t c no united_states tax_court consolidated manufacturing inc m p long living_trust merl philip long trustee tax_matters_person petitioner v commissioner of internal revenue respondent docket no filed date company c c an automobile parts remanufacturer required to take inventories pursuant to sec_471 elected under sec_472 to apply the last-in_first-out lifo inventory_method of accounting with respect to certain raw materials raw materials one labor and overhead included in its inventories but not with respect to certain other raw materials raw materials two included therein as to which c continued to use the first-in_first-out fifo inventory_method and the lower_of_cost_or_market lcm basis of valuation c's method of valuing raw materials two unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure respondent determined that c's method of reporting only raw materials one labor and overhead on the lifo inventory_method c's lifo_method does not clearly reflect income because it is contrary to the require- ments of sec_472 and the regulations thereunder and that therefore c's election to use that method should be terminated respondent further determined that c's method of valuing raw materials two did not reflect the proper amounts for those raw materials under the fifo inventory_method and the lcm basis of valuation permitted by sec_471 held respondent did not abuse respondent's discretion in determining that c's lifo_method does not clearly reflect income because it is contrary to the requirements of sec_472 and the regulations thereunder and that therefore c's election to use that method should be terminated held further respondent did not abuse respondent's discretion in determining that c's method of valuing raw materials two does not clearly reflect income because it did not reflect the proper amounts for those raw materials under the fifo inventory_method and the lcm basis of valuation permitted by sec_471 eric s namee and james scott macbeth for petitioner michael j o'brien david g hendricks karen j goheen and jeffery g mitchell for respondent chiechi judge respondent determined the following s_corporation adjustments to the ordinary distributable net or taxable_income of consolidated manufacturing inc consolidated adjustments to ordinary distributable net or taxable_income year dollar_figure big_number the issues remaining for decision are did respondent abuse respondent's discretion in determining that consolidated's method of reporting certain raw materials labor and overhead on the lifo inventory_method and certain other raw materials on the fifo inventory_method does not clearly reflect income because it contravenes the requirements of sec_472 and the regulations thereunder and that therefore consolidated's election to use that method should be terminated we hold that respondent did not did respondent abuse respondent's discretion in determining that consolidated's method of valuing certain raw materials does not clearly reflect income because it did not reflect the proper amounts for those raw materials under the fifo inventory_method and the lcm basis of valuation permitted by sec_471 we hold that respondent did not findings of fact2 most of the facts have been stipulated and are so found unless otherwise indicated our findings_of_fact and opinion pertain to and the years at issue consolidated an s_corporation had its principal_place_of_business in hutchinson kansas at the time the petition was filed the m p long living_trust is consolidated's tax_matters_person consolidated's business consolidated engaged in the recovery reconditioning and restoration to salable condition of used and worn automobile parts including engines crankshafts cylinder heads transmissions and various smaller parts which it sold as remanufactured automobile parts to its customers we shall refer to the foregoing activities in which consolidated engaged as remanufacturing consolidated was authorized by ford motor company ford to produce specified remanufactured automobile parts and sell them within certain counties in kansas missouri and arkansas to ford-authorized dealers consolidated's ford customers as ford remanufactured automobile products consolidated's ford customers sold the remanufactured automobile parts that they had purchased from consolidated to wholesale and retail consumers consolidated also produced and sold remanufactured engines crankshafts and cylinder heads under its own private label known as four star engine parts four star label to certain warehouse distributors and to ford-authorized dealers consolidated's four star label customers consolidated's four star label customers sold the remanufactured automobile parts that they had purchased from consolidated to jobbers and garages who in turn sold such products at retail we shall refer collectively to consolidated's ford customers and consolidated's four star label customers as customers in addition consolidated served as a ford-authorized distributor of ford-authorized remanufactured automobile parts produced by other automobile parts remanufacturers including clutch discs and pressure plates consolidated did not use any of the used and worn clutch discs and pressure plates that it obtained in its capacity as a ford-authorized distributor to produce remanufactured clutch discs and pressure plates but instead delivered those used and worn parts to the remanufac- turers of those products the portion of a used and worn automobile part that is utilized to produce a remanufactured automobile part is known in the automobile parts remanufacturing industry as a core core in order to recondition and restore to salable condition a used and worn engine transmission cylinder head crankshaft or small automobile part consolidated needed a used and worn engine engine core transmission transmission core cylinder head cylinder head core crankshaft crankshaft core or small automobile part small part core to place into the remanufacturing process consolidated's remanufacturing business depended on a supply of two materials cores and new parts it maintained inventories of inter alia cores unprocessed cores raw material inventory and new parts unprocessed new parts raw material inventory upon which it drew throughout the remanufacturing process during consolidated's remanufacturing process consolidated incurred expenditures_for labor and overhead and transformed those raw materials into its finished goods or products viz remanufactured automobile parts during that process for certain automobile parts new parts were physically affixed to and incorporated into a core in order to produce a remanufactured automobile part the new parts used by consolidated in the remanufacturing process included pistons and rings rockers and lifters springs bearings chains gears plugs pins and other miscellaneous assembly parts consolidated purchased the new parts that it used in its remanufacturing business from the manufacturers of such parts consolidated generally obtained cores from two sources consistent with customary and established practice in the automobile parts remanufacturing industry consolidated acquired most of its cores from its customers customer cores whose source for those cores was their respective customers consolidated also acquired cores except small part cores from persons engaged in the business of selling cores and known in the automobile parts remanufacturing industry as core suppliers or core brokers core suppliers we shall refer to the cores obtained from core suppliers as core supplier cores consolidated obtained core supplier cores only on a special order basis in order to satisfy a specific or temporary demand that had arisen for a particular remanufactured automobile part although there were hundreds of individuals and businesses operating as core suppliers consolidated purchased core supplier cores from six major core suppliers one of which was bishop engine and automatic inc bishop engine bishop engine was consolidated's largest core supplier from which it purchased percent and percent of its core supplier cores during and respectively bishop engine acquired percent of the cores that it sold to automobile parts remanufacturers from salvage yards salvage yard cores bishop engine acquired the balance of such cores from individual peddlers and from manufacturers of automobile parts eg general motors ford and chrysler which sold bishop engine automobile parts that had been returned to them pursuant to the warranties they had issued to their respective customers bishop engine acquired approximately percent of its salvage yard cores from bins that it placed in salvage yards in its local area and in which salvage yard employees placed cores bin salvage yard cores bishop engine acquired the balance of its salvage yard cores by sending its employees to salvage yards throughout the united_states for the purpose of inspecting the cores in those yards and buying those cores that those employees believed were in rebuildable condition non-bin salvage yard cores bishop engine determined the amounts that it was willing to pay for non-bin salvage yard cores and reflected those amounts in price sheets price sheets provided to its employees and distributed to salvage yards approximately every months bishop engine paid the same amounts for bin salvage yard cores that passed inspection at its place of business and for cores acquired from individual peddlers as those listed in the price sheets for the same types of cores bishop engine adjusted those price sheets weekly as necessary to reflect any changing market conditions such as an increase in prices due to increased demand from automobile parts remanufacturers and a decrease in prices but in no event below scrap_value due to decreased demand from those remanufacturers bishop engine distributed those weekly adjusted price sheets every monday morning to its employees who informed the salvage yard operators of changes in the price sheets we shall refer to the amounts that bishop engine paid for non-bin salvage yard cores and for bin salvage yard cores that passed inspection at its place of business as the salvage yard cost bishop engine paid scrap_value for the bin salvage yard cores that did not pass inspection at its place of business and for the types of cores acquired from individual peddlers that were not listed on the price sheets bishop engine generally paid the cost of shipping the salvage yard cores that it had purchased to its place of business at bishop engine's place of business its employees reinspected the non-bin salvage yard cores inspected the bin salvage yard cores and removed any unwanted components of such cores as a result of the inspection process at bishop engine's place of business bishop engine determined that to percent of the non-bin salvage yard cores and approximately percent of the bin salvage yard cores which it had purchased were not in rebuildable condition bishop engine sold the salvage yard cores that did not pass inspection at its place of business as scrap metal and offered the balance of its salvage yard cores that did pass such inspection for sale to inter alia automobile parts remanufacturers bishop engine determined the amounts to charge automobile parts remanufacturers for the various types of core supplier cores that it offered for sale to them by taking account of the amounts being charged by its competitors for those types of core supplier cores and market factors relating to supply and demand whenever consolidated purchased core supplier cores from bishop engine it paid the amounts that bishop engine was charging for those cores bishop engine and the other core suppliers from which consolidated purchased core supplier cores guaranteed those cores to be in rebuildable condition core supplier guarantee if consolidated discovered during the remanufacturing process that a core supplier core had to be scrapped because it was not in rebuildable condition that core was removed from that process and returned to the core supplier and consolidated received a credit from that core supplier for the amount that consolidated had paid for that core approximately percent of the cores sold by bishop engine to automobile parts remanufacturers were not in rebuildable condition and were subsequently returned by them to bishop engine in return for which they received such credits core supplier cores purchased by consolidated entered into its production line almost immediately upon acquisition and remained in its unprocessed cores raw material inventory for only a brief period of time as a consequence that inventory consisted almost entirely of customer cores and not core supplier cores by way of illustration of the remanufacturing process by which consolidated produced reconditioned engines in salable condition engine customer cores were torn down stored in its unprocessed cores raw material inventory and subsequently placed into production if a customer had delivered to consolidated a short-block engine customer core which was an engine customer core without the heads consolidated's employees cleaned off the casting number consulted the identification manual to determine the engine type and core lot number wrote the core lot number on the top of that core and wheeled it into the yard core yard where consolidated stored its unprocessed cores raw material inventory if a customer had delivered to consolidated a long- block engine customer core which was a short-block customer core with the heads that core underwent some initial disassembly by consolidated's employees in order to convert it into a short- block engine customer core ie the cylinder heads related valve train assembly and the oil pump were removed at which point it was marked and wheeled into the core yard short-block engine customer cores that were not sufficiently stripped down so as to permit detection of irreparable latent defects remained in the core yard until they were brought into production at which time they were further disassembled inspected for defects and reconditioned into salable condition during the disassembly and cleaning process engine customer cores and engine core supplier cores were subjected to numerous visual and mechanical examinations and procedures only if an engine core passed all of those examinations and procedures could it become a remanu- factured automobile engine during the disassembly process the cylinder heads the crankshaft the camshaft and rods were removed from the engine core retained by consolidated and subjected to separate remanufacturing processes these parts were if in usable condition remanufactured in separate areas of consolidated's remanufacturing facility those remanufactured automobile parts were then incorporated into remanufactured engines and in the case of crankshafts heads and rods were sold as separate remanufactured automobile parts the following tables show the number of remanufactured automobile parts produced by consolidated the number of such remanufactured automobile parts produced from customer cores and the number of such remanufactured automobile parts produced from core supplier cores type of automobile part total production total production from customer cores total production from core supplier cores engines transmissions crankshafts cylinder heads small parts big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -0- type of automobile part total production total production from customer cores total production from core supplier cores engines transmissions crankshafts cylinder heads small parts big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -0- consolidated's sale of remanufactured automobile parts and acquisition of customer cores consistent with standard and customary practice in the automobile parts remanufacturing industry consolidated sold each remanufactured automobile part for and each of its customers was obligated to pay an amount remanufactured automobile part sales_price that consisted of an exchange amount and a core amount the remanufactured automobile part sales_price was determined by market-related factors including supply and demand the exchange amount the core amount and the total of those two amounts ie the remanufactured automobile part sales_price for each remanufactured automobile part sold by consolidated were separately_stated on each of consolidated's sales invoices for each such sale remanufactured automobile part sales invoice each automobile parts remanufacturer established its own remanufactured automobile part sales_price consisting of an exchange amount and a core amount consolidated