Motor Vehicle Industry Overview Series - June 2004

1952

The Service was restructured in 1952 into a highly decentralized organization consisting of seven regions and 58 districts.  This reorganization was implemented in part to achieve greater sensitivity and responsiveness to pubic needs.  District Directors were given wide latitude and authority in administering the Service's policies, procedures and programs.  While decentralization of the Service proved to be a progressive action, communication between the regions and districts was made more difficult because of their quasi‑autonomy.  Positions taken by the Service on industry issues could differ significantly from one region to another on the same issues.

1971

The Service implemented the Industry Wide Examination Program to concurrently examine the major taxpayers in a given industry, coordinate selected issues common to that industry and to resolve those issues uniformly and consistently among all the industry taxpayers.  Under the direction of project coordinators (usually large case branch chiefs), the industry wide examinations were largely successful in achieving uniform and consistent treatment of issues.  Industry wide examinations were conducted in several industries between 1971 and 1979 and the ability to communicate freely across district and regional lines proved to be invaluable to the success of these examinations.

1977

The Industry wide Examination Program had one major drawback.  Since they existed for only two or three tax years and were then terminated, the program failed to provide continuity.  To correct this situation, a major study group was created in 1977 to review the Service's Coordinated Examination Program.  The study recommended that permanent positions be established for several Industry Specialists and a National Industry Coordinator.  In addition, the study group identified basic industries to which it recommended specialists be assigned.  The duties and responsibilities of the Specialists and the Coordinator were to be much broader than the former Project Coordinators whom they replaced.

1979

The recommendations of the study group were implemented greatly expanding the scope and depth of the Industry wide Examination Program.  The term, Industry Specialization Program, eventually evolved as a name that could encompass the varied concepts of Industry Specialists, National Industry Coordinator, Coordinated Issues, and the many refinements suggested by the study group. 

2000

As part of the Internal Revenue Service’s restructuring, the Industry Specialists were assigned to Pre-Filing and Technical Guidance which is part of LMSB, Headquarters.  The “Industry Specialists” are now called Technical Advisors.  Each of them was placed in one of the five industry areas and is managed by a Technical Advisor manager.

June 1987-December 1988

Motor vehicle industry studied and proposed for inclusion in the Industry Specialization Program

August 1989

Motor Vehicle Industry Specialization Program (MVISP) formally established and an Industry Specialist (ISP) appointed.

1989-1990

  MVISP team grows to include an Assistant ISP, a Revenue Agent team member, and several support staff. 
The Motor Vehicle Industry Specialization Information System (ISIS) industry bulletin board was established.

May 1991

1st MVISP Industry Wide Meeting – Cincinnati, Ohio

Oct. 1994

2nd MVISP Industry Wide Meeting – Detroit, MI

June 2000

MVISP becomes part of the new Large and Midsize Business Division in the Pre-Filing and Technical Guidance Division
Motor Vehicle Industry Specialist is renamed the Motor Vehicle Technical Advisor

Iselin, NJ

Downers Grove, IL

Downers Grove, IL

Paterson, NJ

1893

Charles and Frank Duryea built the first “motorized wagon” with a two-piston, one- cylinder, two-stroke gasoline engine.

1885-1898

A Chicago to Milwaukee contest for horseless carriages inspired a generation of entrepreneurs.
Sponsored by the Chicago Times-Herald, the race was judged on style, technical merit, and practicality, rather than speed.

• By 1898, 200 companies had been organized to manufacture cars.

1897

Ransom Olds forms Olds Motor Vehicle Co., the first company organized in Michigan solely to build autos.

1898

William Metzger opens the first new car dealership in Detroit, MI. 

• Early dealerships operated as retailers of cars, bicycles, gasoline, and served as machinists making replacement parts. 

1902 

The first franchised auto dealerships, called “agents,” emerged.

1903

Manufacturers appointed distributors who then appointed “sub-dealers” to provide the manufacturer with greater coverage in their assigned territories.  (The practice of appointing distributors and sub-dealers ceased in the 1950s.)

1903

Henry Ford’s newly formed Ford Motor Co. sold 1,708 “Model A” cars (selling price - $850) for a profit of $98,851.

1913 

Ford Motor Company established the first assembly line manufacturing plant. 

1942-1945

The U.S. automotive industry ground to a halt as U.S automakers and suppliers produced over $30 billion worth of military hardware in support of the war effort.

1950-1970

Independent distributors began the import revolution.

• In the early years, “import” meant European 
• In 1965, Japan’s Datsun began to crack Europe’s hold on U.S. imports.

By 1996, the import manufacturer distribution system had evolved to a franchise system similar to the domestic vehicles and only five independent distributors remained.

1973-1979

Middle East unrest and the oil embargo spurred manufacturers to design smaller, high-mileage vehicles manufactured from new and lightweight materials.
Small imported vehicles grabbed a larger part of the automotive industry and domestic dealers were forced to add import franchises.

1978

Volkswagen began producing the “Rabbit” in Westmoreland County Pennsylvania, the first  high volume foreign manufacturing operation in the U.S.

1982

Honda built the first Japanese assembly plant in the U.S.

1990

General Motors unveils the EVI – the first electric vehicle.

1996

A wave of mergers overtakes the automotive supplier industry.

• Automakers’ demands for price cuts, additional involvement in product design, and global production forces suppliers to grow quickly.

