                            112 T.C. No. 7



                     UNITED STATES TAX COURT



MOUNTAIN STATE FORD TRUCK SALES, INC., E. P. O'MEARA, TAX MATTERS
                      PERSON, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16350-95.                      Filed March 2, 1999.



          Company M (M), a heavy truck dealer, purchased
     heavy truck parts and accessories (parts) from the
     manufacturers of those parts and sold them to its
     customers. M, which is required to use inventories
     pursuant to sec. 471, I.R.C., made elections under sec.
     472, I.R.C., effective as of the close of its taxable
     year 1980, to apply the last-in, first-out (LIFO)
     method of inventory accounting (LIFO method) with
     respect to its parts inventory, to use the dollar-value
     LIFO method, to calculate the price index for its parts
     pool pursuant to the link-chain method, and to use the
     "most recent purchases method" in computing the "total
     current-year cost of items making up" its parts pool.
     In determining that current-year cost as a first step
     in valuing its parts inventory under the dollar-value
     LIFO method, M used the respective manufacturers'
     prices that were in effect as of the date of its physi-
     cal inventory (replacement cost) for the inventoried
     parts that it had purchased.

          Respondent determined that M's method of using
     replacement cost in valuing its parts inventory under
                               - 2 -


     the LIFO method does not clearly reflect income because
     it is contrary to the requirements of sec. 472, I.R.C.,
     and the regulations thereunder and that M's ordinary
     income for the year at issue should be adjusted to
     include the amount of the so-called LIFO reserve that M
     had computed during the period 1980 through the year at
     issue.

          Held: Respondent did not abuse respondent's
     discretion in determining that M's method of using
     replacement cost in valuing its parts inventory under
     the LIFO method does not clearly reflect income.

          Held, further: Respondent did not place M on an
     impermissible method of inventory accounting when
     respondent adjusted M's ordinary income for the year at
     issue to include the amount of the so-called LIFO
     reserve that M had computed during the period 1980
     through the year at issue, and consequently respondent
     did not abuse respondent's discretion in making that
     adjustment.



     Leslie J. Schneider, Patrick J. Smith, and William F.

Garrow, for petitioner.

     Michael J. Cooper, for respondent.



     CHIECHI, Judge:   Respondent determined S corporation adjust-

ments for 1991 to the ordinary income of Mountain State Ford

Truck Sales, Inc. (Mountain State Ford), in the amount of

$504,013.

     The issues remaining for decision are:

     (1) Did respondent abuse respondent's discretion in deter-

mining that Mountain State Ford's method of using replacement

cost in valuing its parts inventory under the LIFO method does

not clearly reflect income?   We hold that respondent did not.
                                - 3 -


     (2) Even though we have held that respondent did not abuse

respondent's discretion in making the determination described

above, did respondent abuse respondent's discretion by placing

Mountain State Ford on an impermissible method of inventory

accounting when respondent adjusted Mountain State Ford's ordi-

nary income for 1991 to include the amount of the so-called LIFO

reserve that it had calculated during the period 1980 through

1991?    We hold that respondent did not.

                          FINDINGS OF FACT1

     Some of the facts have been stipulated and are so found.

     Mountain State Ford, which was incorporated in Delaware in

1968 and has been an S corporation since its taxable year 1987,

had its principal place of business in Denver, Colorado, at the

time the petition was filed.    E. P. O'Meara (Mr. O'Meara), who

worked in the automobile and truck dealer industry on a part-time

basis since late 1939 and on a full-time basis since January

1947, is Mountain State Ford's tax matters person.

     In January 1968, Mr. O'Meara started operating Mountain

State Ford as a heavy truck dealer under a management agreement

with Ford Motor Company (Ford), which owned all of its stock.      As

a heavy truck dealer for Ford, Mountain State Ford carried, and

maintained an inventory of, different types of heavy truck parts

     1
        Unless otherwise indicated, our Findings of Fact and
Opinion pertain to all periods since the incorporation of
Mountain State Ford to the trial in this case; all section
references are to the Internal Revenue Code (Code) in effect for
the year at issue; and all Rule references are to the Tax Court
Rules of Practice and Procedure.
                               - 4 -


and accessories manufactured by Ford.    It also carried different

types of parts of other manufacturers, some of which were present

in 1968 and others of which were added later.

     Mr. O'Meara continued operating Mountain State Ford under

the management agreement with Ford until around 1978.   At that

time, Mr. O'Meara, his son Eugene Peter O'Meara, Jr., and other

family members completed their purchase from Ford, pursuant to

the terms of that management agreement, of all of the stock of

Mountain State Ford, which they began acquiring during 1975.

After having purchased all of the stock of Mountain State Ford,

Mr. O'Meara and Eugene Peter O'Meara, Jr., continued to operate

Mountain State Ford as a heavy truck dealer for Ford.   On July

31, 1985, Mountain State Ford became a heavy truck dealer for

American Isuzu Motors Inc. and began carrying its parts.

     Eugene Peter O'Meara, Jr., has been employed by Mountain

State Ford since 1974 and has served as its president since 1990.

As its president, Eugene Peter O'Meara, Jr., oversaw all of the

operations of Mountain State Ford, including its new and used

heavy truck sales departments, parts department, service depart-

ment, and lease and rental operations.

     From its incorporation until the date in 1978 on which Ford

no longer owned any stock of Mountain State Ford, only Ford

employees served as members of the board of directors of Mountain

State Ford.   Nonetheless, Mr. O'Meara was involved in all aspects

of Mountain State Ford's business since it was formed in 1968 and
                               - 5 -


served at various times as Mountain State Ford's general manager,

president, and chairman of its board of directors.

     When Mountain State Ford commenced business in 1968, the

accounting methods that it adopted and the books and records that

it maintained were in accordance with the Ford standard system

for Ford truck dealers.   That system included the way in which

the parts inventory was to be maintained.   Throughout the period

from its incorporation until 1978 when Ford no longer owned any

stock of Mountain State Ford, Ford required that Mountain State

Ford retain an independent certified public accountant (C.P.A.)

to conduct an annual audit, prepare its financial statements,

provide an unqualified opinion for those statements, prepare its

tax returns, and observe the taking of its physical inventory.

During that same period, Ford required that Mountain State Ford's

independent C.P.A. value Mountain State Ford's parts inventory

(1) for Ford parts on the basis of "the dealer net prices as

incorporated in the latest dealer price lists published by Ford"

and (2) for other manufacturers' parts on the basis of "the

dealer net prices as incorporated in the latest dealer price

lists published by the applicable manufacturer".

     On a daily basis, Mountain State Ford ordered and received

parts from manufacturers that ranged in number from one to

hundreds, sold parts to customers, and, for reasons not disclosed

by the record, received parts that were returned by certain of

its customers.   The price that each manufacturer charged Mountain

State Ford for each of the parts that it ordered was published in
                               - 6 -


a price list or price catalog (price catalog) that each such

manufacturer distributed to heavy truck dealers, including

Mountain State Ford.   On a periodic basis, each manufacturer

updated its price catalog to reflect any changes in the prices of

such manufacturer's parts and distributed such updated price

catalogs to Mountain State Ford and other heavy truck dealers.

During the period 1980 through 1991, Ford distributed approxi-

mately four to six updated price catalogs each year.

     The different types of parts that Mountain State Ford

carried fluctuated in quantity, but usually totaled about 12,000

out of approximately 17,000 potential different types of parts.

For each such type of part, Mountain State Ford could have

carried as few as one unit or as many as several dozen units,

each or several of which it acquired at different times and

different prices and from different manufacturers.   The units of

different types of parts in Mountain State Ford's parts inventory

turned over at different rates.   While Mountain State Ford's

parts inventory generally turned over every 3 or 4 months, some

units of different types of parts were in its parts inventory for

more than 12 months.