determined the exchange amount that it charged as part of its remanufactured automobile part sales_price based on market-related factors in making that determination consolidated inter alia examined the jobber price exchange amounts for remanufactured automobile parts ie the exchange amounts that automobile retail parts stores determined should be part of the total prices charged their respective customers for remanufactured automobile parts that were produced by those competitors of consolidated which were comparable to it in terms of inter alia quality of products and service and warranty policy the core amount included as part of the remanufactured automobile part sales_price charged for any given remanufactured automobile part varied among remanufacturers consolidated determined that core amount based on several market-related factors including the supply and demand of customer cores one such factor was the location of the customer core within its anticipated life cycle as conceptualized by consolidated consolidated viewed the life cycle of a core as consisting of three phases throughout the first_phase of that cycle during which new automobile parts were being introduced into the market customer cores were scarce consolidated might have purchased those parts from manufacturers and cores from core suppliers in order to have cores from which it was able to produce an inventory of finished goods and consolidated's core amounts generally were increasing throughout the second_phase of the life cycle of a core as conceptualized by consolidated customer core availability increased consolidated's inventory need for customer cores was satisfied through transactions with its customers and on a special order basis from core suppliers and consolidated's core amounts leveled out and remained relatively constant throughout the third phase of that life cycle customer core availability was at its maximum consolidated regularly sold as scrap metal overstocked customer cores in its unprocessed cores raw material inventory and consolidated's core amounts ordinarily were decreasing other market-related factors that consolidated considered in determining the core amount which was part of the remanufactured automobile part sales_price that it charged a customer for a remanufactured automobile part included the supply of a particular type of customer core in consolidated's inventories the probability that its customers would decide to provide it with customer cores the ratio between sales of a particular type of remanufactured automobile part and acquisitions of the corresponding type of customer core and the amounts that core suppliers were charging for certain types of core supplier cores that consolidated anticipated purchasing in order to satisfy a specific or temporary demand for particular types of automobile parts at the time consolidated sold each remanufactured automobile part to each of its customers it offered to purchase from each such customer subject_to the requirements established by consolidated for its acceptance of a customer core consolidated's requirements for acceptance of a customer core a customer core of the same type as each such part sold consolidated offered to purchase each such customer core for an amount customer core purchase offer amount that generally was equal to the core amount which was separately_stated on the remanufactured automobile part sales invoice as part of the remanufactured automobile part sales_price for each such part the customer core purchase offer amount was like the core amount based on market-related factors including supply and demand the customer core purchase offer amount could have been less than the core amount shown on the remanufactured automobile part sales invoice that could have occurred because of the condition of the customer core upon its delivery to consolidated for example consolidated's customer core purchase offer amount for an engine core with a hole in it was equal to percent of the core amount which was separately_stated on the remanufactured automobile part sales invoice as part of the remanufactured automobile part sales_price for a corresponding remanufactured automobile engine the customer core purchase offer amount for each customer core was set at an amount that the marketplace in which consolidated acquired customer cores demanded at no time were consolidated's customers under any obligation to accept consolidated's offer to purchase customer cores from them or otherwise to provide such cores to consolidated however most of those customers did decide to accept consolidated's offer and provided it with customer cores in the event that a customer of consolidated decided to accept consolidated's offer to purchase a customer core and that customer met consolidated's requirements for acceptance of a customer core instead of that customer's receiving a check or cash from consolidated in the customer core purchase offer amount for that customer core that customer became entitled to a credit by consolidated in that amount core credit_amount against the amount which was due from that customer viz the remanufactured automobile part sales_price for such customer's purchase of a remanufactured automobile part from consolidated and which was reflected in consolidated's books as an account receivable from that customer we shall refer to such an account receivable in consolidated's books as the customer account receivable like the customer core purchase offer amount on which it was based the core credit_amount generally was equal to the core amount and was based on market-related factors including the supply and demand of customer cores although as discussed above the customer core purchase offer amount and therefore the core credit_amount could have been in an amount less than the core amount because of the condition of the customer core upon its delivery to consolidated the core credit_amount for each customer core was set at an amount that the marketplace in which consolidated acquired customer cores demanded consolidated's customers did not guarantee the cores that they decided to provide to it however consolidated's requirements for acceptance of a customer core had to be satisfied before consolidated was willing to accept a customer core those requirements were the customer desiring to deliver the customer core had purchased a remanufactured automobile part from consolidated the remanufactured automobile part sales_price charged for that part included a core amount the customer core satisfied consolidated's customer core policy consolidated's customer core policy relating to inter alia the type and condition of the core that consolidated was willing to accept eg consolidated's customer core policy for four star label cylinder head cores stated that those cores were not acceptable if they were obviously broken cracked or welded and the customer followed consolidated's procedures for delivery of a customer core to consolidated consolidated's procedures for delivery of a customer core the following table shows the aggregate number of the different types of ford-authorized and four star label remanufactured automobile parts sold by consolidated and the aggregate number of the different types of corresponding ford- authorized and four star label customer cores that consolidated's customers decided to provide to consolidated and that were delivered to it type of remanufactured automobile part sold engines transmissions crankshafts cylinder heads small parts aggregate number of remanufactured automobile parts sold big_number big_number big_number big_number big_number aggregate number of customer cores delivered big_number big_number big_number big_number big_number aggregate number of remanufactured automobile parts sold big_number big_number big_number big_number big_number aggregate number of customer cores delivered big_number big_number big_number big_number big_number in anticipation that consolidated's customers would decide to accept its offer to purchase and deliver customer cores to it even though they were under no obligation to do so consolidated provided each of those customers with a form known as a request for core credit at the time that it delivered to them the remanufactured automobile parts that they had purchased the request for core credit was a preprinted form generally con- sisting of three copies one for consolidated's customer a transportation copy and a copy that was to be returned to consolidated in the event and at the time that a customer delivered customer cores to it in the case of four star label remanufactured engines the request for core credit preprinted form consisted of the foregoing three copies and a fourth copy for the person usually a jobber who purchased such an engine from consolidated's customer consolidated's customer core policy established a period of time during which any of its customers who decided to provide it with customer cores was required to deliver such cores delivery period that period commenced on the date of the installation of the remanufactured automobile part sold by consolidated the delivery period varied depending on the type of customer core from days for consolidated's four star label customer crankshafts to years for consolidated's ford customer small automobile parts despite consolidated's policy regarding the delivery period consolidated accepted customer cores from its customers after that period had expired even if those cores were determined not to be in rebuildable condition and credited each customer account receivable with the core credit amounts consolidated followed this practice regardless whether the customer cores provided by its customers after the delivery period had become overstocked or obsolete due to the passage of time or whether the core amounts that were part of the remanufactured automobile parts sales prices that those customers were charged had changed consolidated's procedures for delivery of a customer core were the customer presented the transportation copy of the request for core credit to the person who picked up the core from the customer's place of business and who usually was an employee of consolidated making a delivery of remanufactured automobile parts to that customer consolidated's driver a copy of the request for core credit was physically tagged to the customer core that consolidated's driver picked up from that customer and consolidated's driver made a visual inspection of that core and based solely on that inspection determined whether the customer was in compliance with consolidated's customer core policy including the requirements if any in that policy that the type and style of the customer core delivered to consolidated correspond to the type and style of the remanufactured automobile part purchased by that customer in addition to accepting customer cores from its customers that corresponded to the remanufactured automobile parts that those customers had purchased from consolidated consolidated also accepted delivery from those customers of customer cores that did not correspond to those parts in the latter event for each such customer consolidated credited the customer account receivable in an amount that was less than the core amount which was part of the remanufactured automobile part sales_price for each of the remanufactured automobile parts purchased by that customer in the event that one of consolidated's customers decided to accept its offer to purchase and delivered customer cores to it consolidated generated and provided to each such customer a sales invoice customer core sales invoice at or about the time of the delivery of those cores that invoice was prepared from information in a file that consolidated maintained for each of its customers with respect to sales to each such customer of its remanufactured automobile parts the customer core sales invoice inter alia identified the type and the number of customer cores of each type that each of consolidated's customers delivered to it that invoice also had inter alia a column headed cores and under that column was inter alia a column headed price each listed under the column headed price each on the customer core sales invoice was the core credit_amount for each of the customer cores identified on that invoice as having been delivered to consolidated we shall refer to the column on the customer core sales invoice reflecting the price of each customer core that a customer decided to deliver to consolidated as the column headed cores--price each attached to each customer core sales invoice was a completed copy of a request for core credit and a document generated by consolidated's customer showing the date on which such customer received from such customer's customer the core that it decided to deliver to consolidated a customer core could have remained in consolidated's unprocessed cores raw material inventory for months or years before consolidated drew upon it for use in consolidated's remanufacturing process when demand for a type of remanufactured automobile part was sufficiently limited eg if the vehicle for which such a type of part was to be used was an obsolete early model vehicle the customer core corresponding to that type of remanufactured automobile part might have been put out for bid as scrap metal and sold by consolidated at scrap metal prices without ever having entered into production the following percentages of customer cores that were delivered to consolidated and that entered into its remanufacturing process were subsequently determined not to be in rebuildable condition and were scrapped type of customer core engine cores transmission cores crankshaft cores cylinder head cores small part cores percentage of customer cores not in rebuildable condition percentage of customer cores not in rebuildable condition dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure consolidated's accounting consolidated used the calendar_year and the accrual and inventory methods_of_accounting for financial and federal_income_tax tax reporting purposes until the close of its taxable_year consolidated reported its inventories at least for tax purposes by using the fifo method of inventory_accounting and it chose to apply the lcm basis of valuation consolidated submitted form_970 application to use lifo inventory_method with its tax_return form as completed by consolidated the form_970 stated in pertinent part the taxpayer named above consolidated hereby applies to adopt and use the lifo inventory_method provided by sec_472 this method is to be applied for the first time as of the close of the taxable_year ending date to the following specified goods reconditioning costs and new parts inventories not including the cost of used core inventory a list goods subject_to inventory but which are not to be inventoried under the lifo_method used engines and parts cores method used in valuing lifo_inventories unit method dollar-value_method a if pools are used list and describe the contents of each pool one pool consisting of raw material purchased parts and remanufacturing costs c method used in computing lifo value of dollar- value pool sec_3 as we understand it the term reconditioning costs as used in the form_970 means the costs of direct labor and of overhead incident to and necessary for the production of remanufactured automobile parts that consolidated incurred in remanufacturing those parts we shall refer to consolidated's reconditioning costs as labor and overhead the index_method has been used by the company in computing the value of the dollar value pool we shall refer to the lifo inventory_method that consolidated elected in the form_970 as consolidated's lifo_method consolidated submitted another form_970 with its tax_return form as completed by consolidated and as pertinent here the form_970 differed from the form_970 only with respect to the following questions and answers a if you use pools list and describe contents of each pool two pools are used motor_vehicle parts and machine shop products pools include raw material purchased parts and remanufacturing costs c method used in computing lifo value of dollar- value pools simplified lifo per reg sec_1_472-8 ie inventory price index ipi computation method taxpayer initially elected lifo for the tax_year ending date form_970 was timely filed for such election and the taxpayer consistently followed such dollar value method however due to changes made by the economic_recovery_tax_act_of_1981 which allows a change to the use of published indexes taxpayer hereby elects to compute lifo_inventories