1996

The “year of the used car”

• Used car superstores CarMax, AutoNation USA , and Driver’s Mart began to stake their claim to the market.

1996-present 

Some independent new car dealerships unite into “mega” dealerships offering “one stop” shopping and “no-haggle” pricing.

• Some mega dealerships test the waters of public ownership.

Republic Enterprises attempts to establish a new and used car dealership “brand” with AutoNation superstores.

• Many manufacturers strenuously oppose AutoNation and other consolidators and attempt to limit the number of franchises available.

1997-present 

Internet becomes the “buzz word” of the auto industry.
Auto dealers begin to see the Internet as a way to lower marketing costs and generate new business.

• NADA estimates 30 percent of all dealerships have an Internet presence and report an average of 43 leads each month via the web.
•  Internet buying services offer dealers pre-screened sales leads for a price.  

Parts makers join the on-line revolution allowing manufacturers, dealers, and individuals to purchase parts through the Internet. 

1998

  Chrysler Corporation and German auto company Daimler-Benz merge.

• Ford and GM also form strategic alliances with foreign counterparts.

1999

Auto manufacturers roll out web-based supply network that will allow “business to business” purchases over the Internet.

2003

Ford celebrates it’s 100^th Year anniversary

2003

General Motors discontinues the Oldsmobile line

2003

China equal US in production plant investment dollars

Advertising Fee

An amount added to the invoice price of a vehicle by the manufacturer to be used in general or specific advertising by the manufacturer and/or dealer.
Some manufacturers return a portion of the advertising fee to the purchasing dealer’s regional advertising association.
Some manufacturers allow dealers to request that an amount in addition to the manufacturer’s advertising fee be added to the invoice.

• The additional amounts might be immediately returned to the dealership or the dealership’s designee.

Advertising Association

An affiliation of dealerships representing the same manufacturer in the same geographical area (city, county, state, etc.) that places cooperative advertising.

• The association receives a portion of the advertising fees included on a vehicle’s invoice plus any additional amount the dealership requests the manufacturer to include.
• The association may return a portion of the advertising fees that it receives to the participating dealerships.

Agent

An agent is one who represents and acts for another, whose function is to bring about, accept performance of, or terminate contractual obligations between a principal and third persons.  As it relates to Extended Service Contracts, Warranties, etc, an agent is one who represents and acts for another, whose function is to bring about, accept performance of, or terminate contractual obligations between a principal and third persons.

Auction

A sale of used vehicles operated by independent auction houses or vehicle manufacturers.
Generally, auctions are not open to the public and may be limited to dealers in a specific type of vehicle.
Auctions provide an opportunity for dealers to dispose of slow moving vehicles or acquire additional inventory for sale.

Aftermarket

Manufacturers, wholesalers, and retailers that provide replacement parts and customization for vehicles.

Back end

The fixed operations of an automobile dealership; i.e. body shop, service department and parts department.

Back end distribution

An amount paid by a finance company to a dealership upon transfer of the dealership customers’ financing notes, when certain requirements have been met.
In some sub prime financing arrangements, the transferring dealership receives back end distributions when advance amounts have been fully repaid, the finance company has recouped expenses, and certain other criteria are met.

Base Model Code Number

Identifies an item of inventory which is determined by using the entire manufacturer's base model code number that represents the most detailed description of the base vehicle's characteristics under the Alternative LIFO.

Base Price

The cost of a vehicle without options, but including standard equipment, factory warranty, and freight.

Base Vehicle Cost

The cost of a vehicle for Alternative LIFO Method computations that is not adjusted for any options, accessories or other costs. The pool index computed from only the base vehicle cost of vehicles is applied to the total vehicle cost, including options, accessories and other costs of all vehicles in the pool at the end of the taxable year. 

Bird Dog Fee

A finder’s fee paid to someone who refers a customer to a dealership.

Body-On-Frame Construction

A method of car design in which the body, engine, driveline, and suspension are bolted to a weight-bearing frame.

Buy Rate

The rate set by a financing institution, for which it will purchase dealership customer loans.

Capitalized Cost

The total value for a vehicle upon which a lease is based.
Similar to the selling price of a purchased vehicle.

CCR (Capital Cost Reduction)

The amount paid in cash and/or trade-in at the inception of a lease. Similar to a down payment.

Car Jacket

A separate folder for each new vehicle sold which contains documentation pertaining to this particular transaction.

Carryover

Changes to a vehicle model  for a new model year limited to the following:  

• Vehicle model identical to the model sold the previous year except:
  • New color or seating fabric may be offered.

Chassis

Originally the frame of the car which provided the strength of the vehicle to which the body, engine, driveline components and suspension were attached.
Currently, few vehicles other than trucks have separate frames, and the chassis structure is incorporated into the body components in what is known as a shell or unibody construction.

Closed End Lease

A lease for which the amount representing the residual value of the vehicle at the end of the lease is mutually agreed upon within the lease document.

• Risk of depreciation greater than anticipated is born by the lessor, the company leasing the vehicle.

Contracts in Transit

Notes receivable for vehicle sales or leases that have been approved by a financing institution but for which a dealership has not yet received the proceeds.

Core

A non-functioning part usually with replaceable components removed.

• Non-functioning parts awaiting removal of their damaged components are sometimes referred to as "dirty cores”.

Core Charge

An amount that the purchaser of a remanufactured part must pay to the selling company if the purchaser does not provide a non-functioning part (core).