     The respective manufacturers of the different types of parts

carried by Mountain State Ford assigned parts numbers (parts

numbers) to those types of parts.   During any year, a manufac-

turer could have (1) changed a part number for a type of part

without altering that type of part and/or (2) added a new part

number because it altered an existing type of part and/or occa-
                               - 7 -


sionally developed a new type of part.   However, from year to

year, only 10 percent to 15 percent of the parts numbers for

parts carried by Mountain State Ford changed.   For the parts

numbers that did change, Mountain State Ford could have deter-

mined the corresponding parts numbers for the year prior to the

change, but did not do so.

     While each different type of part that Mountain State Ford

carried in its parts inventory was assigned a part number, in

most instances each unit of a particular type of part was not

identified separately from every other unit of that same type of

part.   However, in some instances each unit of the same type of

certain large parts, such as engines, transmissions, and rear

axles, was identified not only by a part number, but also by a

serial number.

     Consistent with standard industry practice for heavy truck

dealers, Mountain State Ford maintained an inventory of parts by

using a computerized recordkeeping system which listed, inter

alia, the quantity of units on hand of each of the different

types of parts that it carried.   Mountain State Ford maintained

that system, which it referred to as its perpetual recordkeeping

system (perpetual inventory recordkeeping system), with the

assistance of a company that provided computer services (computer

vendor) to businesses in the heavy truck dealer industry.   The

manufacturers authorized several computer vendors to assist heavy

truck dealers in the valuation of those dealers' parts invento-

ries.   Prior to 1994 Mountain State Ford utilized Ford's Dealer
                                - 8 -


Computer Services Division, and since 1994 it has utilized ADP,

Inc., as its computer vendor.   In addition to advising Mountain

State Ford and other heavy truck dealers of changes in the prices

of its parts through the periodic distribution of updated price

catalogs, each manufacturer provided to the computer vendors, at

about the same times it distributed such catalogs, computer-ready

mediums, such as magnetic tapes (computerized price update

tapes), which reflected such price changes.

     Under its perpetual inventory recordkeeping system, Mountain

State Ford (1) added to its parts inventory the number of units

of each type of part that were delivered and returned to it and

(2) removed from its parts inventory the number of units of each

type of part that it sold.   When Mountain State Ford received the

parts that it had ordered from a manufacturer, it also received a

computer-ready medium, such as a magnetic tape (shipping tape),

and packing sheets (packing sheets) that included a packing slip.

The shipping tape reflected the part number of each type of part

and the number of units of each such type that the manufacturer

had shipped, or had intended to ship, to Mountain State Ford, but

did not contain any information showing the prices that the

manufacturer charged Mountain State Ford for those parts.

Mountain State Ford used the shipping tape to enter into its

perpetual inventory recordkeeping system the part number and the

number of units of each type of part that the manufacturer

shipped, or intended to ship, to it.
                               - 9 -


     The packing sheets that accompanied each shipment of parts

to Mountain State Ford reflected the same information which

appeared on the shipping tape and which Mountain State Ford

entered into its perpetual inventory recordkeeping system.

Mountain State Ford used the packing sheets to verify that it

received the quantity of units of each type of part that was

shown as shipped on such sheets and on the shipping tape.    Upon

delivery at Mountain State Ford's place of business of parts

shipped to it, an employee in its parts department compared the

packing sheets with the quantity of units of each type of part

that had been delivered.   If after making that comparison the

employee determined that the packing sheets were inaccurate, an

employee adjusted Mountain State Ford's perpetual inventory

recordkeeping system to reflect the quantity of units of each

type of part that had in fact been delivered to it.

     At the end of each business day, Mountain State Ford trans-

mitted to its computer vendor a record of the transactions that

were effected on that day.   The computer vendor computed a value

for the quantity of units of each type of part (1) delivered to,

(2) returned to, and/or (3) sold by Mountain State Ford on each

business day by using the price which the manufacturer of each

such type was charging on that day and which was reflected on the

computerized price update tape that each such manufacturer had

provided to that vendor and in the updated price catalog that

each such manufacturer had distributed to Mountain State Ford and

other heavy truck dealers.
                              - 10 -


     Mountain State Ford generally received invoices on a monthly

basis from the manufacturers for the parts that those manufactur-

ers had shipped, or had intended to ship, to it.   With respect to

those parts, each such invoice showed the part number of each

type of part, the quantity of units of each such type, and the

purchase price of each such unit.   (We shall sometimes refer to

the price of each unit of each type of part as shown on the

invoice that the manufacturer sent to Mountain State Ford as the

invoice price.)

     Upon receipt of a manufacturer's invoice, an employee of

Mountain State Ford entered the total of the invoice prices

(aggregate invoice price) of all the parts, but not the invoice

price of each unit of each type of part, into an account which

Mountain State Ford maintained for the parts that it purchased

(purchases account).   Mountain State Ford did not utilize the

purchases account in maintaining its inventory.    Another employee

of Mountain State Ford in charge of payables verified with the

parts department that Mountain State Ford had received the number

of units of each type of part that was listed on each invoice,

and, if so, Mountain State Ford paid the aggregate invoice price.

Once Mountain State Ford paid the aggregate invoice price, it

filed the invoice by manufacturer and invoice date.

     Where (1) there was a shortage in the quantity of units of

one or more types of parts that the manufacturer intended to ship

to Mountain State Ford, as shown on the shipping tape and the

packing sheets, (2) the manufacturer mistakenly sent Mountain
                              - 11 -


State Ford an invoice which billed it for the units that it had

not received, and (3) Mountain State Ford paid, for reasons not

disclosed in the record, the incorrect aggregate invoice price,

Mountain State Ford filed a shortage claim (shortage claim) with

the manufacturer from whom it had ordered the parts.   In those

instances where Mountain State Ford filed a shortage claim, the

manufacturer to whom such a claim was made issued a credit to

Mountain State Ford in an amount calculated by reference to the

manufacturer's price in effect around the time Mountain State

Ford filed the shortage claim for each unit listed in that claim.

The manufacturer issued a credit in that amount regardless

whether it had originally charged, and sent Mountain State Ford

an invoice showing, a different invoice price for each such unit.

     Mountain State Ford took a physical inventory in late

September or early October, and in a couple of instances in early

November, of each year and adjusted the balance of the quantity

of the units of each type of part reflected in its perpetual

inventory recordkeeping system to reflect each such quantity

physically on hand.   After taking the physical inventory, Moun-

tain State Ford notified the computer vendor of each such quan-

tity physically on hand.   Consistent with standard industry

practice in the heavy truck dealer industry, the computer vendor

determined the value of Mountain State Ford's parts inventory as

of the date of the physical inventory by computing a value for

the quantity of units of each type of part physically on hand by

using the price which the manufacturer of each such type was
                              - 12 -


charging as of that date and which was reflected on the computer-

ized price update tape that each such manufacturer had provided

to that vendor. (We shall refer to the prices reflected on those

tapes at which the different types of parts were valued as of the

date of Mountain State Ford's physical inventory as replacement

cost.)   The replacement cost on which Mountain State Ford valued

the parts in its parts inventory as of the date of the physical

inventory was not necessarily the same as the invoice prices

thereof.   In order to determine the value of its parts inventory

at the end of each year (ending parts inventory), Mountain State

Ford adjusted, in a manner not disclosed by the record, its parts

inventory valued at the time of its physical inventory for any

deliveries and returns of parts to it and/or sales of parts by it

between that time and the end of the year.    Prior to 1980,

Mountain State Ford's ending parts inventory, determined as just

described, was used as its ending parts inventory for both

financial statement and Federal income tax (Federal tax) pur-

poses.