by using such government published indexes as prescribed in reg e per reg e v prior consent of the commissioner is not required if the change is made for the first or second taxable_year ending after taxpayer elects to use the october producer price index report as a representative month for selecting indexes such election is allowed under reg e iii c except for the ipi computation method that consolidated elected to use in the form_970 in calculating its dollar- value lifo pools since the end of its taxable_year consolidated has consistently applied consolidated's lifo_method ie the lifo inventory_method described in the form during all relevant periods at the time of a sale of remanufactured automobile parts to one of its customers for each such part consolidated made an entry increasing its sales exchange amount by the exchange amount that was part of the remanufactured automobile part sales_price its sales core amount by the core amount that was the remaining part of that sales_price and its customer account receivable by the remanufactured automobile sales_price ie the sum of those two amounts at the time at which that customer decided to and did deliver customer cores to consolidated for each such core consolidated made an entry decreasing its sales core amount and its customer account receivable by the core credit_amount at the time consolidated purchased a core supplier core it charged the cost of that core directly to cost_of_goods_sold deloitte touche and pierce faris co chartered audited consolidated's financial statements and financial statements respectively and issued unqualified opinions that those respective financial statements presented fairly in all material respects the financial position of consolidated and the results of its operations and cash flows for and in conformity with generally_accepted_accounting_principles gaap for financial reporting purposes consolidated calculated its inventories by using lcm and the lifo_method for new parts labor and overhead and the fifo method for customer cores for such purposes consolidated reflected customer cores in its inventories at the amounts core supplier amounts that core suppliers were charging for similar types of core supplier cores for tax purposes in determining its yearend inventories consolidated included customer cores in its finished goods inventory at the core supplier amounts and customer cores in its unprocessed cores raw material inventory and its goods in process inventory at scrap_value consolidated's fifo-lcm method for purposes of this case both cores and new parts used by consolidated to produce remanufactured automobile parts are treated as raw materials under gaap and subchapter_e chapter subtitle a of the code relating to accounting periods and methods_of_accounting and they shall be referred to herein as raw materials respondent's determinations respondent mailed notices of final s_corporation administrative adjustment notices for and respectively to merl philip long grantor and trustee of the m p long living_trust the tax_matters_person respondent determined in the notices that consolidated improperly excluded customer cores from the calculation of its inventories under consolidated's lifo_method for each of those years and that consequently consolidated's lifo election should be terminated respondent also determined in the notices that consolidated did not reflect the proper amounts for customer cores in its inventories under consolidated's fifo-lcm method for each of those years opinion this case presents several inventory_accounting issues that implicate sec_446 sec_471 and sec_472 sec_446 provides in pertinent part a general_rule --taxable income shall be computed under the method_of_accounting on the basis of which the taxpayer regularly computes his income in keeping his books b exceptions --if no method_of_accounting has been regularly used by the taxpayer or if the method used does not clearly reflect income the computation of taxable_income shall be made under such method as in the opinion of the secretary does clearly reflect income petitioner conceded the remaining determination in the notice for sec_471 provides a general_rule --whenever in the opinion of the secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer inventories shall be taken by such taxpayer on such basis as the secretary may prescribe as conforming as nearly as may be to the best_accounting_practice in the trade_or_business and as most clearly reflecting the income sec_1_471-2 and d income_tax regs provides in pertinent part c the bases_of_valuation most commonly used by business concerns and which meet the requirements of sec_471 are cost and cost or market whichever is lower d goods taken in the inventory which have been so intermingled that they cannot be identified with specific invoices will be deemed to be the goods most recently purchased or produced but see sec_472 as to last-in_first-out inventories sec_472 and b provides a authorization --a taxpayer may use the method provided in subsection b whether or not such method has been prescribed under sec_471 in inventorying goods specified in an application to use such method filed at such time and in such manner as the secretary may prescribe the change to and the use of such method shall be in accordance with such regulations as the secretary may prescribe as necessary in order that the use of such method may clearly reflect income b method applicable --in inventorying goods specified in the application described in subsection a the taxpayer shall treat those remaining on hand at the close of the taxable_year as being first those included in the opening_inventory of the taxable_year in the order of acquisition to the extent thereof and second those acquired in the taxable_year inventory them at cost and treat those included in the opening_inventory of the taxable_year in which such method is first used as having been acquired at the same time and determine their cost by the average_cost_method sec_446 and sec_471 and the regulations thereunder vest the commissioner of internal revenue commissioner with wide discretion in determining whether a method of inventory_accounting should be disallowed because it does not clearly reflect income 439_us_522 97_tc_120 the commissioner's interpretation of the clear-reflection standard under sec_446 and sec_471 may not be disturbed unless it is clearly unlawful or plainly arbitrary thor power tool co v commissioner supra hamilton indus inc v commissioner supra pincite the commissioner's discretion under sec_446 and sec_471 is not unbridled however thor power tool co v commissioner supra pincite hamilton indus inc v commissioner supra pincite we must decide whether respondent abused respondent's discretion in determining a that consolidated's lifo_method for and does not clearly reflect income because that method pertained only to new parts labor and overhead and not also to customer cores and b that therefore consolidated's election to use that method should be terminated and that consolidated's fifo-lcm method for the years at issue does not clearly reflect income because that method did not reflect the proper amounts for customer cores before turning to the issues presented in this case we note that we have given due consideration to all of the parties' arguments and contentions with respect to those issues even though we do not attempt to address each of them herein consolidated's lifo_method for all relevant periods until the close of its taxable_year consolidated chose to report its inventories in its tax returns on the basis of the fifo inventory_method and lcm in the form_970 that it filed consolidated elected to apply the lifo inventory_method as of the close of its taxable_year to reconditioning costs and new parts inventories not including the cost of used core inventory and to use the dollar- value lifo inventory_method in the form_970 that it respondent does not object to consolidated's method_of_accounting for core supplier cores we shall address only consolidated's inventory_method of accounting for customer cores sec_1_472-8 income_tax regs provides in pertinent part any taxpayer may elect to determine the cost of his lifo_inventories under the so-called dollar-value lifo_method provided such method is used consistently and clearly reflects the income of the taxpayer in accordance with the rules of this section the dollar- value method of valuing lifo_inventories is a method of determining cost by using base-year_cost expressed in terms of total dollars rather than the quantity and price of specific goods as the unit of measurement under such method the goods contained in the inventory continued filed consolidated elected under sec_472 to apply as of the close of its taxable_year the ipi computation method in calculating its dollar-value lifo pools pursuant to that method consolidated elected to use the october producer price index report as allowed by sec_1_472-8 income_tax regs petitioner contends and respondent does not dispute that consolidated's lifo_method conforms to gaap and that it therefore satisfies the requirement of sec_471 and the regulations thereunder that that method conform as nearly as may be to the best_accounting_practice in the trade_or_business and that consolidated has consistently applied that method the dispute between the parties with respect to consolidated's lifo_method is whether respondent abused respondent's discretion in determining that that method does not clearly reflect income because it contravenes the requirements of sec_472 and the regulations thereunder and that consequently consolidated’s election to use that method should be terminated we shall begin our consideration of the parties’ dispute by summarizing the history of the inventory_method of tax continued are grouped into a pool or pools as described in para- graphs b and c of this section the term base- year cost is the aggregate of the cost determined as of the beginning of the taxable_year for which the lifo_method is first adopted ie the base date of all items in a pool accounting the fifo inventory_method and the lifo inventory_method the use of inventories was first required by the revenue act of act ch sec 40_stat_1060 whenever in the opinion of the commissioner such use was necessary in order to determine clearly the income of any taxpayer where goods taken in inventory were so intermingled that they could not be identified with specific invoices article of regulation sec_45 promulgated under the act deemed such goods to be the goods most recently purchased or produced in other words in such circumstances taxpayers were to use the fifo inventory_method as a matter of convenience see 6_bta_1179 it was not until the revenue act of act ch 52_stat_447 that congress first allowed certain taxpayers viz producers and processors of certain nonferrous metals and tanners who were required to use the inventory_accounting method to elect the lifo inventory_method for certain goods included in their inventories act sec_22 through 52_stat_459 effective for taxable years that began after date producers and processors of certain nonferrous metals sec of the revenue act of ch sec 40_stat_1060 was the original predecessor of sec_471 the fifo inventory_method is expressly permitted by sec_1_471-2 income_tax regs when goods taken in inventory are so intermingled that they cannot be identified with specific invoices generally were permitted to elect the lifo inventory_method for raw materials not yet included in goods in process or in finished goods ie for unprocessed raw materials act sec_22 and 52_stat_459 and tanners generally were allowed to elect the lifo inventory_method for raw materials including those included in goods in process and in finished goods act sec_22 52_stat_459 sec_22 through of the act was reenacted as sec_22 through of the code code ch sec_22 through 53_stat_11 congress amended sec_22 of the code effective for taxable years that began after date to provide in pertinent part d a taxpayer may use the following method in inventorying the goods specified in the application required under paragraph a inventory them at cost b treat those remaining on hand at the close of the taxable_year as being first those included in the opening_inventory of the taxable_year in the order of acquisition to the extent thereof and second those acquired in the taxable_year and c treat those included in the opening_inventory of the taxable_year in which such method is first used as having been acquired at the same time and determine their cost by the average_cost_method the method described in paragraph may be used-- a only in inventorying goods specified in an application to use such meth- od filed at such time and in such manner as the commissioner may prescribe the change to and the use of such method shall be in accordance with such regulations as the commissioner with the approval of the secretary may prescribe as necessary in order that the use of such method may clearly reflect income revenue act of act ch sec_219 53_stat_877 we shall refer to sec_22 of the code as amended by sec_219 of the act as sec_22 of the code as amended the regulations promulgated under sec_22 of the code as amended provided in pertinent part sec d -1 inventories under elective method --any taxpayer permitted or required to take inventories may elect with respect to those goods specified in his application and properly subject_to inventory to compute his opening and closing inventories in accordance with the method provided by sec_22 as amended sec d -2 requirements incident to adoption and use of elective method -- the taxpayer shall file an application to use such method specifying with particularity the goods to which it is to be applied secs d -1 and -2 regs in sections d -1 and -2 of regulation sec_103 were repromulgated with changes not pertinent here as sec_29 d -1 and -2 of regulation sec_111 in sec_29 d -1 of regulation sec_111 was amended to add in pertinent part the following language a manufacturer or processor who has adopted the elective lifo inventory_method as to a class of goods may elect to have such method apply to the raw materials only including those included in goods in process and in finished goods expressed in terms of appropriate units this election may also apply to any one raw material when two or more raw materials enter into the composition of the finished product fed reg date we shall refer to the amendment in to sec_29 d -1 of regulation sec_111 as the amendment to sec_29 d -1 of regulation sec_111 sec_22 through of the code as amended was reenacted with changes not pertinent here as sec_472 and b of the code ch sec_472 and b 68a stat and the latter section was reenacted with no changes as sec_472 and b of the 1986_code see tax_reform_act_of_1986 publaw_99_514 100_stat_2095 sec_29 d - and -2 of regulation sec_111 including the amendment to sec_29 d -1 of regulation sec_111 were repromulgated with changes not pertinent here as regulations under sec_472 with this history as background we shall address the disagreement between the parties over whether consolidated's lifo_method contravenes the requirements of sec_472 and the regulations thereunder and therefore does not clearly reflect income consolidated’s remanufacturing business depended on a supply of two raw materials cores and new parts during the remanufacturing process consolidated incurred expenditures_for labor and overhead and transformed those raw materials into its finished goods or products viz remanufactured automobile parts thus cores new parts labor and overhead all entered into the production of those finished goods or products pursuant to sec_1_471-1 income_tax regs consolidated maintained inventories for each of the two unprocessed raw materials that it used in its remanufacturing business for partly finished goods ie goods in process of remanufacture goods in process and for finished remanufactured goods finished goods virtually all of the cores included in consolidated’s inventories were and we shall hereinafter refer to them as customer cores see supra note consolidated elected in the form_970 to use the lifo inventory_method with respect to new parts labor and overhead but not customer cores thus under consolidated's lifo_method consolidated used the lifo inventory_method for a new parts that were included in its inventories for unprocessed new parts although it is not altogether clear from the record it appears that consolidated maintained separate unprocessed new parts raw material inventories unprocessed cores raw