Inventory valuation in asset acquisitions.When trade or business assets are acquired in an asset acquisition, Sec. 1060 requires an allocation of the purchase price among the acquired assets, based on their respective fair market values (FMVs). Sec. 338(b)(5) requires a similar purchase price allocation when an election is made to treat a stock purchase as an asset acquisition under Sec. 338. If inventory is acquired in an asset acquisition or a Sec. 338 transaction, the acquired inventory's FMV FMV - full-motion video must be determined. Because the inventory basis is deducted when inventory is sold, a taxpayer using FIFO (First In First Out) A storage method that retrieves the item stored for the longest time. Contrast with LIFO. See traffic engineering methods. FIFO - first-in first-out can generally minimize his taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. in the acquisition year by maximizing the acquired inventory's valuation. Rev. Proc. 77-12 provides three different methods for determining FMV of inventory--the cost of reproduction method, the comparative sales method and the income method. If correctly applied, all three methods should calculate the same FMV. However, Rev. Proc. 77-12 also states that these valuation methods "can only serve as guidelines for determining the fair market value of inventories," because "valuing inventory is an inherently factual determination" Editor: Wilfred H. Heitritter, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , J.D. Executive Partner -- Tax McGladrey & Pullen LLP LLP - Lower Layer Protocol San Bernardino, CA |
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