- 22 -
illustrates the distortions:
LIFO inventory LIFO inventory
undistorted distorted
Yr. 1 Yr. 2 Yr. 1 Yr. 2
1. Opening inventory $100 $300 $100 $200
2. Plus: Purchases 200 0 200 0
3. Equals: Cost of goods
available for sale 300 300 300 200
4. Less: Closing inventory 300 0 200 0
5. Equals: Cost of goods sold 0 300 100 200
6. Sales 0 300 0 300
7. Less: Cost of goods sold
(line 5.) 0 300 100 200
8. Equals: Gross Income
from sales 0 0 (100) 100
It should be noted that, if T’s failure to index the year 1
increment were corrected as of the beginning of year 2 (increasing
her year 2 opening inventory to $300), without any concomitant
increase in her year 1 ending inventory, then $100 of gross income
would go unreported (T would have a phantom loss of that amount in
year 1 with no offsetting gain in year 2), unless an offsetting
section 481 adjustment were made in year 2 to correct that apparent
windfall.
Respondent’s Examination and Adjustments
–- The Examination
Sometime after the members of the Huffman group filed their
1999 Federal income tax returns, respondent commenced an
examination of those and prior returns. Respondent identified
mistakes in the members’ beginning and ending inventory values
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