• The core charge may be separately stated on the invoice for the remanufactured part.
  • Typically, the purchaser has a time period in which to provide the non-functioning part (core).
  • If the customer does not return the non-functioning part (core) within the required time period, the company selling the remanufactured part issues an invoice to the customer for the core charge. 

Cost Segregation

The reallocation of building costs from 39 year to 5, 7, or 15 year MACRS property

Dealership

The authorized (franchised) sales and service representative of a motor vehicle manufacturer/importer.

Deal Jacket, Folder, or File

A file set up for each vehicle sale that contains all of the paperwork relating to the sale.

Demonstrator/(Demos)

A vehicle held for sale by a dealership but made available to customers for test-drives.
Demos are also frequently provided to dealership employees and some family members.

Distributor

A company in the that distributes, regionally or nationally, vehicles built by a foreign manufacturer.

Domestic vehicle

A vehicle produced in the United States, Canada, or Mexico

Enrollment Fee

Generally, dealers must pay an enrollment fee to enter into an agreement to transfer notes to a finance company.

ESC (Extended Service Contract a.k.a. Vehicle Service Contract)

An aftermarket product that for an additional price, provides coverage for the repair or replacement of covered components at minimal or no cost.

Floor Pan

The metal structure on the bottom of the car.
Almost all cars are "unit body” (unibody) construction and the floor pan provides the foundation for chassis stiffness.
The driver’s feet usually rest on the floor pan.

Floor plan line of credit /Floor Plan

An arrangement through which a dealership borrows money from a financing institution (frequently a subsidiary of the manufacturer) to finance its vehicle inventory. 
The vehicles are used as collateral for the loan.

Floor Plan Assistance or Allowance

An amount paid by the manufacturer to the dealership for the interest expense charged under the floor plan agreement for the time that the vehicle was in transit from the factory to the dealership. 
It may also be an amount paid by the manufacturer or financial institution to the dealership based on an interest free period or reduced rates for a prescribed time to encourage faster turn over.

Flooring Statement

Statement issued by lending institutions reflecting amount of credit extended to a particular dealership for vehicle purchases.  
Other information, such as identification of specific vehicles being financed, can also be found on these statements. 

Franchise

A contract authorizing a person or persons to represent a vehicle manufacturer/importer for sales and service for a specific period.
Auto dealership franchises are personal service contracts that require manufacturer/distributor approval of the individuals that will operate the dealership. 

Freshen

Changes to a vehicle model for a new model year limited to the following:

• Sheet metal untouched; may include new grille, fascia, or headlight/taillight treatments.

Front End

New and used vehicle sales departments.

Holdback

An amount (generally 2-3 percent of adjusted MSRP) included in the vehicle invoice amount.
 Manufacturers repay the holdback amount to the dealership on a quarterly or monthly basis.

Import

A vehicle produced outside of North America and sold in North America

Invoice Price

The manufacturer’s initial charge. 
The invoice price might not reflect the dealer’s final cost due to rebates, allowances, discounts, and incentive awards the dealer might receive.

Light Vehicle

A car or truck with a gross vehicle weight of 14,000 pounds or less.

MSRP Manufacturer’s Suggested Retail Price

The recommended selling price for a vehicle and each of its optional accessories.

Manufacturer’s Statement of Origin (MSO)

A manufacturer’s document that assigns ownership of a new vehicle to the dealership.
Also known as a Manufacturer’s Certificate of Ownership (MCO).

Make

Brand name of a car or truck; e.g., Chevrolet, Dodge, Mazda.

Maquiladora

An arrangement to reduce manufacturing costs by taking advantage of the lower costs of labor, plant, and equipment in Mexico
Under the Maquiladora Program U.S. taxpayers can have up to 100 percent foreign ownership without prior approval from the Mexican Government
U.S.  taxpayers can sell the completed products directly out of the Maquiladora operation.

Model

Body style
4-door sedan, convertible, 2-door hatchback, station wagon.

Money Factor

A percentage representing the cost of the money required to lease a vehicle, similar to the interest rate paid on a loan.

NADA

The National Automobile Dealers Association.  Is an organization whose purpose is to serve as a network catalyst of information which is disseminated to member dealers and as an advocate in Washington for dealership interests.

Nameplate

Name given a vehicle by its manufacturer; e.g. Civic, Mustang, Intrepid. (Line is a synonym for a nameplate.)

New Item Category

A new item category as defined for Alternative LIFO, is an item category not considered in existence in the prior taxable year, is one of the following (i) any new or reassigned manufacturer's model code, as described in IRM section 4.02(3), that is caused by a change in an existing vehicle or (ii) a manufacturers model code, as described in IRM section 4.02(3), created or reassigned because the classified vehicle did not previously exist.  Additionally, if there is no change in a manufacturer's model code, but there has been a change to the platform that results in a change in track width or wheel base, whether or not the same model name was previously used by the manufacturer's, a new item category is created.  New items are found in all LIFO computations, not just in Alternative LIFO.

Official Used Car Guide

A guide book or electronic presentation of the wholesale, retail, and loan value of used cars 
The “official” designation is added by the guide’s publisher and/or common industry use.
It does not designate any specific approval process or governing board.

Open End Lease

A lease for which the lessee must pay any difference between the residual value of the leased vehicle  and the fair market value, if the fair market value is lower, at the end of the lease.

Out of Trust

The result of a dealership selling a vehicle but not paying off the related floor plan liability within the time specified in the floor plan agreement. 

