFO inventory using a dollar-value method and begins her first
year under the dollar-value method (year 1) with 100 units of an
inventoriable item with a base-year cost of $1.00 a unit. Later
11 The yearend LIFO value of the pool was understated
because, even under the LIFO method, inventory cannot be carried
at a cost lower than the actual cost of purchasing the inventory.
Cf. Fox Chevrolet, Inc. v. Commissioner, 76 T.C. 708, 732 n.15
(1981).
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