     Throughout the period from its incorporation until the date

in 1978 on which Ford no longer owned any stock of Mountain State

Ford, Mountain State Ford did not use the invoice prices or the

purchases account in maintaining its inventory under its perpet-

ual inventory recordkeeping system.    That was because, as dis-

cussed above, Ford required that Mountain State Ford's parts

inventory be valued for Ford parts on the basis of "the dealer

net prices as incorporated in the latest dealer price lists
                               - 13 -


published by Ford" and for other manufacturers' parts on the

basis of "the dealer net prices as incorporated in the latest

dealer price lists published by the applicable manufacturer".

Nor did Mountain State Ford maintain inventory records which

showed the invoice price that it paid for each unit of each type

of part (1) delivered and/or returned to it and added to its

parts inventory and/or (2) sold by it and removed from that

inventory.    However, Mountain State Ford did maintain other

records, such as accounts payable records and invoices, which

listed the invoice price paid by Mountain State Ford for each

unit of each type of part delivered to it.

     After 1978, when Ford no longer owned any stock of Mountain

State Ford, Mountain State Ford was free to use an engagement

letter in employing a C.P.A. to audit its financial statements

and prepare its tax returns that was different from the letter

that it had previously used when Ford owned stock of Mountain

State Ford.   Mountain State Ford also became free to adopt

accounting methods and/or procedures that were different from

those which it employed when it was owned by Ford, including its

method of valuing its parts inventory on the basis of replacement

cost, provided that it sought and received the consent of the

Internal Revenue Service before it made a change, inter alia, in

that method of valuing its parts inventory.    After 1978, when

Ford no longer owned any stock of Mountain State Ford, Mountain

State Ford made no attempt to determine whether it could have

modified its perpetual inventory recordkeeping system so that it
                               - 14 -


could have used invoice prices in valuing its parts inventory.

Nor did it determine whether it could have created a new inven-

tory recordkeeping system that could have used invoice prices in

that inventory valuation process.   Instead, Mountain State Ford

continued to use replacement cost in valuing its parts inventory

because it had used that method when Ford owned it and because

that was the method used by the heavy truck dealer industry.

     In 1978, respondent conducted an examination of Mountain

State Ford's return for 1976, during which respondent requested

documents with respect to Mountain State Ford's inventories for

that year.   As part of that examination, respondent did not

propose any adjustments to Mountain State Ford's method of

valuing its parts inventory.

     From its incorporation in 1968 through 1979, Mountain State

Ford accounted for its parts inventory on the basis of the lower

of cost or market (LCM).   Mountain State Ford submitted Form 970

(Form 970), Application to Use LIFO Inventory Method, with its

1980 return.   In that form, Mountain State Ford adopted the LIFO

method of valuing its parts inventory and its new heavy trucks

inventory, effective as of the close of its taxable year ended

December 31, 1980.   It adopted the same method for both financial

statement and Federal tax purposes.     As pertinent here with

respect to Mountain State Ford's parts inventory,2 the Form 970


     2
        Mountain State Ford's election of the LIFO method with
respect to its new heavy trucks inventory is not at issue in this
case.
                             - 15 -


stated that Mountain State Ford intended to (1) take inventory

"at actual cost regardless of market value", (2) value its parts

inventory on the dollar-value LIFO method, (3) use one pool

(parts pool) for its parts inventory, (4) calculate the price

index for its parts pool pursuant to the link-chain method, and

(5) "determine the cost of * * * [parts] in the closing inventory

in excess of those in the opening inventory" on the basis of

"most recent purchases"; i.e., pursuant to the most recent

purchases method under section 1.472-8(e)(2)(ii)(a), Income Tax

Regs. (most recent purchases method).   Mountain State Ford

attached a schedule to the Form 970 which stated in pertinent

part:

     Cost System Used for Parts Inventory

          The taxpayer [Mountain State Ford] keeps detailed
     records of the cost of all parts in inventory. The
     total actual cost of all parts inventory will be di-
     vided by the number of each type of part on hand at the
     end of the year.

In response to a request in the Form 970 to indicate the "Method

used in computing LIFO value of dollar-value pools", Mountain

State Ford attached a schedule which stated in pertinent part:

     Link-Chain Method for Parts Inventory

          The taxpayer [Mountain State Ford] receives weekly
     reports from Ford Motor Company which indicate the
     increase in prices for a major portion of the parts
     inventory which is supplied to the taxpayer from Ford
     Motor Company. The taxpayer compares this list of
     prices with the actual cost of the same items in the
     parts inventory to develop a current year price index.
     * * * The index developed by this large sample is then
     applied to the total parts inventory. Once a yearly
     index is developed it will be added to prior year
     indices to develop a cumulative index.
                              - 16 -



     After having elected the LIFO method, Mountain State Ford

continued to use replacement cost, determined in the same manner

as it had calculated it prior to that election, in valuing its

ending parts inventory for financial statement and Federal tax

purposes.   However, Mountain State Ford used replacement cost in

that valuation process as the starting point in determining its

ending parts inventory under the dollar-value LIFO method; i.e.,

it used replacement cost in the computation of the total current-

year cost of items making up its parts pool under section 1.472-

8(e)(2)(ii), Income Tax Regs. (current-year cost of its parts

pool).   After computing such current-year cost, Mountain State

Ford computed an annual price index designed to measure the

change in the cost of parts from one year to the next.   That

index was computed by reference to, inter alia, the respective

manufacturers' prices each week for parts carried by Mountain

State Ford in its parts inventory and the respective manufactur-

ers' prices for such parts as of the end of the preceding week.

     At the time Mountain State Ford adopted the LIFO method, it

made no attempt to determine whether it could have modified its

perpetual inventory recordkeeping system so that it could have

used invoice prices in valuing its parts inventory.   Nor did it

determine whether it could have created a new inventory record-

keeping system that could have used invoice prices in that val-

uation process.   Instead, Mountain State Ford continued to use

replacement cost in valuing its parts inventory under the LIFO
                               - 17 -


method because it had used that method prior to adopting the LIFO

method and because that was the method used by the heavy truck

dealer industry.    In using replacement cost in valuing its parts

inventory under the LIFO method, Mountain State Ford was not

attempting to, and did not, determine or approximate the invoice

prices of the parts that it purchased.

     On May 22, 1995, respondent issued a notice of final S

corporation administrative adjustment (notice or FSAA) for 1991

to Mr. O'Meara, the tax matters person.    In the notice, respon-

dent did not terminate the elections that Mountain State Ford

made in the Form 970 to value its parts inventory under the

dollar-value, link-chain LIFO method and to use the most recent

purchases method in determining the current-year cost of its

parts pool.    However, respondent determined in the notice that

the cost of goods sold reported in Mountain State Ford's 1991

return should be reduced, and the ordinary income reported in

that return should be increased, by $463,515.3    The amount of

that reduction and that increase was equal to the amount of the

LIFO reserve that Mountain State Ford had calculated over the

period 1980 through 1991 (LIFO reserve).    The adjustment at issue

in the notice thus was based on restoring to Mountain State

Ford's income the amount of that LIFO reserve.    In making that

adjustment, respondent was unable to, and did not, recompute

Mountain State Ford's non-LIFO inventory value under a method

     3
          The parties settled the remaining adjustments in the
notice.
                              - 18 -


using the invoice prices of parts inventoried or a cost other

than replacement cost.   That was because Mountain State Ford did

not have, and did not provide to respondent, the records that

were necessary in order to calculate for the period 1980 through

1991 (1) the LIFO value and the non-LIFO value of its parts

inventory and (2) its LIFO reserve on the basis of invoice prices

or a cost other than replacement cost.   Thus, the non-LIFO value

that was used to compute the amount of the adjustment at issue in

the notice (i.e., the amount of the LIFO reserve that Mountain

State Ford had calculated for the period 1980 through 1991) was

based on replacement cost.