PEP Cars

Product Evaluation Program – vehicles are provided by manufacturers and/or distributors to employees who provide comments regarding the operations of the vehicles. 

Platform

The main structural element or backbone of a vehicle to which the suspension, power train, and body are mounted. 
In older vehicles, it was traditionally the frame; in newer unibody vehicles, it is the lower, horizontal sheet metal stamping.

Prime

A designation generally used to describe high quality finance contracts  (A and B contracts).

Preparation Charges

Charges imposed by a dealer for preparing a newly purchased car for delivery to the buyer.
Typically includes filling the gas tank, verifying appropriate fluid levels, last minute touch-up cleaning, etc.

Redesign

Changes to a vehicle model for a new model year limited to the following:
New platform 
New interior and exterior styling
Engine and transmission could be carryover from previous model year.

Report of Sales Book

A record kept by auto dealerships of all sales made and reported to the Department of Motor Vehicles, as required by state law.  For example, in  California , all sales must be reported within 5 days of sale in order for the vehicles to be registered.

Residual Value

The amount agreed upon to represent the value of the leased vehicle at the termination of the lease period.
Generally the amount of depreciation in the vehicle’s value predicted during the term of the lease.

Reskin

Changes to a vehicle model for a new model year limited to the following:
Minor styling changes to sheet metal
Front and/or rear styling changed from previous year.

Restyle

Changes to a vehicle model for a new model year limited to the following:
Same platform as previous year, but extensive changes to exterior and interior design 
Looks totally different from previous model year.

Shuttling Service

To transport vehicles to and/or from the dealership; hence a car shuttler is a person who performs those services.

Spiffs

Amounts paid in cash or merchandise by a dealership to employees to stimulate and/or reward employees for meeting sales volumes or other criteria.

Sub Prime/Non Prime

Generally describes finance contracts for less creditworthy customers.  (C& D Credit)

Tier 1, 2, & 3 Suppliers

The hierarchy of suppliers in the automotive industry. 
Tier 1 suppliers provide components, systems, and parts directly to the manufacturers.
Tier 2 suppliers provide components, systems, and parts to Tier 1 suppliers.
Tier 3 suppliers provide components, systems, and parts to Tier 2 suppliers.

Trade-in Value

The amount that the dealership will credit the customer for a vehicle as a partial or full payment on another vehicle.
The trade-in amount is usually about 5 percent below the wholesale value of the vehicle.

Transplant

A foreign manufacturer’s U.S. manufacturing and/or assembly facility.

Unibody Construction

A manufacturing process where sheet metal body parts are combined with stress-bearing elements to form the body and chassis as a single piece, as opposed to attaching body parts to a frame.

Warranty Repairs

Repairs made under a warranty contract that the manufacturer pays the dealership to make.
The manufacturer sets the rates that the dealership can charge. 

Accounting Manuals

To facilitate the detailed and specific accounting practices and procedures, manufacturers and distributors provide step by step accounting manuals to dealers.
The National Auto Dealers Association (NADA) and other professional organizations also publish engagement manuals and other guides to the industry.

Last in First Out (LIFO) Inventory Method

A cost flow concept that assumes for purposes of determining the value of ending inventory, the last inventory items purchased or produced are the first to be sold.
Form 970 is used to elect the LIFO method and changes to the method must receive the Commissioner’s permission prior to the change.
Form 3115 is used to request permission to change a method of accounting.
Motor vehicle and parts manufacturers, distributors, wholesalers, and dealers frequently elect the LIFO method of inventory valuation.

Alternative LIFO for Auto Dealerships

A simplified method of computing LIFO available to dealers in automobiles and light trucks.
First available in 1992 (R. P. 92-79 superceded by R. P. 97-36), Alternative LIFO waives the full comparability requirements of traditional LIFO.
Alternative LIFO must be properly elected and dealers must agree to certain simplifying concepts.
Many auto dealers availed themselves of the simplified method, however it is not safe to assume that all dealers use Alternative LIFO.
The method is not available to dealers in heavy trucks, equipment dealers, or farm implement dealers.

LIFO Conformity

Taxpayers that elect LIFO many use no method other than LIFO for purposes of statements to shareholders and creditors.
(See Rev. Rul. 97-42, Rev. Proc. 97-44, and Rev. Proc. 98-46 for special rules related to dealers.)

Service Warranty Income Method (SWIM)

Revenue Procedure 97-38 (Previously Rev. Proc. 92-98) provides a method of accounting by which the obligor on an extended service contract can defer the reporting of a portion of the sales proceeds.
The method must be properly elected and the taxpayer must agree to certain conditions and criteria to order to use the SWIM method. (See Rev. Proc. 92-98 and Rev. Proc. 97-38)

Percentage of Completion

Technical Advice Memorandum 199925002 (March 8, 1999) ruled that molds used in automobile parts production are unique items for purposes of IRC §460(f). 
The manufacturer must account for the related long-term contracts using the percent­age-of-completion accounting method.

Alternative LIFO for Used Vehicle Dealers

Revenue Procedure 2001-23
A simplified method of computing LIFO available to dealers of used autos and used light trucks.
An elective method effective for tax years ending on or after December 21, 2000,
A link-chain method encompassing several special rules and required sub-methods.
LIFO indexes are computed using base costs and an “official used vehicle guide.”
Indexes are then applied to the value of ending inventory including options, condition, mileage and accessories.

