Comparative sales method.

• Author: Heitritter, Wilfred H.
• Position: Inventory tax accounting

According to Rev. Proc. 77-12, the comparative sales method values finished goods at their actual or expected selling prices, less the costs of disposition and a profit commensurate with the investment amount, the time required to sell the inventory and the degree of risk. If inventory quantities exceed normal trading volumes, expected selling prices are a valid starting point under this method, but only if the inventory is used to fill customer orders in the ordinary course of business.

In Jack Daniel Distillery, 379 F2d 569 (1967), the Court of Claims determined that the FMV of the unbottled whiskey inventory of a whiskey distillery business on the date of its distribution in a Sec. 334(b)(2) liquidation was properly computed under a market value formula used for insurance purposes. This formula valued the unbottled whiskey inventory by prorating, according to age, the difference between the value of mature unbottled whiskey and fresh whiskey. Mature unbottled whiskey was valued at the case price of whiskey in glass, less excise taxes, bottling costs and other completion and disposal costs; freshly distilled whiskey was valued at its production cost. The court determined that this valuation resulted in a reasonable allocation of profit between the buyer and the seller. The market value formula used in this case was essentially a hybrid method that calculated the value of unbottled whiskey by...