                              OPINION

     The issues presented implicate not only section 472, enti-

tled "Last-In, First-Out Inventories", but also section 446,

entitled "General Rule for Methods of Accounting", and section

471, entitled "General Rule for Inventories".   Sections 446 and

471 and the regulations thereunder are the provisions that vest

the Commissioner of Internal Revenue (Commissioner) with wide

discretion in determining whether a method of inventory account-

ing should be disallowed because it does not clearly reflect

income.   Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 532-

533 (1979); Consolidated Manufacturing, Inc. v. Commissioner, 111

T.C. 1, 19 (1998).   The Commissioner's interpretation of the

clear-reflection standard under sections 446 and 471 may not be

disturbed unless it is clearly unlawful or plainly arbitrary.

Thor Power Tool Co. v. Commissioner, supra; Consolidated Manufac-
                              - 19 -


turing, Inc. v. Commissioner, supra.   The Commissioner's discre-

tion under sections 446 and 471 is not unbridled, however.    Thor

Power Tool Co. v. Commissioner, supra at 533; Consolidated

Manufacturing, Inc. v. Commissioner, supra.   Even if a taxpayer's

accounting method does not result in a clear reflection of

income, the Commissioner may not change the taxpayer's accounting

method to another method that also fails to reflect income

clearly.   Harden v. Commissioner, 223 F.2d 418, 421 (10th Cir.

1955), revg. 21 T.C. 781 (1954) and affg. Harden v. Hinds, 48

AFTR 1268, 54-1 USTC par. 9348 (W.D. Okla. 1954); Rotolo v.

Commissioner, 88 T.C. 1500, 1514 (1987).

     As framed by petitioner, the question relating to the clear-

reflection-of-income standard is whether respondent abused

respondent's discretion in concluding that, in computing the LIFO

value of its dollar-value parts pool under the link-chain

method,4 Mountain State Ford's use of replacement cost in

     4
        The parties disputed at trial whether there are deficien-
cies in the manner in which Mountain State Ford computed the
price indices under its link-chain method. However, after trial
the parties entered into a second supplemental stipulation
regarding those price indices. According to that stipulation, in
the event that the Court were to sustain Mountain State Ford's
method of using replacement cost in computing the LIFO value of
its parts inventory, respondent's adjustment in the notice to
Mountain State Ford's ordinary income for 1991 would be reduced
from $463,515 to $53,870. That reduction would be made in that
event in order to reflect the parties' agreement in the second
supplemental stipulation to correct certain of the alleged
deficiencies that respondent had found in Mountain State Ford's
computation of the price indices under its link-chain method.
The parties further agreed in that stipulation that in the event
that the Court were not to permit Mountain State Ford's method of
using replacement cost in computing the LIFO value of its parts
                                                   (continued...)
                              - 20 -


determining the current-year cost of its parts pool pursuant to

any other proper method under section 1.472-8(e)(2)(ii)(d),

Income Tax Regs.5 (any other proper method), which petitioner

claims Mountain State Ford elected in the Form 970, does not

clearly reflect income.   Respondent agrees with petitioner's

framing of the issue relating to the clear-reflection-of-income

standard except that respondent contends that Mountain State Ford

     4
      (...continued)
inventory, respondent's adjustment in the notice to Mountain
State Ford's ordinary income for 1991 would be sustained. Thus,
no issue regarding the price indices calculated by Mountain State
Ford under its link-chain method remains for our decision.
     5
        Sec. 1.472-8(e)(2), Income Tax Regs., which describes the
double-extension method of computing the LIFO value of a dollar-
value pool, provides in pertinent part:

          (ii) The total current-year cost of items making
     up a pool may be determined--

               (a) By reference to the actual cost of
          the goods most recently purchased or
          produced;

               (b) By reference to the actual cost of
          the goods purchased or produced during the
          taxable year in the order of acquisition;

               (c) By application of an average unit
          cost equal to the aggregate cost of all of
          the goods purchased or produced throughout
          the taxable year divided by the total number
          of units so purchased or produced; or

               (d) Pursuant to any other proper method
          which, in the opinion of the Commissioner,
          clearly reflects income.

Although sec. 1.472-8, Income Tax Regs., relating to the dollar-
value LIFO method does not discuss how the link-chain method that
Mountain State Ford elected in the Form 970 is to be applied, the
parties agree that sec. 1.472-8(e)(2)(ii), Income Tax Regs.,
applies to the link-chain method.
                              - 21 -


elected in the Form 970 to use the most recent purchases method,

and not any other proper method, in determining the current-year

cost of its parts pool.6

     In inventorying goods with respect to which a taxpayer

elected the LIFO method, the taxpayer is required to (1) treat

those goods remaining on hand at the end of the taxable year as

being (a) those included in the opening inventory of the taxable

year, in the order of acquisition and to the extent thereof, and

(b) those acquired during the taxable year, sec. 472(b)(1); sec.

1.472-1(a), Income Tax Regs.; and (2) inventory them at cost,

sec. 472(b)(2); sec. 1.472-2(b), Income Tax Regs.

     There are two basic LIFO computational systems.    One is

based on specific goods (specific-goods LIFO method).    See sec.

1.472-2, Income Tax Regs.   The other is based on the dollars

invested in inventory and is known as the dollar-value LIFO

method.   See sec. 1.472-8, Income Tax Regs.   Under the specific-

goods LIFO method, quantitative changes in inventory during the

year are measured in terms of an appropriate unit, such as

pounds, pieces, or gallons.   The dollar-value LIFO method deter-

mines increases or deceases in inventory in terms of total

     6
        The parties and their respective experts also disagree
about whether Mountain State Ford's method of using replacement
cost under the LIFO method complies with generally accepted
accounting principles (GAAP) and conforms as nearly as may be to
the best accounting practice in Mountain State Ford's trade or
business, as required by sec. 471 and the regulations thereunder.
However, our resolution of the disagreement between the parties
about the clear-reflection-of-income standard makes it
unnecessary for us to address the parties' and their respective
experts' dispute over GAAP.
                              - 22 -


dollars, rather than in terms of physical units.    Amity Leather

Prods. Co. v. Commissioner, 82 T.C. 726, 732 (1984).   To deter-

mine under the dollar-value LIFO method whether there has been an

increase or a decrease in inventory during the year, the ending

inventory is valued in terms of total dollars that are equivalent

in value to the dollars used to value the beginning inventory.

Id.

      Respondent argues that the term "cost" in section 472(b)(2)

and the regulation thereunder (viz., section 1.472-2(b), Income

Tax Regs.) means actual cost and that, as required by section

472(b)(2), section 1.472-8(e)(2)(ii), Income Tax Regs., pertain-

ing to the dollar-value LIFO method mandates that the determina-

tion of the current-year cost of items making up a pool be made

on the basis of, or by reference to, actual cost.   According to

respondent, Mountain State Ford's method of using replacement

cost, instead of actual cost, in determining the current-year

cost of its parts pool contravenes those requirements of the Code

and regulations, and consequently that method does not clearly

reflect income.