• The manufacturers and distributors mandate the specifications of dealership accounting systems. 
• Dealerships have a limited number of hardware and software vendors from which to choose.
• The transfer of data from one vendor’s product to another is difficult or impossible.
• Information systems are typically relatively small and do not store information from prior cycles.
  • Back up tapes might be made but typically are not retained for an extended period.
  • If back up information is available, it generally cannot be loaded back onto the dealer’s system without removal of the current activity. 
• Information systems contain proprietary software that usually cannot be accessed by a Computer Audit Specialist.
• Dealers communicate with manufacturers through a Dealer Communication System (DCS) that generally allows a dealership to order vehicles and parts, submit warranty claims, and send other communications to the factory.
• Dealerships increasingly use the Internet and e-mail to communicate with customers, manufacturers, and other partners.
  • Some dealers have entire departments devoted to providing e-mail responses to prospective clients.

Manufacturers/Distributors/

Suppliers

• Most companies have sophisticated a system that provides data archiving and allows Computer Audit Specialist to download data and produce reports.
• Manufacturers and Distributors communicate with their dealership body through a computer network.   
• Manufacturers order parts through automatic replacement Systems.

• Motor vehicle companies manufacture and assemble vehicles at locations throughout the world.
• Some parts are produced at manufacturer-owned facilities (OEM parts) and others are purchased from a supplier.
  • The supply chain consists of several tiers of companies manufacturing various parts or components.
    • Tier One suppliers provide products directly to the motor vehicle companies while Tier Two and Three companies provide product to a company one step higher in the supply chain.
• Motor vehicle products are typically marketed through a network of franchised dealerships.
  • Some imports are distributed through a network of independent and company owned distributorships.
    • Vehicles move from the manufacturer to the distributor to the dealership to the ultimate consumer.
• The manufacturer/distributor’s relationship with dealerships is governed by a personal service contract called a Sales and Service Agreement. 
  • Manufacturers and distributors retain the right to appoint all dealerships operators and to approve all transfers.
• Manufacturers/Distributors and dealerships sometimes have competing interests that cause tensions between the parties.
  • Tensions can include vehicle allocations, location and condition of dealership facilities, and availability and cost of credit.
• Manufacturers allocate vehicles based on a dealership’s previous sales records and based on the dealership’s special customer orders. 
• Vehicles are generally shipped directly from the factory to the dealership without a warehouse operation.
• Some manufacturers are test marketing sales to the ultimate consumer (Europe) however, some state laws prohibit the manufacturer from selling directly to the consumer.
• The Internet is increasingly a sales outlet with distribution at local dealerships.
• Manufacturers are testing full and partial ownership of dealerships.
  • Manufacturer owned dealerships would provide a distribution outlet for vehicles sold over the Internet.
• Large and small companies located throughout the world also produce aftermarket parts.
  • Parts are distributed through wholesalers or jobbers to retail parts stores or dealerships that sell parts to the ultimate consumer.

Issue:

Issue Description:

Dollar Value LIFO
Definition of an Item

For purposes of an inventory of motor vehicles, an item of LIFO inventory is defined by reference to:

• Make
• Year
• Model
• Body style
• Standard equipment
• Options, and other factors.
• Adjustments should be made to the cost of the vehicles on hand at the end of the prior taxable year to account for as many of the factors as possible.
• Safe harbor simplified methods are available in Revenue Procedure 92-79, The Alternative LIFO Method for new vehicles and Revenue Procedure 2001-23, Used Vehicle Alternative LIFO method. The coordinated issue still applies to taxpayers that have not elected the safe harbor and to all dealers in heavy equipment, farm equipment, and medium and heavy-duty trucks.
  • Coordinated Issue date: July 1998; 
  •   Settlement Guidelines: June 1993

Remanufacturers’ Inventory of Cores

Remanufacturers must value their inventory of cores for tax purposes at cost unless they substantiate a lower inventory valuation in accordance with the provisions of the regulations.

• The remanufacturer’s “core charge,” “core deposit,” or other similar amount generally represents the cost and market of a remanufacturable core.
• A safe harbor accounting method, The Core Alternative Valuation Method (CAV), was offered in Revenue Procedure 2003-20.  As a result, many taxpayers will be required to cease valuing the inventory of cores at zero or scrap.
  • Coordinated issue date: September 1989; 
  • Settlement Guidelines: August 1993

Excess Parts Inventory

Any excess parts that have been transferred to a warehousing company are includible in inventory when the taxpayer retains dominion and control over the parts.

• Surplus and obsolete material transferred at a loss as part of a purported sale to an unrelated warehouse facility in prior years that are now closed by the statute of limitations constitute inventory for the current year when the taxpayer has retained dominion and control.
• If the parts have been excluded for a number of years, a catch-up adjustment should be made to include them in the current year's inventory.
  • Original Coordinated Issue Date: September 1989,
  •  Revised 1998;
  •  Settlement Guidelines: August 1993  

Service Technicians’ Tool Reimbursements

Whether amounts paid to motor vehicle service technicians, as tool reimbursements meet the accountable plan requirements of IRC §62.  

• If the facts and circumstances indicate that amounts are paid under a non-accountable plan, IRC §62 and the accompanying regulations require that the amounts must be:
•   Included in the employee’s gross income
• Reported on Form W-2
• Subject to the withholding and payment of employment taxes.
  • Coordinated Issue Date: July 2000

Issue

Brief Summary of Issue:

Auto Dealership Software Programs

Issue:  Whether computer systems used by automobile dealerships to generate financial and accounting data satisfy the record retention and accessibility requirements of Revenue Procedure 98-25.

