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THE UNITED STATES TAX SYSTEM: AN OVERVIEWLast-in, first-out (LIFO) 39 is the second method for tracking inventories. Itassumes that the items of inventory last purchased are the first sold. Under LIFO,only the cost method of valuation is permitted. 40 Because the most recently purchaseditems of inventory are the first items sold, the effects of inflation (risingmarket prices) or deflation (falling market prices) are minimized. The effect ofprice increases or decreases tend to be less dramatic than under the FIFO method.Obviously, the choice of method of tracking inventories (FIFO or LIFO) andthe method for inventory valuation (cost or cost or market) can have a significantimpact on the income (profit or loss) picture of a taxpayer.§2.14 GAINIn discussing what is income for tax purposes, the Supreme Court 41 noted thataccessions to a person’s economic resources, clearly realized, and within the controlor dominion of the person, are income. An accession to economic resourcesis an increase or addition to such resources. In other words, a person gainssomething as an addition to his, her, or its resources by an accession; these gainsare forms of income.The concept of gain is clear in the service context. One performs services andreceives a wage or salary. If one is an employee, one’s wage or salary is an economicgain in wealth. Personal expenses, but not real economic expenses, areincurred in the production of this income. Gross income and adjusted grossincome are basically the same. If one performs personal services as a businessperson,one may have a number of costs associated with that performance.Because a cost is incurred in producing income, the total revenue earned is not atrue measure of accession to wealth. The costs incurred are deducted to arrive ata better measure of economic gain. Therefore, business expenses are deductedfrom gross income to arrive at adjusted gross income. This adjusted gross incomeis a clearer measure of the economic gain of a businessperson’s personal services.Gains can arise with respect to property as well. Indeed, the term is more frequentlyused in the context of transfers of property. When one sells property, onetypically receives money in exchange. This is frequently referred to as liquidatingan asset.Liquidity refers to the ease with which an asset can be used as a medium ofexchange in the economy. Because money is the normal medium of exchange, itis inherently liquid. In contrast, assets like land are not typically used in the marketas a medium of exchange. One usually sells, or liquidates, an asset like landfor its equivalent value in money. Money is then used for other transactions inthe economy. In selling an asset, one is merely changing the form of one’s holding.Money is substituted for the asset.For the most part, all assets (property) have value, even if the value is little ornominal. The value is generally considered to be the fair market value, namely,what a willing purchaser is prepared to pay to a willing seller in a fair market inan arm’s length (free from undue familiarity) transaction. A fair market is an open39 Method permitted under IRC § 472.40 IRC § 472(b)(2).41 Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). 40