      Petitioner concedes that if the Court were to find that

Mountain State Ford's method of using replacement cost were to

contravene the requirements of the provisions of the Code and the

regulations upon which respondent relies, that method would not

clearly reflect income.   However, petitioner argues that those

provisions do not require that Mountain State Ford determine the

current-year cost of its parts pool by using actual cost.
                             - 23 -


According to petitioner, respondent's interpretation of the term

"cost" in section 472(b)(2) as meaning actual cost is wrong, and

Mountain State Ford's method of using replacement cost qualifies

as any other proper method under section 1.472-8(e)(2)(ii)(d),

Income Tax Regs., which does not require the use of actual cost.

     To support his argument that respondent's position about the

meaning of the term "cost" in section 472(b)(2) and the regula-

tion thereunder is wrong, petitioner asserts:

          With regard to the "cost" requirement in section
     472(b)(2), the petitioner submits that an examination
     of the statute and regulations, as well as the histori-
     cal development surrounding the LIFO method, makes
     clear that the cost requirement in section 472(b)(2) is
     simply the expression of the rule that the lower of
     cost or market method may not be used in conjunction
     with the LIFO method. Accordingly, the respondent is
     attempting to extend the cost requirement in section
     472(b)(2) far beyond its intended scope.

               *    *    *    *    *    *       *

     * * * The use of replacement costs * * * under the
     dollar-value LIFO method does not in any way represent
     a use of lower of cost or market and, accordingly, does
     not violate the cost requirement of section 472.

     Even assuming arguendo that petitioner were correct in his

contention about the reason why Congress required that goods for

which a taxpayer elected the LIFO method be inventoried at cost,7

that contention does not address the meaning of the term "cost"




     7
        It is noteworthy that the replacement cost as of the date
of Mountain State Ford's physical inventory, which it used in
determining the LIFO value of its dollar-value parts pool, is
analogous to "market" in inventory tax accounting. See Thor
Power Tool Co. v. Commissioner, 439 U.S. 522, 534 (1979); sec.
1.471-4(a)(1), Income Tax Regs.
                                  - 24 -


in section 472(b)(2) and the regulation thereunder.          Section

472(b)(2) provides:

          (b) Method Applicable.--In inventorying goods
     specified in the application described in subsection
     (a), the taxpayer shall:

                  *      *    *    *     *      *    *

                  (2) Inventory them at cost * * *

The regulation under section 472(b)(2), section 1.472-2(b),

Income Tax Regs., provides:

          (b) The inventory shall be taken at cost regard-
     less of market value.

     Both parties rely in part on dictionary definitions of the

word "cost" to support their divergent positions regarding the

meaning of the term "cost" in section 472(b)(2) and the regula-

tion thereunder.       According to respondent, the commonly under-

stood and generally accepted meaning of the word "cost", as

reflected in dictionary definitions, is actual cost.          According

to petitioner, dictionary definitions of the word "cost" "clearly

encompass replacement cost."        We agree with respondent.

     Black's Law Dictionary 345 (6th ed. 1990) defines the word

"cost" to mean:       "Expense; price.   The sum or equivalent ex-

pended, paid or charged for something.          See also Actual cost;

Costs; Net cost; Rate."       Merriam-Webster's Collegiate Dictionary

262 (10th ed. 1996) defines the word "cost" to include:          "The

amount or equivalent paid or charged for something:          price."

Webster's Third New International Dictionary 515 (1993 ed.)

defines the word "cost" to include:          "the amount or equivalent
                                - 25 -


paid or given or charged or engaged to be paid or given for

anything bought or taken in barter or for service rendered".    We

conclude that the common and ordinary meaning of the word "cost"

is actual cost or the price paid for something.8

     We see no reason, however, to rely in this case on dictio-

nary definitions of the word "cost" to determine the meaning of

the term "cost" in section 472(b)(2) and section 1.472-2(b),

Income Tax Regs.    That is because the term "cost" is defined in

regulations under section 471, the "General Rule for Invento-

ries".    Application of the definition of cost in those regula-

tions (section 1.471-3, Income Tax Regs., entitled "Inventories

at cost"), which is based on what we have concluded is the common

and ordinary meaning of the word "cost", will result in a deter-

mination of the actual cost of merchandise or goods purchased or

produced during the taxable year,9 or in certain instances an

approximation of such cost determined upon a reasonable basis

(reasonable approximation).10




     8
        The accounting profession generally defines the word
"cost" as used in inventory accounting "as the price paid or
consideration given to acquire an asset". Accounting Research
Bulletin No. 43, "Restatement and Revision of Accounting Research
Bulletins", ch. 4, statement 3 (June 1953).
     9
        As pertinent here, sec. 1.471-3(b), Income Tax Regs.,
defines the term "cost" in the case of merchandise purchased
since the beginning of the taxable year as "the invoice price".
     10
        Sec. 1.471-3(d), Income Tax Regs., provides in pertinent
part that in certain instances "costs may be approximated upon
such basis as may be reasonable and in conformity with
established trade practice in the particular industry."
                               - 26 -


     The definition of the term "cost" in section 1.471-3, Income

Tax Regs., is virtually the same as the definition of the term

"cost" as it appeared in the regulations promulgated under

section 203 of the Revenue Act of 1918 (1918 Act), ch. 18, 40

Stat. 1060, the original predecessor of section 471, which first

required certain taxpayers to use the inventory accounting

method.   See Regs. 45, art. 1583 (1918).   The definition of the

term "cost" as it appeared in the regulations under the 1918 Act

was repromulgated in virtually the same language in the regula-

tions issued under all subsequent Federal tax provisions that

continued to require certain taxpayers to use the inventory

accounting method.   The term "cost" in inventory tax accounting

had a settled meaning when Congress first permitted certain

taxpayers to elect the LIFO method, Revenue Act of 1938, ch. 289,

sec. 22(d), 52 Stat. 459,11 and shortly thereafter when Congress

     11
        The regulations in effect when Congress first allowed
certain taxpayers to elect the LIFO method and required that the
goods with respect to which that method was elected be invento-
ried at cost, Regs. 94, art. 22(c)-3 (1936), defined the term
"cost" for inventory accounting purposes as follows:

           Art. 22(c)-3.   Inventories at cost.--Cost means:

          (1) In the case of merchandise on hand at the
     beginning of the taxable year, the inventory price of
     such goods.

          (2) In the case of merchandise purchased since the
     beginning of the taxable year, the invoice price less
     trade or other discounts, except strictly cash dis-
     counts approximating a fair interest rate, which may be
     deducted or not at the option of the taxpayer, provided
     a consistent course is followed. To this net invoice
     price should be added transportation or other necessary
                                                   (continued...)
                             - 27 -


permitted all taxpayers to elect that method, Revenue Act of

1939, ch. 247, sec. 219, 53 Stat. 877.   In requiring that goods

for which a taxpayer adopted the LIFO method be inventoried at

cost, Congress presumptively was aware of the established regula-

tory definition of the term "cost" in inventory tax accounting.

If Congress had intended for the term "cost" in LIFO inventory

tax accounting to have a meaning different from that regulatory

definition, it would have so stated.   It did not do so when it


     11
      (...continued)
     charges incurred in acquiring possession of the goods.

          (3) In the case of merchandise produced by the
     taxpayer since the beginning of the taxable year,
     (a) the cost of raw materials and supplies entering
     into or consumed in connection with the product,
     (b) expenditures for direct labor, (c) indirect ex-
     penses incident to and necessary for the production of
     the particular article, including in such indirect
     expenses a reasonable proportion of management ex-
     penses, but not including any cost of selling or return
     on capital, whether by way of interest or profit.