• Dealership computer systems generally do not retain data for a sufficient period nor does the system generate data in sufficient detail.
• Typically, dealerships use proprietary software that does not allow access by IRS computer audit specialists. 
• Revenue Procedure 98-25 provides the record retention requirements for taxpayers that utilize an electronic data processing system.
• Scope of the Issue:
  • Due to the requirements imposed by automobile manufacturers, the issue potentially affects the entire body of franchised dealerships (in excess of 22,000 dealerships
• Applicable Rulings and Cases
  • Revenue Procedure  98-25

Capital Cost Reduction (CCR)

Issue:  Whether the capital cost reduction payment (CCR)   or the first monthly lease payment made by a lessee is income to the purchasing company (frequently the finance subsidiary of a motor vehicle manufacturer or distributor), or a reduction in the basis of the leased vehicle on the books of the purchaser.

• Vehicle lessees often reduce their monthly lease payments by making a capital cost reduction (CCR) payment. Further, lessees are often required to make the first monthly payment on the lease up front.
  • The dealership generally retains the CCR and first monthly lease payment.
• The vehicle is then transferred to a leasing company for an amount negotiated between the dealership and the leasing company.
• The leasing company remits to the dealership the difference between the negotiated selling price less the CCR and first month’s rental payment.
  • Status: Rev. Proc 2002-36 allows the purchaser to treat the CCR payment and the first monthly payment as reductions to the basis of the leased vehicle. However, lease acquisition fees should still be included in the taxable income of the leasing company.   Further, Rev. Proc. 2002-36 holds that the treatment of the CCR and first monthly lease payments by the leasing company is a method of accounting, and any change to this method must be made prospectively by filing a Form 3115.
  • Advice: Ensure that your taxpayer is including lease acquisition fees in taxable income. Contact the Motor Vehicle Technical Advisor if you receive a claim with respect to CCR or first monthly lease payments.

Dealer Participation

Issue:  Whether dealer participation paid by an automotive finance company to a dealer on the acquisition of a retail installment sales contract (RISC) or lease should be capitalized and amortized.

• When a dealer sells/assigns a RISC or lease contract to a purchaser (often an automotive finance subsidiary), that carries a contract interest rate that is greater than the purchaser’s buy rate, the dealer receives dealer participation, also known as dealer finance income, from the purchaser. 
• FSA 200217025 (April 26, 2002), holds that dealer participation paid to acquire RISCs is subject to capitalization and is not treated as a currently deductible transaction cost. The FSA does not address how the capitalized dealer participation should be amortized, nor does it address whether dealer participation paid on the acquisition of a lease should be capitalized and amortized. Further, the FSA was issued prior to the time the final 263(a) regulations on the capitalization of  costs to acquire certain intangibles were published.   
• Advice:  The final 263(a) regulations (2003 TNT 246-4) were published at the end of 2003. The MVTA intends to seek out cases for which published guidance can be requested  (Technical Advice) that will address this issue.   What does this mean to you if you have the issue? You should contact either Sharon Russell, the Capitalization TA.

Demonstrator Autos

Issue:  Whether demonstrator vehicles provided to dealership employees qualify as excludible working condition fringe benefits.

• If the use of a demonstrator vehicle does not qualify as a working condition fringe benefit, the fair market value of the use must be included in gross income.
• To exclude the value of demonstrator vehicles provided to dealership sales employees, the dealership must satisfy the detailed substantiation requirements of IRC §274, in addition to other requirements.
• Dealers may not use the lease value rules to determine the fair market value of demonstrator vehicles unless it properly elects the method and complies with all requirements.
• Scope of the Issue:
  • Potentially affects all new and used car dealerships (in excess of 22,000 dealerships).
• Applicable Rulings and Cases
  • Technical Advice Memoranda and Private Letter Rulings
    • 9801002
    • 9840015
    • 9816007
    • 9522002
• Court Rulings
  • BMW of North America, Inc. 83 AFTR2d Par. 99-413
• Revenue Procedure
  • 2001-56

Extended Service Contracts

Issue:  What is the proper method of reporting proceeds from the sale of extended service contracts, payments for the purchase of insurance policies, and amounts remitted to an administrator, escrow account, or producer owned reinsurance company (PORC)?