material inventories goods in process inventories and finished goods inventories in respect of the different types eg remanufactured automobile engines of goods or products that it produced viz remanufactured automobile parts for goods in process and for finished goods and b labor and overhead that were included in consolidated's inventories for goods in process and for finished goods and the fifo inventory_method for customer cores that were included in its inventories for unprocessed customer cores for goods in process and for finished goods respondent contends that sec_472 and the regulations thereunder require a taxpayer who wants to elect the lifo inventory_method to make that election with respect to a good or goods subject_to inventory and specified in the application prescribed by the secretary_of_the_treasury secretary for electing that method viz form and to make that election with respect to such entire good or goods and not a portion thereofdollar_figure according to respondent it is critical to note that the statute and the regulations specify that the election is to be made as to goods the goods produced by consolidated are remanufactured automobile parts such as remanufactured engines under the general_rule if consolidated elected lifo as to remanufactured automobile engines the lifo election would apply to raw materials ie cores and new parts and the reconditioning costs ie labor and overhead however consolidated elected as to only a portion of each type of good by excluding cores for each type of goods such as remanufactured engines this left a portion of the respondent concedes that a taxpayer may elect the lifo inventory_method with respect to a type or class of goods such as remanufactured automobile engines but contends that that election must be as to the entire good and not a portion of a good within a type or class of goods for convenience generally we shall refer only to a good or goods and not to a type or class of goods goods new parts and reconditioning costs on lifo and a portion of the goods cores on fifo a permissible variance to the inclusion of the total goods in lifo is provided by sec_1 c which allows the lifo election to be restricted to raw materials consolidated has fashioned a method_of_accounting that factors out inflationary price increases for part of a particular good labor overhead and a secondary raw material--new parts and takes into account inflation and changes in market_value for the remaining portion of the goods the principal raw material--the core this is inconsistent with the plain language of sec_472 and the purpose of the lifo_method a taxpayer must decide in toto for a type or class of goods whe- ther it will use either the lifo_method to currently deduct inflationary price increases or the lcm method to currently deduct decreases in the market_value of production_costs a taxpayer is not permitted to use a hybrid of these two methods for a single type or class of goods in support of respondent’s position respondent points inter alia to sec_472 and sec_1_472-1 income_tax regs sec_472 provides in pertinent part a taxpayer may use the lifo inventory_method in inventorying goods specified in an application to use such method sec_1 a income_tax regs elaborates on sec_472 in pertinent part as follows any taxpayer permitted or required to take inventories pursuant to the provisions of sec_471 and pursuant to the provisions of sec_1_471-1 to inclusive may elect with respect to those goods specified in his application and properly subject_to inventory to compute his opening and closing inventories in accordance with the method provided by sec_472 this section and sec_1_472-2 petitioner concedes in its opening brief that sec_472 and the regulations promulgated thereunder are worded in terms of electing to value goods under the lifo_method however according to petitioner sec_1_471-3 is clear that the cost of finished and partly finished goods consist sic of the cost of raw materials labor and overhead thus the finished and partly finished goods included in such an lifo election necessarily consist of the cost attributable to raw materials labor and overhead petitioner elaborates on the foregoing argument in its answering brief as follows sec_1_472-1 provides that a ny taxpayer permitted or required to take inventories pursuant to the provisions of sec_471 and pursuant to the provisions of sec_1_471-1 to inclusive may elect with respect to those goods specified in his application and properly subject_to inventories to compute his opening and closing inventories in accordance with the lifo_method sec_1_472-1 the cost of raw materials the cost of labor and the cost of overhead are expressly identified as inventoriable costs in sec_1_471-3 hence such costs are included within the specified provisions identified in sec_1_472-1 for which the lifo inventory_method is expressly made available respondent may not therefore deny petitioner's right to elect the lifo_method for labor and overhead costs or condition its right to make such an election on electing lifo for the good produced by such labor and overhead we agree with respondent we find petitioner's interpretation of sec_1_471-3 and sec_1_472-1 income_tax regs on which it relies to be strained and its reliance on those regulations to be misplaceddollar_figure the latter regulation sec_1_472-1 income_tax regs merely provides that a taxpayer who is allowed or required to use the inventory_accounting method as provided by sec_471 and the regulations thereunder may elect the lifo inventory_method under sec_472 but only with respect to those goods specified in his application and properly subject_to inventory the cross- reference in sec_1_472-1 income_tax regs to all the regulations promulgated under sec_471 including sec_1_471-3 income_tax regs that were extant when sec_1_472-1 income_tax regs was promulgated is of no relevance let alone significance in deciding whether sec_472 and the regulations thereunder mean what they say when they permit a taxpayer to elect the lifo inventory_method in inventorying goods specified in an application filed by such taxpayer the former regulation sec_1_471-3 income_tax regs on which petitioner relies and to which sec_1_472-1 income_tax regs inter alia refers merely defines the term cost one of the two commonly used bases of inventory_valuation we also find petitioner’s reliance on revrul_60_321 1960_2_cb_166 to be misplaced petitioner argues that because that ruling permitted a dealer_in_securities which are intangibles to account for such securities under the lifo inventory_method consolidated should be permitted to elect the lifo inventory_method for the inventoriable costs of its labor and overhead which also are intangibles even though they are not goods rev_rul supra holds only that a taxpayer is permitted to elect the lifo inventory_method for the intangible goods securities that satisfy the requirements of sec_471 to mean in the case of inventories for goods in process and for finished goods-- the cost of raw materials_and_supplies entering into or consumed in connection with the product expenditures_for direct labor and indirect production_costs incident to and necessary for the production of the particular article the foregoing definition of the term cost does not transform the latter two items in that definition viz in the instant case labor and overhead into goods subject_to inventory as to which a taxpayer may elect the lifo inventory_method under sec_472 in other words just because the costs of the labor and overhead involved here are two of the three basic elements of cost that were reflected in consolidated’s inventories for goods in process and for finished goods see sec_1_471-4 income_tax regs does not convert labor and overhead into goods themselves as to which consolidated could have elected the lifo inventory_method under sec_472 nor does the fact that the cost of consolidated’s new parts one of the two raw materials used by consolidated in its remanufacturing business is a third basic element of cost that also was reflected in consolidated’s inventories for goods in process and for finished goods see id mean that its labor and overhead when combined with its new parts become goods as to which consolidated could have elected the lifo inventory_method under sec_472 as stated above the goods produced by consolidated are remanufactured automobile parts or a type or class of such goods eg remanufactured automobile engines although consolidated’s new parts labor and overhead enter into the production and thus are components of those goods another raw material indeed the principal raw material that enters into the production and thus is a component of the goods produced by consolidated is the customer cores the labor and overhead involved in this case are not goods the new parts labor and overhead involved in this case when taken together but without customer cores do not constitute goods however the new parts labor overhead and customer cores involved in this case when taken together do constitute goods and are included in and comprise consolidated's inventories for goods in process and for finished goods sec_472 allows a taxpayer to elect the lifo inventory_method in inventorying goods specified in the taxpayer's application that section does not state that a taxpayer may elect the lifo inventory_method in inventorying other than a good nor does that section state that a taxpayer may elect the lifo inventory_method in inventorying a portion of a good the labor and overhead involved here are not a good let alone the entire good of consolidated subject_to inventory even though they enter into the production of consolidated’s finished goods viz remanufactured automobile parts by transforming consolidated’s customer cores and new parts into such goods and are included along with customer cores and new parts in consolidated’s inventories for goods in process and for finished goods nor do the labor and overhead involved here become a good let alone the entire good of consolidated subject_to inventory when the new parts involved here are combined with them the goods of consolidated subject_to inventory as to which it was permitted by sec_472 and the regulations thereunder to elect the lifo inventory_method are the remanufactured automobile parts produced by consolidated a type or class of those goods eg remanufactured automobile engines and if consolidated had made the election permitted by sec_1 c income_tax regs which it did not its raw material goods ie customer cores and or new parts we conclude that sec_472 requires a taxpayer who wants to elect the lifo inventory_method to make that election with respect to a good or goods which are subject_to inventory and specified in a form_970 and which could include one or more raw material goods used by a manufacturer or processor that will become part of the merchandise intended for sale see sec_1_472-1 income_tax regs and to make that election with respect to such entire good or goods that section does not permit and we do not construe it to allow a taxpayer to make such an election with respect to other than such a good or goods or with respect to a portion thereof if congress had intended to permit such an election under sec_472 it would have so provided in that section it did not petitioner also relies on sec_1_472-1 income_tax regs to support the validity of consolidated’s lifo_method petitioner asserts respondent apparently believes that sec_1_472-1 supports her position in this matter to the contrary sec_1_472-1 contradicts her argument that the lifo inventory_method may only be elected with respect to goods under the raw_material_content method a taxpayer's lifo election is limited to the cost of raw materials including the cost of the raw_material_content of work-in-progress and finished goods sec_1_472-1 the regulation describes the manner in which a taxpayer may segregate the cost of one or more raw materials from work-in-progress and finished goods and value those costs using lifo while all other costs associated with work-in-progress and the finished good are valued under the fifo convention thus a taxpayer using the raw_material_content method elects to value the cost of raw materials including the cost of raw materials incorporated into work-in-progress and finished goods using the lifo convention not the raw material themselves rather than support her position in this matter sec_1_472-1 provides further evidence of the validity of petitioner's sic lifo election in addition respondent's attempt to characterize the raw_material_content method as the single permissive variance to the inclusion of the total goods in lifo is not an accurate statement of the law we disagree with the foregoing contentions of petitioner as to what sec_1_472-1 income_tax regs which permits a taxpayer to elect what we shall refer to as the raw_material_content lifo inventory_method provides and allows we reject petitioner’s position that that regulation contradicts respondent’s argument that the lifo inventory_method may only be elected with respect to goods sec_1_472-1 income_tax regs which is virtually identical to the amendment to sec_29 d -1 of regulation sec_111 provides in pertinent part c a manufacturer or processor who has adopted the lifo inventory_method as to a class of goods may elect to have such method apply to the raw materials only including those included in goods in process and in finished goods expressed in terms of appropriate units if such method is adopted the adjustments are confined to costs of the raw material in the inventory and the cost of the raw material in goods in process and in finished goods produced by such manufacturer or processor and reflected in the inventory sec_1_472-1 income_tax regs as did the amendment to sec_29 d -1 of regulation sec_111 states that the election under sec_1_472-1 income_tax regs may apply to any one raw material when two or more raw materials enter into the composition of the finished product we disagree with petitioner’s assertions that under sec_1_472-1 income_tax regs a taxpayer’s lifo election is limited to the cost of raw materials including the cost of the raw_material_content of work-in-progress and finished goods a taxpayer using the raw_material_content lifo inventory_method elects to value the cost of raw materials including the cost of raw materials incorporated into work-in-progress and finished goods using the lifo convention not the raw materials themselves emphasis added petitioner also contends that because the examples in sec_1_472-1 income_tax regs illustrate the manner in which a raw material may be accounted for on the raw_material_content lifo inventory_method and labor and overhead on the fifo inventory_method it is not logical to conclude that when lifo is elected for one raw material together with labor and overhead continued pursuant to sec_1_472-1 income_tax regs a manufacturer or processor may elect to have such lifo inventory_method apply to the raw materials only including those included in goods in process and in finished goods such an election is not made with respect to the costs of such raw materials petitioner takes the reference in sec_1_472-1 income_tax regs to costs of the raw material out of context and misstates the reason for that reference in that regulation once a manu- facturer or processor has elected the raw_material_content lifo inventory_method as to one or more raw materials including those included in goods in process and in finished goods such a taxpayer is required by sec_472 to inventory such raw material s at cost that is why sec_1_472-1 income_tax regs states if such method the raw_material_content lifo inventory_method is adopted the adjustments are confined to costs of the raw material in the inventory and the cost of the raw material in goods in process and in finished continued that a second raw material cannot be valued under fifo we disagree the examples in sec_1_472-1 income_tax regs merely illustrate how the adjustments should be made under the raw_material_content lifo inventory_method even if a taxpayer were to rely on those examples in calculating the adjustments under such taxpayer's lifo inventory_method that taxpayer would not be able to use such a method unless it were permitted by or not inconsistent with sec_472 and the regulations thereunder goods produced by such manufacturer or processor and reflected in the inventory emphasis added we also disagree with petitioner's contention that sec_1_472-1 income_tax regs provides evidence of the validity of petitioner's