          (4) In any industry in which the usual rules for
     computation of cost of production are inapplicable,
     costs may be approximated upon such basis as may be
     reasonable and in conformity with established trade
     practice in the particular industry. Among such cases
     are (a) farmers and raisers of live stock (see article
     22(c)-6), (b) miners and manufacturers who by a single
     process or uniform series of processes derive a product
     of two or more kinds, sizes, or grades, the unit cost
     of which is substantially alike (see article 22(c)-7),
     and (c) retail merchants who use what is known as the
     "retail method" in ascertaining approximate cost (see
     article 22(c)-8).

The definition of the term "cost" in Regs. 94, art. 22(c)-3
(1936), is virtually identical to the definition of that term in
sec. 1.471-3, Income Tax Regs.
                               - 28 -


first enacted the LIFO provisions or at any other time thereaf-

ter.    We hold that the definition of the term "cost" in section

1.471-3, Income Tax Regs., which is intended to arrive at actual

cost, applies to the term "cost" in section 472(b)(2) and the

regulation thereunder.12   See Commissioner v. Keystone Consol.

Indus., Inc., 508 U.S. 152, 158-159 (1993).




       12
        Our holding as to the meaning of the term "cost" in sec.
472(b)(2) and the regulation thereunder disposes of petitioner's
contention that "respondent may not interpret the rules and
regulations in a way that will impose unreasonable administrative
burdens on taxpayers attempting to use the LIFO method or in a
way that will diminish or eliminate the availability of the LIFO
method to a significant group of taxpayers". Respondent has no
discretion to deviate from the requirements of the Code and the
regulations even if such requirements were to impose administra-
tive burdens on Mountain State Ford. On the record before us,
however, we find that petitioner has not established that respon-
dent's position in the present case that the term "cost" in sec.
472(b)(2) means actual cost would result in the imposition of
unreasonable administrative burdens on Mountain State Ford.
Petitioner acknowledges that it is not impossible for Mountain
State Ford to use actual cost, and not replacement cost, in
valuing its parts inventory. In fact, Mr. Hommer, petitioner's
expert on computerized inventory-tracking systems, admitted that
the reason why there is no inventory recordkeeping system cur-
rently available in the automobile and truck dealer industry that
uses actual cost in that valuation process is because there has
been no demand for such a system in that industry. Moreover,
when Mountain State Ford adopted the LIFO method, Mountain State
Ford made no attempt to determine whether it could have modified
its perpetual inventory recordkeeping system so that it could
have used invoice prices, i.e., actual cost, in valuing its parts
inventory. Nor did it determine whether it could have created a
new inventory recordkeeping system that could have used invoice
prices or actual cost in that valuation process. In fact, when
questioned by this Court as to why Mountain State Ford continued
to use replacement cost, and did not use invoice prices or actual
cost after it elected the LIFO method as of 1980, Eugene Peter
O'Meara, Jr., testified that replacement cost had been utilized
by Mountain State Ford previously and that Mountain State Ford
did not consider using other than replacement cost when it
elected the LIFO method.
                              - 29 -


     To support his position that Mountain State Ford's method of

using replacement cost to determine the current-year cost of its

parts pool qualifies as any other proper method under section

1.472-8(e)(2)(ii)(d), Income Tax Regs., which in his view does

not require the use of actual cost, petitioner contends (1) that

Mountain State Ford elected in the Form 970 to use any other

proper method in determining that current-year cost13 and

(2) that Mountain State Ford's use of replacement cost qualifies

as such a method.   We disagree on both counts.   Mountain State

Ford did not elect in the Form 970 to use any other proper

method.   Instead, Mountain State Ford elected in that form to

"determine the cost of * * * [parts] in the closing inventory" on

the basis of "most recent purchases".   On the record before us,

we find that Mountain State Ford elected to determine the

current-year cost of its parts pool pursuant to the most recent

purchases method described in section 1.472-8(e)(2)(ii)(a),

     13
        In support of his position that Mountain State Ford
elected in the Form 970 to use any other proper method, peti-
tioner points out that Mountain State Ford "attached to the Form
970 a description of its method that clearly indicated * * *
[that Mountain State Ford] was basing its index of computations
on Ford's latest weekly price lists for parts". We note ini-
tially that Mountain State Ford used replacement cost (viz., the
prices reflected in the respective manufacturers' computerized
price update tapes in effect as of the date of Mountain State
Ford's physical inventory) in determining the current-year cost
of its parts pool; it did not use all of the various "latest
weekly price lists" to which Mountain State Ford referred in the
Form 970 and which it indicated in that form it intended to use
in calculating its price indices under its link-chain method. It
is also noteworthy that in the Form 970 Mountain State Ford
stated that it intended to take inventory "at actual cost regard-
less of market value".
                              - 30 -


Income Tax Regs.   That regulation requires such cost to be

determined by "reference to the actual cost of the goods most

recently purchased".   Sec. 1.472-8(e)(2)(ii)(a), Income Tax Regs.

Mountain State Ford did not request, and did not receive, the

permission of the Commissioner to use a method different from the

most recent purchases method that it elected in the Form 970.

See sec. 472(e).   We conclude that Mountain State Ford was

precluded in determining the current-year cost of its parts pool

from using a method other than the most recent purchases method

which it elected in the Form 970 that it filed with its 1980

return.

     Even if, as petitioner contends, Mountain State Ford had

elected in the Form 970 to use any other proper method under

section 1.472-8(e)(2)(ii)(d), Income Tax Regs., that method must

be a proper method and must, in the opinion of the Commissioner,

clearly reflect income.   Respondent determined that Mountain

State Ford's method of using replacement cost in determining the

current-year cost of its parts pool was not a proper method and

does not clearly reflect income because section 472(b)(2) re-

quires that Mountain State Ford calculate such current-year cost

by using actual cost, which in this case is the invoice prices.

Petitioner contends that respondent abused respondent's discre-

tion in making that determination.     Petitioner asserts:

     An examination of * * * [section 1.472-8(e)(2)(ii),
     Income Tax Regs.] indicates that whereas the earliest
     and latest acquisitions cost methods (Treas. Reg. §§
     1.472-8(e)(2)(ii)(a) & (b)) are described in terms of
     actual cost, this term is not used in describing either
                                - 31 -


     the average acquisitions cost method or the so-called
     "other" method that * * * [Mountain State Ford] is
     using. Accordingly, the respondent's interpretation of
     the regulations imports into Treas. Reg. § 1.472-
     8(e)(2)(ii)(d) a requirement that does not exist in the
     regulations. For example, under the average acquisi-
     tions cost method described in Treas. Reg. § 1.472-
     8(e)(2)(ii)(c), the unit cost assigned would often not
     be the actual cost of any units; for example, where
     half the units acquired during the year were acquired
     at a cost of $10 and half were acquired at a cost of
     $11, the unit cost determined under the average cost
     method, $10.50, is not the actual cost of any units.

     As petitioner acknowledges, the determination of the

current-year cost of items making up a pool must be made

(1) under the most recent purchases method under section 1.472-

8(e)(2)(ii)(a), Income Tax Regs., by "reference to the actual

cost of the goods most recently purchased or produced", and

(2) under the earliest acquisition method under section 1.472-

8(e)(2)(ii)(b), Income Tax Regs., by "reference to the actual

cost of the goods purchased or produced during the taxable year

in the order of acquisition".    We believe that those respective

regulations mandate that actual cost be used because of the

requirement in section 472(b)(2) that goods with respect to which

a taxpayer elected the LIFO method be inventoried at cost; i.e.,

actual cost.   Section 1.472-8(e)(2)(ii)(c), Income Tax Regs.,

requires a taxpayer electing the average unit cost method de-

scribed therein to divide the aggregate cost of all the goods

purchased or produced throughout the taxable year, which peti-

tioner does not dispute, and we conclude, means the aggregate

actual cost of such goods, by the total number of units so

purchased or produced in order to arrive at an average unit cost.
                               - 32 -


Although, as petitioner points out, application of the average

unit cost method under section 1.472-8(e)(2)(ii)(c), Income Tax

Regs., might not result in assigning a unit cost equal to the

actual cost of any units purchased or produced during the taxable

year, the determination of the current-year cost of items making

up a pool under that regulation is required to be made on the

basis of, or by reference to, the actual cost of all goods

purchased or produced during the taxable year.   That regulation

thus complies with the mandate of section 472(b)(2) that actual

cost be used.