• Dealers, manufacturers, or other parties sell extended service contracts as an “agent” or as the “obligor” or “principal” on the contract.
• If the company is the agent it must: 
  • Accrue commission income in year sold.
• If the company is the obligor or principal and it purchased insurance to cover its risk it must: 
  • Include the full selling price of the contract in income in the year the contract is sold. 
  • Amortize the cost of insurance over the life of contract.
• If the company is the obligor and it purchased insurance from an unrelated company to cover its risk, it may:
  • Elect the Service Warranty Income Method (SWIM).
    • The company includes the qualified advance payment amount in income over the life of the contract.
      • Qualified Advance Payment Amount  
        • The amount of the sales proceeds that equals the payment for insurance plus an “interest” factor added in.
• If the company is the obligor or principal and it enters into an agreement whereby some portion of the funds are deposited into an escrow or trust account, the company might: 
  • Purchase Stop loss insurance.
  • Pay Administrator fees.
  • The dealership or its designee might receive unconsumed reserves.
• If the company is the obligor or principal and it enters into an agreement whereby some portion of the funds are deposited into an escrow or trust account, the following applies:
  • Investment income earned by the escrow or trust account must be reported as income by the dealership.
  • Sales price of contract is income to the dealership when the contract is sold. 
    • Claims are deductible when paid.
    • Administrator fees are deductible as economic performance occurs.
    • Stop loss insurance costs must be amortized.
• Scope of the Issue:
  • Potentially affects all franchised new vehicles dealerships, used car dealerships, dealers in motorcycles, boats and equipment, insurance companies, and financial institutions.  Similar issues may exist in other industries.
• Applicable Rulings and Cases
  • Rev. Procedures:
    • 92-97
    • 92-98
    • 97-36
  • Technical Advice and Private Letter Rulings:
    • 7921048
    • 9218004
    • 9225003
    • 9251007
    • 9417028
    • 9601001
    • 9727014 
  • Court Rulings:
    • Hinshaw’s Inc. T.C. Memo 1994-327
    • Schulde v. Commissioner 372 U.S. 128
    • Rameau A. Johnson, 84AFTR2d Par. 99-5073 and 108 T.C. No.22
    • Toyota Town, Inc. T.C. Memo 2000-40
    • Appeal Filed  (Bob Wondrias Motors)
    • Affirmative Issue Raised – Dealers were only “agents”.
    • Department of Justice Brief filed  - 2000TNT 202 10/18/00

Interest Rate Subvention Payments

Issue 1:  What is the proper tax treatment of interest rate support payments (subvention payments) made by an automobile manufacturer to its wholly owned finance subsidiary in the following circumstances?:

1. The interest rate subvention payments are made in connection with the acquisition of below-market rate  retail installment sales contracts (RISCs) and leases. 
2. The subvention liability is accrued by the parent but payments are deferred and made to the finance subsidiary over the life of the RISC or lease.

Issue 2:  Is the subvention transaction a method of accounting or a method of reporting?

Issue 1 Status: Following the Tax Court’s decision in General Motors v. Comm., 112 TC 270 (1999), the 1995 consolidated return intercompany transaction regulations, and   TAM 200302002, subvention payments made by a manufacturer or distributor to it’s wholly-owned finance subsidiary are deductible in the year paid. Further, subvention payments received by the finance subsidiary reduce the basis of the RISC, or, in the case of a lease, reduce the basis of the leased vehicle. The finance subsidiary includes the subvention payment in taxable income over time as the retail customer makes its payments. Still at issue is whether the manufacturer or distributor can currently deduct its accrued subvention liability under Section 461 before it actually makes the subvention payment to the finance subsidiary.

Issue 2 Status: The issue here is whether the subvention payment transaction is a method of accounting, or a method of reporting , that does not require the Commissioner’s consent to change. This is a factual determination. Following the GM Tax Court decision, many industry taxpayers filed claims to either reverse the deferral of the manufacturer’s subvention deduction or to reverse the finance subsidiary’s current inclusion of the subvention payment in its taxable income. Those taxpayers that made the reversals on their tax returns as “consolidated return adjustments” similar to the adjustments made by GM have generally had their claims allowed. The Tax Court determined that these adjustments are changes in methods of reporting consolidated taxable income and consent to change was not required. But those taxpayers who made their reversals as part of their separate method of accounting, where the facts differ from GM, have had their claims denied. See for example, TAM 200302002. This issue generally applies to claims filed for tax years prior to 1996.  After 1995, the revised  consolidated return regulations define this as an intercompany transaction, and state that all intercompany transactions are considered methods of accounting.

Advice: 1) What if your taxpayer claims a deduction under section 461 when it accrues the subvention liability but defers payment over time, or 2) What if you receive a claim for subvention that spans both pre-1996 and post-1995 tax periods? You should contact the Motor Vehicle Technical Advisor for advice. Both of these issues are currently being considered by Appeals. 

Like Kind Exchange

Issue:  Whether the transfers of lease vehicles followed by the acquisition of replacement vehicles are deferred exchanges, each qualifying for non-recognition of gain or loss under section 1031.

• Taxpayer’s vehicle leasing operation was restructured with the intent that the disposition of a vehicle coming off lease by the company to an unrelated party and the acquisition by the company of a lease vehicle recently acquired from a dealer will qualify as a like-kind exchange under section 1031. 
• Taxpayer entered into an agreement with a qualified intermediary (QI) and assigned its rights for the sale of relinquished vehicles and the purchase of replacement vehicles to the QI 
• Status: Recent letter rulings -- similar facts:
  • LTR 200240049 (2002 TNT 195-41)
  • LTR 200241013 (2002 TNT 199-40)
  • LTR 200242009 (2002 TNT 204-23)

IRS ruled in all three that the transfers of vehicles, followed by the acquisition of replacement vehicles are deferred exchanges, each qualifying for non-recognition of gain or loss under section 1031.

Advice: The above rulings were obtained by banks. The like kind exchange issue is currently being examined on several industry cases. Please contact the Motor Vehicle Technical Advisor if you have this issue on your examination.

Mark to Market

Issue:  What is the proper valuation method to use in determining the fair market value of motor vehicle finance securities for purposes of Section 475, mark to market (MTM)?