sic lifo election as discussed above and as made clear by that regulation a manufacturer or processor may elect to apply the lifo inventory_method to one or more raw materials only including those included in goods in process and in finished goods consolidated could have elected but did not elect to apply the raw_material_content lifo inventory_method to its new parts and or its customer cores sec_1_472-1 income_tax regs it could not have elected to apply that method to its new parts labor and overhead only or to its labor and overhead only id we conclude that sec_1_472-1 income_tax regs does not permit consolidated's lifo_method and does not provide evidence of the validity of consolidated's lifo election under the raw_material_content lifo inventory_method the only adjustment to the closing_inventory is the cost of the raw material for which a taxpayer elects the raw_material_content lifo inventory_method the processing costs and overhead cost are not changed sec_1_472-1 income_tax regs example last sentence although petitioner concedes that it may not be used or cited as precedent sec_6110 petitioner relies on tech adv mem date in an effort to show that respondent has permitted a taxpayer to account for one or more but less than all of its raw materials and all of its labor and overhead under the lifo inventory_method it is not at all clear from tech adv mem what if any of the labor and continued to the contrary we find sec_1_472-1 income_tax regs to be consistent with respondent’s position regarding consolidated's lifo_method the secretary promulgated that regulation under the authority granted by sec_472 to prescribe regulations as necessary in order that the use of such lifo inventory_method may clearly reflect income dollar_figure as discussed above the raw_material_content lifo inventory_method authorized by sec_1_472-1 income_tax regs permits a manufacturer or processor who has adopted the lifo inventory_method with respect to a class of goods to apply that method to the raw materials only including those included in goods in process and in finished goods raw materials are goods continued overhead in question ultimately were allowed to be on or ultimately were disallowed from being on the lifo inventory_method upon examination of the income_tax returns of the taxpayer to the extent that tech adv mem may be read to suggest that a taxpayer may validly elect the lifo inventory_method with respect to all of its labor and overhead but not all of its raw materials that enter into the production of a good or type or class of goods we reject any such suggestion as contrary to sec_472 and the regulations thereunder the position of the secretary in sec_1_472-1 income_tax regs is identical to the position taken by the commissioner and approved by the secretary under the original predecessor of sec_472 viz sec_22 of the code as amended which was set forth in the amendment to sec_29 d -1 of regulation sec_111 we have found nothing in sec_472 its predecessor provisions or their legislative_history which establishes that sec_1_472-1 income_tax regs and its predecessor regulations as they relate to the raw_material_content lifo inventory_method were intended to be anything other than a proper interpretation of the statutory language under which those regulations were promulgated sec_1_472-1 income_tax regs is consistent with sec_472 and sec_1_472-1 income_tax regs which require a taxpayer who wants to elect the lifo inventory_method to make that election with respect to a good or goods which are subject_to inventory and specified in a form_970 and with respect to such entire good or goods when a manufacturer or processor elects the raw_material_content lifo inventory_method under sec_1_472-1 income_tax regs the good or goods specified in a form_970 to which that method applies are one or more raw materials and not the goods produced or processed by such a taxpayer and that method must be applied to such entire raw material goods see sec_1_472-1 j income_tax regs respondent also points to sec_472 in support of respondent’s position that consolidated's lifo_method is contrary to the requirements of sec_472 and the regulations thereunder we agree sec_472 states in inventorying goods specified in the application described in subsection a the taxpayer shall inventory them at cost sec_472 thus requires a taxpayer who has elected the lifo inventory_method under sec_472 to inventory the good or goods specified in a form_970 at cost that section does not permit and we do not construe it to allow a taxpayer to inventory at cost other than such a good or goods or a portion of such a good or goods as further support for respondent’s position that consolidated’s lifo_method contravenes the requirements of sec_472 and the regulations thereunder respondent directs our attention to sec_1_472-8 income_tax regs the regulations under sec_472 relating to the dollar-value lifo inventory_method according to respondent consolidated’s lifo_method contravenes those regulationsdollar_figure we agree regardless of the different types of pools that a taxpayer may use if such taxpayer elects the dollar-value lifo inventory_method eg natural_business_unit pools multiple pools or pools established under the ipi computation method that method must be used with respect to a good or goods subject_to inventory and specified in a form_970 and with respect to such entire good or goods see sec_1_472-8 e income_tax regs petitioner argues that respondent's contention that consolidated’s lifo_method contravenes the dollar-value lifo inventory_method regulations under sec_472 is a new_matter in respect of which the burden_of_proof is on respondent under rule a we disagree the determinations in the notice and the notice are stated quite broadly and we construe them to encompass respondent’s contentions relating to consolidated’s dollar-value lifo inventory_method respondent determined in the notice since you did not include the cost of yard cores in the lifo calculation of inventory for taxable_year as required in accordance with your lifo election taxable_income is increased by the amount of your lifo reserve an identical determination for appears in the notice even if we were not to address respondent's argument under the regulations relating to the dollar-value lifo inventory_method because it is a new_matter our holding regarding consolidated's lifo_method would not change to illustrate pursuant to the rules for establishing natural_business_unit pools a pool is to consist of all items entering into the entire inventory investment for a natural_business_unit of a business_enterprise unless the taxpayer elects to use the multiple_pooling method provided in sec_1_472-8 income_tax regs if a business_enterprise is comprised of only one natural_business_unit one pool is to be used for all of its inventories including raw materials goods in process and finished goods sec_1_472-8 income_tax regs if a business_enterprise is composed of more than one natural_business_unit more than one pool is required id to illustrate further a taxpayer may elect to establish multiple pools for inventory_items that are not within a natural_business_unit as to which the taxpayer has adopted the natural_business_unit method of pooling as provided in sec_1 b income_tax regs sec_1_472-8 income_tax regs in the event of such an election each such pool is ordinarily to consist of a group of inventory_items that are substantially_similar which is to be determined based on all the whether an enterprise consists of more than one natural_business_unit is a matter of fact to be determined from all the circumstances sec_1_472-8 income_tax regs in the case of a manufacturer like consolidated a natural_business_unit ordinarily consists of the entire productive activity of the enterprise within one product line or within two or more related product lines including the obtaining of materials the processing of materials and the selling of manufactured goods id facts and circumstances id pursuant to the rules for establishing multiple pools unprocessed raw materials which are substantially_similar are to be pooled together and goods in process and finished goods in the inventory are to be placed in pools classified by major types or classes of goodsdollar_figure sec_1_472-8 and c income_tax regs in the face of various provisions in sec_472 and the regulations thereunder that respondent contends and we agree are contrary to consolidated’s lifo_method petitioner argues that taxpayers are afforded great flexibility with respect to the dollar-value lifo inventory_method and computational procedures under that method consequently according to petitioner consolidated should be afforded great flexibility with respect to consolidated's lifo_method in support of that position petitioner cites sec_1_472-1 l and sec_1 b i d income_tax regs sec_1_472-1 income_tax regs provides in pertinent part the requirement in sec_1_472-8 and c income_tax regs that a taxpayer establish pools by major types of materials or major classes of goods does not preclude the establishment of a miscellaneous pool because a taxpayer may elect the dollar-value lifo inventory_method with respect to all or any designated goods in such taxpayer’s inventory there may be a number of such inventory_items covered in the election a miscellaneous pool is to consist only of items that are rela- tively insignificant in dollar value when compared to other inventory_items in the particular trade_or_business and that are not properly includible as part of another pool sec_1 b i d income_tax regs the lifo inventory_method is not dependent upon the character of the business in which the taxpayer is engaged or upon the identity or want of identity through commingling of any of the goods on hand and may be adopted by the taxpayer as of the close of any taxable_year the foregoing regulation does not permit a taxpayer flexibility to elect a lifo inventory_method that is contrary to the requirements of sec_472 and the regulations thereunder sec_1_472-1 income_tax regs provides if a taxpayer uses consistently the so-called dollar- value method of pricing inventories or any other method of computation established to the satisfaction of the commissioner as reasonably adaptable to the purpose and intent of sec_472 and this section and if such taxpayer elects under sec_472 to use the lifo inventory_method authorized by such section the taxpayer's opening and closing inventories shall be determined under sec_472 by the use of the appropriate adaptation petitioner directs us to the reference in the foregoing regulation to any other method of computation consolidated elected the dollar-value lifo inventory_method in the form_970 and the form_970 it did not elect any other method of computation referred to in the foregoing regulation even if consolidated had used any such other method it would have been required to establish to the satisfaction of respondent that such other method is reasonably adaptable to the purpose and intent of sec_472 and the regulations thereunder consolidated has failed to make such a showing to respondent or to the court petitioner also argues that sec_1_472-8 income_tax regs supports its position that consolidated should be afforded great flexibility regarding its lifo_method that regulation provides in pertinent part that a taxpayer may elect the dollar-value lifo inventory_method with respect to all or any designated goods in his inventory contrary to petitioner's argument we find that the foregoing language in sec_1 b i d income_tax regs supports respondent's position and is consistent with sec_472 which requires a taxpayer who elects the lifo inventory_method to make that election with respect to a good or goods subject_to inventory and specified in a form dollar_figure the issue relating to consolidated’s lifo_method is one that is answered by the requirements of sec_472 and the regulations thereunder the court has no flexibility to rewrite sec_472 our flexibility to reject the legislative regulations under sec_472 that are implicated here is quite limited those regulations must be upheld unless they are arbitrary capricious or manifestly contrary to sec_472 petitioner also cites the following cases in support of its contention that this court has shown a willingness to allow flexibility with respect to the dollar-value lifo inventory_method and computational matters relating thereto 76_tc_736 76_tc_708 and 82_tc_726 in each of those cases the taxpayer elected the lifo inventory_method as to a good or goods or a type or class of goods and as to such entire good or goods or type or class thereof in none of those cases was the court presented with the issue that we now are addressing 467_us_837 petitioner also contends that sec_472 and its predecessor provisions in the internal revenue laws have been interpreted broadly and that the court should interpret that section broadly in this case and find that consolidated's lifo_method does not contravene it or the regulations thereunder in support of that contention petitioner cites several cases including 8_tc_14 we find all of those cases to be distinguishable and petitioner's reliance on them to be misplaced in the interest of brevity we shall discuss only the hutzler bros co case because of the number and diversity of the goods of the taxpayer involved in hutzler bros co v commissioner supra the taxpayer a department store retailer devised a lifo inventory_method that reduced the goods to their lowest common denominator viz a dollar figure that method which is now known as the dollar-value lifo inventory_method was not expressly permitted by regulation for the year before the court in the hutzler bros co case hutzler bros co v commissioner supra pincite the only method for that year that was permitted by the regulations under sec_22 of the code as amended a predecessor of sec_472 was a method that required the identification of specific goods in a taxpayer’s inventory a method known as the specific goods lifo inventory_method see sec_1_472-2 income_tax regs the court in hutzler bros co v commissioner supra reviewed the legislative_history of not only sec_22 of the code as amended which was applicable to the year at issue but also sec_22 of the act 52_stat_459 and concluded that the purpose of the lawmakers was to have it the lifo inventory_method apply in general terms to all those coming within its provisions id pincite the court explained that in contrast to the determination under the lifo inventory_method of the merchandise to which a cost is to be attributed in the case of a manufacturer the determination under the lifo inventory_method of the merchandise to which a cost is to be attributed becomes difficult in the case of a retail merchant primarily because of the complications of the retail_method itself id pincite the court added the process engaged in by petitioner a retail merchant is to reduce the price level of the retail stock to that prevailing as of the opening_inventory and thereby to identify the merchandise remaining in inventory at the close of the year as that constituting inventory at the beginning of the year to the extent of the size of the opening_inventory that this is done by dealing with the merchandise stated in terms of dollars rather than of numbers or quantities is a requisite of the aspect of department store accounting which relies for its inventory volume on a statement in dollars alone id the court rejected respondent's contention that stating inventory in terms of dollars instead of other measures of quantity has the effect of distorting the inventory content pointing out that the retail_method has been used with respondent's complete approval for too long a time for the assumption to be permissible that the contents of an inventory can not be satisfactorily represented for all purposes by its expression in dollars only id the court then examined the lifo inventory_method used by hutzler brothers company and held that that method was permitted by sec_22 of the code as amended and clearly reflected income even though it was not expressly permitted by the regulations under that section id pincite although we find hutzler bros co v commissioner supra to be distinguishable from the instant case the following explanation by the court in that case of the lifo inventory_method is instructive and rejects petitioner's position here the process envisaged by lifo involves not so much the ascertainment of cost as the ascertainment of what it is of which we are to discover the cost the last in first out formula