     As we have just explained, each of the methods prescribed in

section 1.472-8(e)(2)(ii)(a), (b), and (c), Income Tax Regs.,

relating to the dollar-value LIFO method mandates, as required by

section 472(b)(2), that the determination of the current-year

cost of items making up a pool be made on the basis of, or by

reference to, actual cost.14   We conclude that, in order for a

     14
        Pursuant to the requirement of sec. 472(b)(2), each of
the methods prescribed in sec. 1.472-2(d)(1)(i)(a), (b), and (c),
Income Tax Regs., relating to the specific-goods LIFO method also
mandates that the cost of goods on hand as of the close of the
taxable year with respect to which the taxpayer elected the LIFO
method and which are in excess of what were on hand as of the
beginning of the taxable year be determined on the basis of, or
by reference to, the actual cost of certain or all of the goods
purchased or produced during the taxable year, regardless of
identification with specific invoices and regardless of specific
cost accounting records. See sec. 1.472-2(d), Income Tax Regs.
   Consistent with sec. 472(b)(2), sec. 472(b)(3) and the regula-
tions thereunder specifically require that goods with respect to
which a taxpayer elected the LIFO method that are included in the
opening inventory of the taxable year for which the LIFO method
is first used are to be considered as having been acquired at
the same time and at a unit cost determined by reference to the
                                                   (continued...)
                             - 33 -


method to qualify under section 1.472-8(e)(2)(ii)(d), Income Tax

Regs., as any other proper method which clearly reflects income,

the method must, as required by section 472(b)(2), determine the

current-year cost of items making up a pool on the basis of, or

by reference to, actual cost (or in certain instances a reason-

able approximation of such cost).   Assuming arguendo that Moun-

tain State Ford had elected to use any other proper method under

section 1.472-8(e)(2)(ii)(d), Income Tax Regs., in the Form 970

that it filed with its 1980 return, which we have found it did

not, petitioner has not persuaded us that the method which

Mountain State Ford used to determine that current-year cost,

which was based on replacement cost and not actual cost, is a

proper method that clearly reflects income under that regula-

tion.15

     In further support of his position that Mountain State

Ford's method of using replacement cost, and not actual cost, in

     14
      (...continued)
aggregate actual cost of such goods (i.e., by dividing such
actual cost by the number of units on hand). Sec. 1.472-2(c),
Income Tax Regs. The aggregate actual cost is to be determined
pursuant to the inventory method used by the taxpayer under the
regulations applicable to the taxable year preceding the taxable
year for which the election of the LIFO method is made, with the
exception that restoration is to be made with respect to any
write-down to market values resulting from the pricing of former
inventories. Id.
     15
        In using replacement cost to determine current-year cost
under sec. 1.472-8(e)(2)(ii), Income Tax Regs., Mountain State
Ford was not attempting to, and did not, determine or approximate
the actual cost (i.e., the invoice prices) of the parts that it
purchased. It would have been sheer happenstance if the replace-
ment cost that Mountain State Ford used equaled or reasonably
approximated such actual cost.
                              - 34 -


valuing its parts inventory under the dollar-value LIFO method is

proper, petitioner asserts:

     ever since this Court's decision in Hutzler Brothers v.
     Commissioner, 8 T.C. 14 (1947), taxpayers have been
     permitted to use the retail method in conjunction with
     the dollar-value LIFO method despite the fact that
     under the retail method a taxpayer does not compute the
     actual cost of the items in its inventories under any
     of the three inventory ordering conventions.

     We turn first to petitioner's suggestion in the foregoing

excerpt from his brief that respondent is arguing in this case

that it is necessary under the dollar-value, link-chain LIFO

method which Mountain State Ford elected to determine the actual

cost of each unit inventoried.   We do not understand respondent

to be taking that position.   To the contrary, as section 1.472-

8(e)(2)(ii), Income Tax Regs., makes clear, the requirement in

section 472(b)(2) that goods for which a taxpayer elected the

LIFO method be inventoried "at" cost does not mean that, in

determining the current-year cost of items making up a pool, it

is necessary to determine the actual cost of each unit invento-

ried.16

     Turning now to petitioner's argument about the retail

method, petitioner is correct that the retail method is permitted

to be used in conjunction with the dollar-value LIFO method,

Hutzler Bros. Co. v. Commissioner, 8 T.C. 14 (1947); sec. 1.472-

1(k), Income Tax Regs.; sec. 1.472-8(e)(1), Income Tax Regs., and

that that method "does not compute the actual cost of the items

     16
        Nor is it necessary to do so under the specific-goods
LIFO method. See sec. 1.472-2(d), Income Tax Regs.
                              - 35 -


in" a taxpayer's inventory.   However, the actual cost reasonably

approximated under the retail method, which is described in

section 1.471-8, Income Tax Regs., satisfies the definition of

the term "cost" in section 1.471-3(d), Income Tax Regs.   Conse-

quently, the requirement in section 472(b)(2) that goods for

which a taxpayer elected the LIFO method be inventoried at

"cost", which we have held has the same meaning accorded the term

"cost" in section 1.471-3, Income Tax Regs., is satisfied by a

retailer who elects the dollar-value LIFO method, determines a

reasonable approximation of actual cost under the retail method,

and, inter alia, complies with section 1.472-1(k), Income Tax

Regs., and section 1.472-8(e)(1), Income Tax Regs.   We reject

petitioner's argument that the use of the retail method in

conjunction with the dollar-value LIFO method means that Mountain

State Ford's method of using replacement cost under the dollar-

value LIFO method is permitted by section 472 and the regulations

thereunder.17

     17
        We also reject petitioner's position that the use of the
standard cost method in conjunction with the dollar-value LIFO
method supports his position that Mountain State Ford's method of
using replacement cost under the dollar-value LIFO method is
permitted under sec. 472 and the regulations thereunder. In this
regard, petitioner states:

     taxpayers have been consistently permitted to use the
     standard cost method under both the full absorption
     method and the uniform capitalization method, in con-
     junction with the dollar-value LIFO method, despite the
     fact that standard costs are merely a predetermined
     estimate of the taxpayer's actual costs. Treas. Reg.
     §§ 1.471-11(d)(3); 1.263A-1(f)(3)(ii)(A).

