How does reconstruction of base year costs affect Dollar Value pricing?
The double extension method is the “preferred method” to compute base year costs as stated in Treas. Reg. section 1.472-8(e)(1). However, in the auto dealership context, using the double extension method to reconstruct base year costs raises concerns and hence is more susceptible to error than other known methods. LIFO – Reconstruction of New Item Cost Treas. Reg. section 1.472-8(e)(2) states in part; “Double-extension method. —(i) Under the double-extension method the quantity of each item in the inventory pool at the close of the taxable year is extended at both base-year unit cost and current-year unit cost (emphasis added).” Under the double-extension method a base-year unit cost must be ascertained for new items entering a pool for the first time. The base-year unit cost of the new item shall be the current-year cost of that item unless the taxpayer is able to reconstruct or otherwise establish a different cost. If the new item is a product or raw material not in existence on the