assumes that the merchandise remaining in inventory is that which was first purchased if we were dealing with a fabricator or manufacturer the first step would be to determine which merchandise it is to which a cost is to be attributed and the second to determine that cost emphasis added hutzler bros co v commissioner supra pincite we see no reason to elaborate further on the foregoing succinct explanation in the hutzler bros co case regarding what the process envisaged by the lifo inventory_method is we conclude that petitioner has not shown that respondent abused respondent’s discretion in determining that consolidated's lifo_method is contrary to the requirements of sec_472 and the regulations thereunder and that therefore that method does not clearly reflect income we shall next address the parties' dispute over whether respondent abused respondent's discretion in terminating consolidated's election to use consolidated's lifo_method because that method does not clearly reflect income petitioner contends that in the event that the court were to find that consolidated's lifo_method does not clearly reflect income respondent would not be permitted to terminate consolidated's election to use that method provided that consolidated agrees to account for its customer cores under the lifo inventory_method and to make any necessary adjustments resulting therefromdollar_figure petitioner asserts in conceding that consolidated would have to make any necessary adjustments we believe that petitioner is acknowledging that consolidated would be required to produce the books_and_records needed to make such adjustments however petitioner did not produce at trial any of consolidated's books_and_records that would be required to make any necessary adjustments instead without even indicating on brief whether or not consolidated has the books_and_records to make any necessary adjustments petitioner takes the position that respondent must establish that consolidated does not have such books_and_records because whether or not it does is a new_matter on which respondent has the burden_of_proof we disagree it is petitioner who is claiming that consolidated should be permitted to modify its lifo election to include customer cores provided that inter alia consolidated establishes that it can and does make any necessary adjustments petitioner has failed to establish its ability to make such adjustments it would be unreasonable unduly punitive and constitute an abuse of her discretion for respondent to terminate consolidated's lifo election because petitioner has sought judicial review of her determination that it is essential to a clear_reflection_of_income that its customer core inventory be included in the lifo election in support of its position petitioner cites inter alia revproc_79_23 1979_1_cb_564 and sec_1_472-3 income_tax regsdollar_figure we first turn to revproc_79_23 supra on which petitioner relies petitioner contends that revproc_79_23 supra provides that a termination of a taxpayer's lifo election may be warranted only where one of four specified circumstances exists petitioner maintains that the present case does not involve any of those four situationsdollar_figure we note initially that petitioner also cites tech adv mem date to show that respondent has previously recognized that a taxpayer may contest her determination regarding lifo inventory matters without the threat of having its lifo election terminated petitioner's reliance on tech adv mem is misplaced tech adv mem which has no precedential value sec_6110 involved an adjustment proposed by the district_director pursuant to sec_1_472-4 income_tax regs to perfect the taxpayer's lifo election and not a termination of that election to the extent that tech adv mem may be read to suggest that respondent does not have the authority in this case to terminate consolidated's election to use consolidated's lifo_method such a reading is wrong see sec_446 sec_1_472-3 income_tax regs petitioner further contends that the exclusion of customer cores from consolidated's lifo pools fits within one or both of the following situations described in sec_3 b and d of revproc_79_23 1979_1_cb_564 as to which respondent has indicated termination of a lifo election is not warranted continued revproc_79_23 supra does not provide the only circumstances in which respondent will in respondent's discretion terminate a taxpayer's lifo election in any event one of the four situations described in revproc_79_23 supra in which respondent will in respondent's discretion terminate such an election is found in sec_3 b of that revenue_procedure viz failure by the taxpayer to properly elect the lifo_method that situation exists in the instant case we have held that contrary to the requirements of sec_472 and the regulations thereunder consolidated's lifo election did not apply to an entire good or goods subject_to inventory and specified in a form_970 consequently consolidated failed to properly elect the continued b selection by the taxpayer of a fewer or greater number of inventory pools than those determined by an examining agent d the taxpayer improperly including or excluding a specific item in a particular inventory_pool we do not believe that the situation presented here is described in sec_3 b or d of revproc_79_23 supra respondent does not take the position that consolidated selected too few or too many inventory pools nor does respondent take the position that consolidated improperly included or excluded a specific item in a particular inventory_pool respondent is arguing inter alia that regardless of the different types of pools that a taxpayer may use if such taxpayer elects the dollar-value lifo inventory_method that method must be used with respect to a good or goods subject_to inventory and specified in a form_970 and with respect to such entire good or goods lifo_method when it filed the form_970 and the form dollar_figure we now turn to sec_1_472-3 income_tax regs on which petitioner relies that regulation provides as a condition to the taxpayer's use of the lifo inventory_method the commissioner may require that the method be used with respect to goods other than those specified in the taxpayer's statement of election if in the opinion of the commissioner the use of such method with respect to such other goods is essential to a clear_reflection_of_income petitioner contends that in the instant case the foregoing regulation does not authorize respondent to terminate a taxpayer's lifo election petitioner's reliance on sec_1_472-3 income_tax regs is misplaced that regulation authorizes respondent to require a taxpayer who has elected the lifo inventory_method with respect to an entire good or goods subject_to inventory and specified in a form_970 to apply the lifo inventory_method to any other such good or goods but not specified in that form in the present case respondent is not seeking to require consolidated which did not elect the raw_material_content lifo inventory_method to apply the lifo inventory_method to a good or goods subject_to inventory but not specified in the form_970 and the form_970 conse- we reject the suggestion of petitioner that sec_3 b of revproc_79_23 supra pincite applies only to the procedural requirements for electing the lifo inventory_method see revproc_76_28 1976_2_cb_645 quently sec_1_472-3 income_tax regs is not apposite here the pertinent authority governing disposition of the issue regarding respondent's termination of consolidated's lifo election is sec_446 and sec_1_472-3 income_tax regs sec_446 provides b exceptions --if no method_of_accounting has been regularly used by the taxpayer or if the method used does not clearly reflect income the computation of taxable_income shall be made under such method as in the opinion of the secretary does clearly reflect income the foregoing section permits respondent to terminate a taxpayer's method_of_accounting that does not clearly reflect income here consolidated's lifo_method and to require the taxpayer to use a method here the fifo inventory_method that does clearly reflect income sec_1_472-3 income_tax regs provides d whether or not the taxpayer's application_for the adoption and use of the lifo inventory_method should be approved and whether or not such method once adopted may be continued and the propriety of all computations incidental to the use of such method will be determined by the commissioner in connection with the examination of the taxpayer's income_tax returns under the foregoing regulation it is within respondent's discretion to determine whether or not a taxpayer's application_for the adoption and use of the lifo inventory_method should be approved and continued we conclude that petitioner has not shown that respondent abused respondent's discretion in terminating consolidated's election to use consolidated's lifo_method amounts at which customer cores should be reflected in inventory as permitted by sec_1_471-2 income_tax regs consolidated chose to apply the lcm basis of valuation in accounting for its customer cores under the fifo inventory_method in applying lcm in its returns for the years at issue consolidated reflected the customer cores in its finished goods inventory at core supplier amounts and in its unpro- cessed cores raw material inventory and its goods in process inventory at scrap_value respondent determined that conso- lidated's fifo-lcm method did not reflect the customer cores in its inventories at the proper amounts we must decide whether respondent abused respondent's discretion in making that determination that inquiry requires us inter alia to determine the cost and the market for consolidated's customer cores for purposes of sec_471 as we understand it it is petitioner's position that consolidated's fifo-lcm method conforms to gaap and clearly reflects income respondent disagrees for financial reporting purposes consolidated reflected its customer cores in all of its inventories at core supplier amounts however for tax purposes consolidated reflected customer cores in its finished goods inventory at core supplier amounts it reflected customer cores in its unprocessed cores raw material inventory and its goods in process inventory at scrap_value on the record before us we find that petitioner has not met its burden of establishing that consolidated's fifo-lcm method conforms to gaap or that that method otherwise satisfies the requirement in sec_471 that it conform as nearly as may be to the best_accounting_practice in the trade_or_business we shall now consider whether consolidated's fifo-lcm method satisfies the requirement under sec_471 that that method clearly reflect income in support of that position petitioner contends that consolidated obtained customer cores in exchange and not purchase transactions and that therefore the cost and the market for those cores for purposes of sec_471 are to be determined on the basis of the respective fair market values of those cores according to petitioner those values were either the salvage yard cost for non-bin salvage yard cores or the scrap_value for bin salvage yard cores that did not pass inspection at bishop engine's place of businessdollar_figure petitioner asserts on brief t he price paid the salvage yard cost by core suppliers to purchase cores from salvage yards on an individual basis non-bin salvage yard cores should be determinative of the actual value of cores received by consolidated from its customers in this regard at trial mr bishop the president of one of the largest core suppliers in the country testified that the cores received by remanufacturers from their customers are the cores bin salvage yard cores which continued petitioner further asserts that even if the court were to find that the transactions by which consolidated acquired customer cores were purchases and not exchanges only the respective fair market values of those cores are the cost and the market for purposes of sec_471 and that the alleged excesse sec_24 continued did not pass inspection at bishop engine's place of business that core suppliers do not ordinarily purchase from salvage yards except at scrap_value thus for a substantial number of the cores received by consolidated from its customers the fair_market_value of such cores is as correctly reported on its and federal_income_tax returns scrap_value citations omitted assuming arguendo that fair_market_value were the proper criterion under sec_471 petitioner's position regarding what the fair market values of its customer cores were appears to be inconsistent on the one hand petitioner contends that the salvage yard cost for non-bin salvage yard cores should be determinative of the actual value of consolidated's customer cores on the other hand petitioner asserts that mr bishop testified that the customer cores of the type acquired by consolidated are comparable to bin salvage yard cores which did not pass inspection at bishop engine's place of business and which were purchased by core suppliers from salvage yards at scrap_value consequently according to petitioner for a substantial number of consolidated's customer cores the fair_market_value was scrap_value in any event even assuming arguendo that we were to agree with petitioner that either the salvage yard cost for non-bin salvage yard cores or the scrap_value for bin salvage yard cores which did not pass inspection at bishop engine's place of business is the determinant of the cost and the market for customer cores for purposes of sec_471 which we do not petitioner has not established either what those amounts were or that for a substantial number of customer cores those amounts did not exceed scrap_value moreover petitioner concedes that at least with respect to other than a substantial number of consolidated's customer cores consolidated erred when it included in its returns those cores in its unprocessed raw materials inventory and in its goods in process inventory at scrap_value over such cost and market that consolidated credited to each customer account receivable are deductible expenses under sec_162 in support of respondent's position that consolidated's fifo-lcm method does not clearly reflect income respondent contends that consolidated acquired customer cores in purchase and not exchange transactions and that therefore the cost and the market for those cores for purposes of sec_471 are to be determined by reference to the invoice prices that were shown on the customer core sales invoices according to respondent those invoice prices are the amounts viz the core credit amounts that consolidated credited to each customer account receivable and that were shown on those invoices under the column headed cores--price each dollar_figure respondent further asserts that even if the court were to find that the transactions by which consolidated acquired customer cores were exchanges and not purchases respondent' sec_25 on brief respondent uses the term core amount when refer-ring to the amount that consolidated credited to each customer account receivable for each core that it acquired in fact the amount of such a credit was generally equal to the core amount and we assume that respondent uses the term core amount for convenience however because of inter alia the condition of each customer core that a customer decided to deliver to consol-idated it was possible that consolidated sometimes credited to a customer account receivable an amount that was less than the core amount unless we are quoting from the briefs of the parties we shall refer to the amounts that consolidated credited to each customer account receivable as the core credit amounts position as to what are the cost and the market for conso- lidated's customer cores for purposes of sec_471 would not change purchase vs exchange transactions in support of petitioner's position that consolidated acquired customer cores in exchange transactions petitioner asserts petitioner's method of obtaining cores from its customers is at its root an exchange of a remanu- factured automobile part for a sum of money the exchange amount plus the customer's core respondent's attempt to characterize the core deposit as the cost to petitioner of a core provided to it by a customer is apparently founded in sec_1_471-3 and assumes that the core deposit is the invoice price of the core respondent's position ignores both the absence of an invoice or invoice price relating to a customer core and the fundamental nature of the transaction between petitioner and its customer petitioner's customers do not issue invoices to petitioner on the sale of a