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Applying the lower of cost or market and arm's-length price principles Even assuming the taxpayer has properly written down its inventory in compliance with the regulations and Thor Power, the Sec.
Therefore, taxpayers should be aware of the two separate accounting entries that must be made regarding the inventory: (1) The amount of inventory write-down, if any, determined under the lower of cost or market principles; and (2) the proper value of the inventory in the sale to the related party, determined under the arm's-length price principles, which generally include a profit factor.
Further, an inventory write-down is determined by the lower of cost or market principles, which do not necessarily provide the same result as the arm's-length price principles.