                                                     (continued...)
                             - 36 -


     We hold that Mountain State Ford's method of using replace-

ment cost in determining the current-year cost of its parts pool

under the dollar-value LIFO method contravenes the requirements

of section 472(b)(2), section 1.472-2(b), Income Tax Regs., and

section 1.472-8(e)(2)(ii), Income Tax Regs.   We further hold




     17
      (...continued)
In advancing the foregoing argument, petitioner fails to mention
that, in determining the cost of inventoried goods, a taxpayer
subject to the inventory accounting method is and/or was ex-
pressly made subject by sec. 1.471-3, Income Tax Regs., to
(1) sec. 1.263A-1, Income Tax Regs., on or after Jan. 1, 1994;
(2) sec. 1.263A-1T, Temporary Income Tax Regs., 52 Fed. Reg.
10060 (Mar. 30, 1987), for taxable years beginning on or after
Dec. 31, 1986, until Dec. 31, 1993; and (3) sec. 1.471-11, Income
Tax Regs., for taxable years beginning on or before Dec. 31,
1986. All of those regulations allow or allowed the use of the
standard cost method. Under that method, a taxpayer may allocate
an appropriate amount of direct and indirect costs to property
that such taxpayer produces through the use of preestablished
standard allowances, without reference to costs actually incurred
during the taxable year. See sec. 1.263A-1(f)(3)(ii)(A), Income
Tax Regs. We have held that the term "cost" in sec. 472(b)(2)
has the same meaning accorded to the term "cost" in sec. 1.471-3,
Income Tax Regs. Sec. 472(b)(2) thus permits the use of the
standard cost method in inventorying goods at cost under the LIFO
method.
   In advancing his argument about the standard cost method,
petitioner also fails to mention that the regulations in effect
at different times describing the standard cost method (viz.,
sec. 1.263A-1(f)(3)(ii), Income Tax Regs., sec. 1.263A-
1T(b)(3)(iii)(D), Temporary Income Tax Regs., 52 Fed. Reg. 10065
(Mar. 30, 1987), and sec. 1.471-11(d)(3), Income Tax Regs.)
require and/or required a taxpayer to "reallocate to the goods in
ending inventory a pro rata portion" of the variance between the
predetermined estimate and actual cost unless such variance is
not "significant" in amount. If that variance is not "signifi-
cant" in amount, it does not have to be allocated to the tax-
payer's goods in ending inventory unless such an allocation is
made in the taxpayer's financial reports. See sec. 1.263A-
1(f)(3)(ii)(B), Income Tax Regs.; sec. 1.263A-1T(b)(3)(iii)(D)
(2), Temporary Income Tax Regs., supra; sec. 1.471-11(d)(3)(ii),
Income Tax Regs.
                               - 37 -


that, consequently, that method does not clearly reflect income.

See Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979).

       Petitioner argues that if we were to find, as we have, that

Mountain State Ford's method of using replacement cost in valuing

its parts inventory under the LIFO method does not clearly

reflect income, that method should nonetheless be sustained

because respondent changed that method to an impermissible method

which does not clearly reflect income.    In support of his posi-

tion, petitioner cites Dayton Hudson Corp. & Subs. v. Commis-

sioner, 153 F.3d 660, 664 (8th Cir. 1998), revg. T.C. Memo. 1997-

260; Harden v. Commissioner, 223 F.2d at 421; Prabel v. Commis-

sioner, 91 T.C. 1101, 1112 (1988), affd. 882 F.2d 820 (3d Cir.

1989); and Golden Gate Litho v. Commissioner, T.C. Memo. 1998-

184.    Relying on those cases, petitioner argues:

            The respondent is unwilling to admit the conse-
       quences of the adjustment he seeks in this case. The
       respondent claims he "has not replaced one impermissi-
       ble method with another." The respondent in his brief
       refuses to admit that his adjustment changes * * *
       [Mountain State Ford's] inventory value from a dollar-
       value LIFO value determined using replacement costs as
       current-year costs to an inventory value that is in its
       entirety equal to current replacement costs. At trial,
       however, the respondent admitted that this was the
       case. * * * it is internally inconsistent for the
       respondent to claim that a LIFO inventory value based
       on using replacement costs as current-year costs does
       not clearly reflect income while maintaining that the
       inventory must be adjusted to a value that is in its
       entirety equal to current replacement costs. If the
       respondent were correct in his claim that the use of
       replacement costs to determine current-year costs under
       dollar-value LIFO produces an impermissible inventory
       value, then an inventory value based entirely on cur-
       rent replacement costs would surely be even more
       impermissible.
                               - 38 -


     Respondent counters that respondent has not terminated

Mountain State Ford's elections to value its parts inventory

under the dollar-value, link-chain LIFO method and to use the

most recent purchases method in determining the current-year cost

of its parts pool.   According to respondent, respondent has

merely required Mountain State Ford to conform to the elections

that it made in the Form 970 which it filed with its 1980 tax

return.   Respondent states on brief:

     All respondent has done in this case is to determine
     that * * * [Mountain State Ford's] LIFO reserve was
     incorrectly calculated because * * * [Mountain State
     Ford] used replacement cost. * * * [Mountain State
     Ford] did not attempt to reconstruct or recalculate the
     corrected reserve amount or provide evidence from which
     an estimate could be made. Because of this, respondent
     was unable to determine the amount of the corrected
     reserve and had to restore the reserve to income.

     We agree with respondent.   In contradistinction to the cases

on which petitioner relies, in the instant case Mountain State

Ford did not comply with the requirement of section 1.472-2(h),

Income Tax Regs., that it maintain detailed inventory records "as

will enable the district director readily to verify * * * [Moun-

tain State Ford's] inventory computations as well as * * * [its]

compliance with the requirements of section 472" and the regula-

tions thereunder.    Consequently, Mountain State Ford did not

have, and did not provide to respondent, the records that were

necessary in order to calculate for the period 1980 through 1991

(1) the LIFO and non-LIFO value of its parts inventory and

(2) its LIFO reserve on the basis of invoice prices or a cost

other than replacement cost.
                              - 39 -


     We do not understand the statements of respondent's counsel

during his opening statement at trial to be a concession by

respondent that respondent placed Mountain State Ford on a non-

LIFO method that utilizes replacement cost, and we reject peti-

tioner's contention to the contrary.    Even if respondent's

counsel had made such a concession during his opening statement

at trial, we would not consider it to be a concession that binds

respondent.   That is because, inter alia, any such concession

would have been contrary to respondent's position as set forth in

paragraph 51 of the stipulation of facts, which was made part of

the record in this case immediately before the Court allowed

counsel for the parties to make opening statements.    The position

of respondent in paragraph 51 of the stipulation of facts is

totally consistent with the notice.    In the notice, respondent

did not terminate Mountain State Ford's elections to value its

parts inventory under the dollar-value, link-chain LIFO method

and to use the most recent purchases method in order to determine

the current-year cost of its parts pool.18   Mountain State Ford

remains on those methods and cannot account for its parts inven-

tory on any other methods without first receiving permission from

     18
        Pursuant to sec. 3.01(c), Rev. Proc. 79-23, 1979-1 C.B.
564, "Failure by the taxpayer to value its LIFO inventory at cost
for Federal income tax purposes, for the year preceding the LIFO
election, the year of the LIFO election, and all subsequent
taxable years" may warrant the termination of that taxpayer's
LIFO election. However, such termination is within the discre-
tion of respondent and is not mandatory. See Consolidated
Manufacturing, Inc. v. Commissioner, 111 T.C. 1, 38 (1998). In
the present case, respondent chose not to exercise that discre-
tion and did not terminate Mountain State Ford's LIFO election.
                              - 40 -


the Commissioner.   See sec. 472(e); sec. 1.472-5, Income Tax

Regs.

     On the record before us, we find that respondent did not

place Mountain State Ford on an improper method of inventory

accounting in the notice.   We further find that respondent did

not abuse respondent's discretion in making the adjustment at

issue in the notice.   Consequently, we sustain that adjustment.19

     To reflect the foregoing and the concessions of the parties,

                                         Decision will be entered

                                    under Rule 155.




     19
        We have considered all of the arguments and contentions
of petitioner that are not addressed herein and find them to be
without merit or irrelevant.