remanufactured automobile part petitioner issues an invoice to its customer that reflects an exchange amount and a core deposit the core deposit is reflected on the invoice with the understanding that the customer can return his or her core and receive back from petitioner the full amount of the core deposit shown the recording of the core deposit on petitioner's invoice is therefore simply the posting of a customer deposit to secure the return of the customer's core further the refunding of the core deposit and the issuance of a credit invoice by petitioner to a customer simply document sec_26 petitioner uses the term core deposit on brief presumably because it contends that the core amount for a customer core represents a deposit made by consolidated's customer to secure the return of the customer's core which was to be refunded at the time that customer decided to deliver a customer core to consolidated the refunding of that deposit finally the credit invoice customer core sales invoice issued by petitioner to its customers relates to the sale of the remanufactured automobile part to the customer not the purchase of a core by petitioner the absence of an invoice or invoice price regarding customer cores is not surprising when the transaction between petitioner and its customer is analyzed for what it is an exchange in which the customer's core is received by petitioner as partial payment for the remanufactured automobile part sold when a customer purchases one of petitioner's remanufactured automobile parts the customer must either provide to petitioner a core corresponding in type and style to the remanufactured automobile part purchased or post a core deposit with the under- standing that the deposit will be refunded when the customer returns his or her core if a customer were to provide a core to petitioner at the time of sale the existence of the exchange would be indis- putable the customer receives a remanufactured automobile part in exchange for cash the exchange amount and the customer's core see sec_1_1002-1 exchange defined as a reciprocal transfer of property as distinguished from a transfer of property for a money consideration only the fact petitioner's customers do not generally provide a core to it at the time of sale does not as respondent would have this court hold transform the transaction into two separate sales it is well established that an integrated transaction may not be separated into components for the purposes of taxation by either the internal_revenue_service or the taxpayer 399_f2d_652 5th cir see also 214_f2d_685 5th cir in 400_f2d_682 10th cir affirming 26_tcm_748 a case factually indistinguishable from the one at bar the exchange analysis set forth above was recognized by both the tax_court and the tenth circuit_court of appeals fn ref omitted in support of respondent's position that consolidated acquired customer cores in purchase transactions respondent asserts the parties have stipulated that when consolidated sells a remanufactured automobile part to a customer it receives a total sales amount the total sales amount consisting of the exchange amount plus core amount is taken into income as a cash credit transaction a customer core may or may not subsequently be acquired by consolidated at the core amount if it is this is a separate cash credit transaction whereby consolidated is out-of-pocket the core amount the customer core sales invoices use the term price each not refund or deposit when referring to the value given up by consolidated for cores provided to consolidated by its customers these stipulated facts are not indicative of an exchange transaction as advocated by petitioner these facts also do not support the proposition that the customer cores are obtained by consolidated at little or no out-of-pocket cost petitioner acknowledges that consolidated's customers do not generally provide a core to consolidated at the time a remanufactured part is sold in fact an entire year may go by before a customer provides a core nevertheless petitioner presents a scenario in support of the exchange argument in which the core is provided simultaneously petitioner has not established in the record that such a scenario is treated any differently than a normal core acquisition it is instructive to consider the scenario wherein consolidated knows at the time that a remanufactured part is sold that the customer cannot provide a core the stipulated facts indicate the customer would still pay the core amount although there is no possible core return to be secured petitioner's argument that it acquires cores in an integrated transaction does not comport with the facts consolidated's customers are not required to provide a core the remanufactured part is not sold to the customer contingent upon a core being provided there is no evidence that any negotiation whatsoever is permitted regarding the price of the remanufactured part the customer must pay the stated or list price of the remanufactured part even if consolidated knows that the customer will not provide a core we have found the following facts on the instant record at the time a customer purchased a remanufactured automobile part from consolidated that customer became obligated to pay consolidated the remanufactured automobile part sales_price which consisted of the exchange amount and the core amount and which along with the exchange amount and the core amount consolidated reflected on the remanufactured automobile part sales invoice that it generated for that sale and consoli- dated offered to purchase from that customer a customer core corresponding to that part for the customer core purchase offer amount there was no obligation on the part of that customer to deliver a customer core to consolidated as part of that sale the remanufactured automobile part sales_price the customer core purchase offer amount and the core credit_amount were determined on the basis of market-related factors including supply and demand consolidated accounted for each remanufactured automobile part that it sold to a customer by making entries increasing sales exchange amount by the exchange amount that was part of the remanufactured automobile part sales_price for each such part sales core amount by the core amount that was part of that price for each such part and customer account receivable by that price for each such part if a customer even though under no obligation to do so decided to accept consolidated's offer to purchase and delivered a customer core to consolidated and if that core satisfied consolidated's requirements for acceptance of a customer core consolidated purchased that core for a price which generally was equal to the core amount ie the core credit_amount and which was shown on the customer core sales invoice under the column headed cores--price each and paid for it by crediting that customer's customer account receivable in an amount equal to that price viz the core credit_amount the customer core purchase offer amount and the core credit_amount for each customer core were set at an amount that the marketplace in which consolidated acquired customer cores demanded the facts that we have found on the record in this case and the issue under sec_471 that is presented to us distinguish this case from 399_f2d_652 5th cir and 400_f2d_682 10th cir affg tcmemo_1967_160 the principal cases on which petitioner relies to support its position that consolidated acquired customer cores in exchange and not purchase transactions consequently we find petitioner's reliance on those cases to be misplaced the court_of_appeals for the fifth circuit began its opinion in redwing carriers inc v tomlinson supra by framing the issue presented to it as follows this case involves another attempt by a taxpayer to insulate himself from the incidence of taxation by means of paper armor the question presented is whether a taxpayer may shape what is essentially an integrated purchase and trade-in transaction of new and used trucks into two separate transactions in order to recognize an immediate gain at capital_gains rates and concomitantly to take a larger depreciation deduction from ordinary_income redwing carriers inc v tomlinson supra pincite the court_of_appeals then recited certain facts relevant to its resolving the foregoing issue including the following which it characterized as indicia of transactional unity id pincite during and respectively the taxpayer a profitable trucking concern and a prestigious account for general motors corporation g m c and white motor company white transferred title to and used trucks to g m c and at about the same time the taxpayer's wholly owned subsidiary acquired and new trucks from g m c id during transactions in like form were executed with white id the taxpayer was in a strong bargaining position vis-a-vis g m c and white consequently it succeeded in having the form of each transfer by it of used trucks and each acquisition by its subsidiary of new trucks cast as a sale and a purchase respectively it also succeeded in having the aggregate price for such alleged sales set at an amount in excess of the aggregate fair_market_value of the used trucks that it transferred to g m c and white and the aggregate price for such alleged purchases set at an amount in excess of the aggregate fair_market_value of the new trucks that its subsidiary acquired from those companies id in negotiating the foregoing transactions with g m c and white charles e mendez mendez the president and chairman of the board_of both the taxpayer and its subsidiary did not indicate to either g m c or white which corporation he was representing and it made no difference to g m c or white whether they were dealing with the taxpayer or with its subsidiary id both the taxpayer and its subsidiary used the same address on the checks utilized in the transactions in question even though they were located in different cities in florida and even though the taxpayer's subsidiary used a different bank account for all of its business activities id g m c and white delivered most of the trucks acquired in the alleged purchases by the taxpayer's subsidiary directly to the taxpayer even though they were ostensibly being sold to that subsidiary for resale to the taxpayer id in addition to reciting the foregoing facts in redwing carriers inc v tomlinson supra the court_of_appeals for the fifth circuit observed that a definite contractual inter- dependency between the sale of new trucks and the trade-in of old trucks existed id in that there would have been no purchase by the taxpayer's subsidiary of new trucks or tractors without concurrent and binding agreements to purchase the taxpayer's used equipment id quoting the u s district court's opinion in redwing carriers inc v tomlinson aftr 2d ustc par m d fla the court_of_appeals further noted that because the aggregate price that g m c paid for the used trucks was in excess of their aggregate fair_market_value g m c could have yielded a profit from the transactions in question only by viewing the alleged purchases of used trucks and the alleged sales of new trucks as one transaction id according to the court_of_appeals the transactions in question were sculptured so as to achieve the best possible tax results for redwing instead of obtaining customary discounts from the retail price of the new trucks mendez would insist that the manufacturers add the discount amount to the price of the used trucks being repurchased the gain of the trade-in price over the depreciated basis of the used trucks would be recognized at capital_gains rates and the basis of the new trucks for depreciation purposes would be inflated as a result redwing's depreciation_deductions from ordinary_income would also be inflated resulting in considerable tax savings redwing carriers inc v tomlinson supra pincite the court_of_appeals for the fifth circuit held in the redwing carriers inc case that the transfers of used trucks by the taxpayer and the acquisitions of new trucks by its subsidiary were in substance like-kind_exchanges in so holding the court stated as is obvious from the above facts these mendez- dominated transactions were severable in form only on substance the sale was in bondage to the purchase and the purchase indissolubly dependent upon the sale if redwing had not carried out the agreement to buy the new trucks the auto makers would have had no juristic obligation to purchase the used trucks the buying and selling were synchronous parts meshed into the same transaction and not independent transactions taxation is transactional and not cuneiform our tax laws are not so supple that scraps of paper regardless of their calligraphy can transmute trade- ins into sales although the taxpayer's transfers may have been paper sales they were actual exchanges a taxpayer may engineer his transactions to minimize taxes but he cannot make a transaction appear to be what it is not documents record transactions but they do not always become the sole criteria for transactional analysis id pincite redwing carriers inc v tomlinson supra is distin- guishable from the instant case for several reasons including the following unlike the case before us the redwing carriers inc supra case did not involve the inventory_accounting issue under sec_471 that is presented here in redwing carriers inc v tomlinson supra the respective prices at which the old trucks were transferred by the taxpayer and the new trucks were acquired by its subsidiary were set for tax purposes in excess of the aggregate fair_market_value of those trucks and were therefore not determined on the basis of market-related factors such as supply and demand and g m c could have yielded a profit from the transactions in question only by viewing the alleged purchases of used trucks and the alleged sales of new trucks as one transaction in contrast we have found in the instant case that the remanufactured automobile part sales_price ie the price that consolidated charged a customer who purchased a remanufactured automobile part as well as the customer core purchase offer amount and the core credit_amount ie the price that consolidated paid to acquire a customer core were determined on the basis of market-related factors such as supply and demand we conclude that 399_f2d_652 5th cir does not control our resolution of the issue presented here nor does 400_f2d_682 10th cir govern our resolution of the inventory_accounting issue under sec_471 that is involved in the instant case in burrell v commissioner supra the court_of_appeals for the tenth circuit to which an appeal in this case would generally lie recited the facts on which it relied as follows in william p burrell as a sole_proprietor was engaged in reboring automobile engine blocks called cores using them to rebuild automobile engines which he sold to both retail and wholesale customers in order to maintain an inventory of cores to be rebored burrell desired that each customer to whom he sold a rebuilt engine with a rebored core therein deliver to him the old core in the automobile engine which the rebuilt engine replaced or a like old core from an automobile engine of the same make the amount of the bill which burrell rendered to customers who purchased from him rebuilt engines with rebored cores was for a single amount which in fact was made up of two items such items were reflected separately on an invoice furnished to the customer item one on such invoice was for the rebuilt engine item two was for the core from the old engine or a substitute therefor to be delivered to burrell by the customer when a new core was returned item two was cancelled although the actual value of the old core did not equal the amount of the item two charge such charge was purposely made higher than the value of the old core to be returned in order to induce customers to return old cores and to enable burrell to maintain a needed inventory of old cores burrell did not strictly enforce the 45-day limit but accepted old cores tendered to him for credit by customers a considerable time after the 45-day period had expired the effect of a transaction between burrell and a customer was a charge against the customer in one amount reflected on the bill delivered to him made up of two items one being item one the charge for the rebuilt engine with a rebored core sold to the customer payable in cash and which most customers paid on receipt of the bill and the other item two to be paid_by the return of a like core to burrell within days or if not returned within days to be paid in full in cash the reason burrell did not strictly enforce the 45-day time limit was that he preferred old cores to cash burrell carried on his books an account referred to as customer core_deposits it reflected the amounts of item two charges which customers would have to pay in cash if they failed to discharge them by the return of an old core on date the corporation engine rebuilders inc was organized under the laws of colorado on that date the corporation which was wholly owned by the burrells took over the wholesale business of burrell the corporation continued to use the same billing and invoice procedures the same customer core_deposits account and generally the same bookkeeping methods that the burrells had followed burrell v commissioner supra pincite fn ref omitted we shall refer to burrell and the corporation collectively as the taxpayers the issue in burrell v commissioner supra was whether the taxpayers were required to include the so-called item two charge in income at the time they sold a rebuilt engine unlike the instant case the court_of_appeals for the tenth circuit in the burrell case was not presented with the inventory_accounting question under sec_471 of the proper amounts at which the taxpayers were required to reflect the cores that they acquired in their inventories and that court did not decide that issue the court_of_appeals in burrell v commissioner supra pincite held that the item two charges should have been included in income at the time the rebuilt engines were sold by the taxpayers in dictum that court suggested that there might be some basis for the contention that the amount thereof the item two charge did not accrue until the expiration of days from the date of the sale and unless the customer during such period failed to return the replacement core and that the value of the core returned should be accrued on the date of its return within the 45-day period id however the court_of_appeals did not apply the foregoing dictum because the taxpayers' books were so lacking in completeness that it would have been impossible to determine the amount the taxpayers should have accrued on that basis id even assuming arguendo that we were to find the above-quoted dictum to be a correct statement of the tax law we reject petitioner's contention that that dictum controls our resolution of the inventory_accounting issue involving consolidated's customer cores that is presented here the facts involved in burrell v commissioner supra although they might appear to be facially similar to the facts involved here are different from the facts established by the record in the present case for example the court_of_appeals for the tenth circuit stated that the item two charge was purposely made higher than the value of the old core to be returned in order to induce customers to return old cores and to enable burrell to maintain a needed inventory of old cores id pincite it is not clear what the court_of_appeals meant by the term value in any event in the instant case we have found on the record presented to us that consolidated determined the price that it was willing to pay to acquire customer cores on the basis of market-related factors including supply and demand and that it did not pay more to acquire customer cores than the marketplace in which it acquired those cores demanded the court in burrell v commissioner supra pincite also indicated that the taxpayers' books reflected an account called customer core_deposits which reflected the amounts of item two charges which customers would have to pay in cash if they failed to discharge them by the return of an old core in the present case we have found that at the time of each sale of a remanufactured auto- mobile part the core amount which was part of the remanufactured automobile part sales_price for each such sale was reflected in consolidated's books as an entry increasing sales core amount and as part of an entry ie the remanufactured automobile part sales_price increasing customer account receivable the core amount was not shown in those books as a deposit based on our examination of the entire record in this case we reject petitioner's position that consolidated acquired customer cores in exchange transactions in which consolidated's customers purchased remanufactured automobile parts from it in exchange for the payment by them of the exchange amounts and delivery by them of customer cores to consolidated on that record we find that the substance of the transactions by which consolidated acquired customer cores were purchases in which consolidated purchased customer cores for the prices that were shown in the customer core sales invoices under the column headed cores--price each we shall now address what the cost and the market are for purposes of sec_471 for the customer cores that consolidated acquireddollar_figure the cost for consolidated's customer cores for purposes of inventory_accounting under sec_471 the cost of merchandise purchased is determined under sec_1 income_tax regs that section provides in pertinent part cost means assuming arguendo that we were to have found that consolidated’s acquisitions of customer cores were exchanges and not purchases our findings below as to the cost and the market for consolidated's customer cores for purposes of sec_471 would not change b in the case of merchandise purchased since the beginning of the taxable_year the invoice price although petitioner disputes that the transactions by which consolidated acquired customer cores constituted purchases petitioner agrees with respondent that if the court were to find that such transactions were purchases the term merchandise purchased in sec_1_471-3 income_tax regs includes raw materials purchased by a manufacturer such as the customer cores purchased by consolidated however petitioner contends that that regulation does not apply in determining the cost of the customer cores acquired by consolidated because there was no invoice issued by any of consolidated's customers and no invoice price for any of those cores on the record before us we reject petitioner's contention we have found that at or about the time that a customer delivered a customer core to consolidated consolidated prepared a sales invoice28 viz the customer core sales invoice which identified the type and the number of customer cores of each type that each of its customers delivered to it we find no significance for purposes of sec_471 and sec_1_471-3 income_tax regs in the fact that it was consolidated and not its customers that generated the customer core sales invoices we also have found that the price which indeed petitioner stipulated that the customer core sales invoice prepared by consolidated was a sales invoice attached to each customer core sales invoice was inter alia a completed copy of a request for core credit consolidated paid for each customer core delivered to it by a customer viz the core credit_amount was shown on each of the customer core sales invoices under the column headed cores-- price each petitioner further contends that sec_1012 and the regulations thereunder relating to the cost_basis of property require consolidated to ascertain the respective fair market values of the customer cores that it acquired in determining the cost of those cores for purposes of sec_471 according to petitioner the core credit_amount for each customer core which consolidated acquired exceeded its fair_market_value and the aggregate amount of such alleged excesses is deductible under sec_162 as an amount expended to protect and promote consolidated's supply of raw materials we disagree with petitioner's position that sec_1012 and the regulations thereunder are determinative of the cost of consolidated's customer cores for purposes of sec_471 those provisions do not control the determination of the proper amounts at which property must be reflected in a taxpayer's inventories for purposes of sec_471 the regulations under sec_1013 relating to the basis_of_property included in inventory make it clear that the amounts at which property must be reflected in a taxpayer's inventories are controlled by sec_471 and the regulations thereunder sec_1_1013-1 income_tax regs provides the basis_of_property required to be included in inventory is the last inventory value of such property in the hands of the taxpayer the requirements with respect to the valuation of an inventory are stated in subpart d sec_471 and following part ii subchapter_e chapter of the code and the regulations thereunder we also reject petitioner's position that the aggregate amount of the alleged excesses of the core credit amounts over the alleged fair market values of consolidated's customer cores is deductible under sec_162 in support of that position petitioner asserts even if one regards the refund of the core deposit as payment for the core an artificially or unnecessarily high payment does not change the cost of property under the code rather when a taxpayer pays more than the fair_market_value for the purchase of an asset and the excess payment is for a purpose other than the acquisition of the property or the transaction is based upon peculiar circumstances which influence the purchaser to pay more than fair_market_value the excess_amount is excluded from the cost of the property 60_tc_872 aff'd 514_f2d_1209 8th cir 120_f2d_12 8th cir affirming 42_bta_698 2_tc_708 aff'd 146_f2d_697 1st cir instead under such circumstances cost is determined with reference to the fair_market_value of the property received 77_tc_1326 acq 1983_1_cb_1 as illustrated above respondent cannot reasonably dispute that the core deposit for any particular remanufactured automobile part is greatly in excess of the fair_market_value of the core in burrell the tenth circuit found that the core deposit was purposely set higher that sic the value of the core in order to induce the customers to return the old cores and to enable burrell to maintain a needed supply of cores burrell f 2d pincite the same is true in the present case we find the foregoing cases on which petitioner relies to be distinguishable from the instant case and petitioner's reliance on them to be misplaced none of those cases involved the issue of the proper amounts at which a taxpayer must reflect property in such taxpayer's inventories moreover unlike the cases viz 120_f2d_12 8th cir affg 42_bta_698 77_tc_1326 and 2_tc_708 affd 146_f2d_697 1st cir on which petitioner relies in which the respective purchasers involved there paid more than fair_market_value for the assets that they purchased we have found on the record before us that the amounts for which consolidated acquired customer cores were based on market-related factors including supply and demand and were set at amounts that the marketplace in which consolidated purchased those cores demanded on the record before us we find that for purposes of sec_471 the cost for each of the customer cores that consolidated acquired is the price viz the core credit_amount for each such core which it paid for each such core and which is shown under the column headed cores--price each on the customer cores sales invoice that was prepared at or about the time a customer delivered such a core to consolidated the market for consolidated's customer cores petitioner contends that as a result of extraordinary facts and circumstances sec_1_471-4 income_tax regs and not sec_1_471-4 income_tax regs applies in determining the market for consolidated's customer cores for purposes of sec_471 in support of that contention petitioner asserts that unlike the manner in which prices are set under normal market conditions with numerous buyers and sellers operating at arm's length to achieve for themselves the best economic bargain possible consolidated intentionally set the core amounts and consequently the customer core purchase offer amounts and the core credit amounts at amounts greater than the core supplier amounts that it was paying its core suppliers to purchase core supplier cores which had core supplier guarantees and were of higher quality than customer cores of the same typesdollar_figure as we understand it petitioner also contends that sec_1_471-4 income_tax regs and not sec_1_471-4 income_tax regs applies because consolidated did not purchase customer cores in an open market respondent contends that the market for consolidated's customer cores for purposes of sec_471 is determined under sec_1_471-4 income_tax regs respondent further assert sec_29 we are not persuaded on the record before us that bishop engine and other core suppliers would not have increased their prices ie the core supplier amounts for core supplier cores in the event that consolidated and or other automobile parts remanufacturers had decided to fill more of their respective core inventory requirements from those core suppliers rather than from those remanufacturers' customers that pursuant to that section as interpreted by 439_us_522 and 8_bta_1099 the market for each of consolidated's customer cores is the current bid price ie the replacement cost for a customer core of the same type that was prevailing at the respective dates of consolidated's inventory in the marketplace in which consolidated actually participated and that that marketplace is the marketplace in which it obtained customer cores from its customers according to respondent the current bid price or replacement cost for a customer core that was included in consolidated's inventories at the end of each of the years at issue is the core credit_amount for a customer core of the same type that was prevailing at the end of each of those years sec_1_471-4 and b income_tax regs provides in pertinent part a under ordinary circumstances and for normal goods in an inventory market means the current bid price prevailing at the date of the inventory for the particular merchandise in the volume in which usually purchased by the taxpayer and is applicable in the cases-- of goods purchased and on hand and of basic elements of cost materials in goods in process of manufacture and in finished goods on hand b where no open market exists or where quotations are nominal due to inactive market conditions the taxpayer must use such evidence of a fair market price at the date or dates nearest the inventory as may be available such as specific purchases or sales by the taxpayer or others in reasonable volume and made in good_faith or compensation paid for cancellation of contracts for purchase commitments the supreme court of the united_states has held that the term current bid price used in sec_1_471-4 income_tax regs is synonymous with the replacement cost that is the price the taxpayer would have to pay on the open market to purchase or reproduce the inventory_items thor power tool co v commissioner supra pincite the current bid price is to be determined based on prevailing prices in the market in which the taxpayer actually participates 34_tc_776 aff296_f2d_732 6th cir bamert v commissioner supra pincite based on our examination of the entire record before us we find that consolidated acquired its customer cores under ordinary and not extraordinary circumstances in acquiring customer cores consolidated participated in the marketplace in which it purchased those cores from its customers and not in the marketplace in which it purchased core supplier cores from core suppliers we further find that petitioner has failed to persuade us either that the marketplace in which consolidated acquired customer cores from its customers is not an open market in which consolidated participated within the meaning of sec_1_471-4 income_tax regs or that consolidated did not acquire its customer cores in an open market on the instant record we find that sec_1_471-4 income_tax regs and not sec_1_471-4 income_tax regs applies in determining the market for consolidated's customer cores for purposes of sec_471 we further find that the market under sec_1_471-4 income_tax regs is the replacement cost and that the replacement cost for each of the customer cores of consolidated that were included in its inventories at the end of each of the years at issue is the core credit_amount for a customer core of the same type that was prevailing at the end of each of those years based on our examination of the entire record in this case we find that petitioner has not shown that respondent abused respondent's discretion in determining that consolidated's fifo- lcm method does not clearly reflect income because that method did not reflect the proper amounts for customer cores to reflect the foregoing and the concession of petitioner for decision will be entered for respondent