Background: A number of industry taxpayers are engaged in the business of acquiring retail installment sales contracts (“RISCs”) from independent dealerships covering the sales of motor vehicles to the dealership’s customers.  Generally, motor vehicle manufacturers and distributors establish a captive finance subsidiary whose principal purpose is to acquire the RISCs from the independent dealers.  These taxpayers are considered (or can elect to be considered) dealers in securities, and consequently, the RISCs are debt instruments under section 475(c)(2)(C) and are subject to the mark-to-market provisions. 

Status: On April 30, 2003, an Advance Notice of Proposed Rule Making was published that describes and explains a possible safe harbor that would satisfy the MTM valuation requirement for certain securities and commodities (REG -100420-03). The ANPRM does not change the Service’s position with respect to this issue as it is currently illustrated in Bank One Corp. v. Commissioner, (120 T.C. No. 11).Accordingly, John Petrella, Director, Heavy Manufacturing and Transportation, has directed that current audits involving the section 475 MTM valuation issue should proceed in the same manner as before the ANPRM was issued., and no published guidance will be issued by the Service until the proposed regulations are finalized.

Advice: What does this mean to you if you have the issue? You should contact either the Section 475 Technical Advisor, Suzanne Boule, or the Motor Vehicle Technical Advisor. They are both currently working closely with the Financial Products Specialists that are developing MTM valuation methodologies on a number of industry examinations. Because these methodologies involve complex economic and finance principles, they are beyond the scope of this guide. Further, the MTM issue is affected by both the subvention issue and the securitization issue, so it is important to coordinate the development of all three issues.

Parts Inventory

Issue:  How can a taxpayer to value parts inventory?  A taxpayer can use replacement cost to value parts inventory.

• Revenue Procedure 2002-17
• Producer Owned Reinsurance Companies (PORC)

Issue:  Do transactions with a Producer Owned Reinsurance Company (PORC) qualify as arms length transactions or is the PORC as sham corporation?

• Typically, an automobile dealership owner or shareholder forms a reinsurance company to reinsure extended service contracts and/or credit life insurance sold by a related automobile dealership.
• PORCs are generally:
  • Formed offshore in locations such as the Turks and Caicos Islands, Bermuda, Nevis Island, etc.
  • Minimally Capitalized
• Funds typically remain within the U.S.
• A dealership sells “dealer obligor” extended service contracts and insures its risk by purchasing a contractual liability policy from an unrelated insurer or “fronting company.”
  • The fronting company transfers the risk and the premium, less a ceding fee, to the related PORC.
• The PORC might:
  • Elect to be taxed as U S Corporation.
  • Apply special life insurance company rules.
  • Assert tax exempt status applicable to some casualty companies.
• Potential Issues:
  • Improper application of insurance company rules.
  • Improper application of tax exempt rules.
  • Inadequate risk shifting and risk distribution.
  • Sham transactions.
  • Undercapitalization
  • Indemnification of ceding insurer.
  • Non-performing loans.
  • Dividends.
  • Commission shifting arrangements – credit life.
• Scope of the Issue:
  • Potentially affects new car and used car dealerships,dealers in equipment and other motor vehicles, motor vehicle manufacturers, insurance companies, administrators, and financial institutions.
• Applicable Rulings and Cases
  • Revenue Rulings:
    • 77-316
    • 89-61
    • 88-72
    • 92-93
  • Technical Advice Memoranda
    • 9729002
  • Court Rulings:
    • William Wright T.C. Memo 1993-328
    • Malone and Hyde, Inc. 76 AFTR2d Par. 95-5250
    • William L. McCurleyT.C. Memo 1997-371
• Notices for Listed Transactions
  • Notice 2002-70 (Disclosure required)

R & E Credit

Whether the manufacturer or supplier (or both) is entitled to the research credit when the manufacturer requires the supplier to develop all or part of a component, subsystem, or production process.

• Manufacturers are increasingly requiring suppliers to become more involved in the engineering and design of automotive components, subsystems, and production processes.
• Suppliers may conduct research and manufacture prototype parts that will eventually be mass-produced, or processes that will be used in the mass production of parts
• The manufacturer may reimburse the supplier for at least a portion of the costs but typically, reimbursement is received on a piece-part basis under the terms of a parts supply agreement.

Potential issues:

• Several parties may be incurring research costs for the development of the same components, subsystems, and processes, and there may be a duplication of the research credit.  
• Records tying research costs to specific projects may not be maintained.
• All applicable tests must be considered to decide if the item or activity constitutes qualifying research activity for purposes of IRC §41. 
• In determining who is entitled to take the credit several factors should be considered:
  • Who is bearing the costs?
  •  Who is bearing the risk?
  • How and when is reimbursement received?
  • When is risk shifted?
  • On what amounts should the credit be computed?

Scope of the Issue:   Potentially affects all motor vehicle manufacturers and suppliers.

Related Finance Company (RFC)

Whether transfers of vehicle finance contracts from the selling dealership to a related finance company are arms length transactions or whether the RFC is a sham corporation.

• Dealerships frequently provide financing to vehicle purchasers that are unable to obtain financing through traditional channels.
• Subsequently, the dealership transfers the contracts to a finance company related to the dealership (RFC).
• Analysis of the substance of the transfer is required to determine if a sale occurred.
• Some transfers are not arms-length and lack economic substance.

Scope of the Issue:  Potentially affects all used car dealerships and allows dealerships to reduce income or defer the reporting of income in a manner not contemplated by the tax statute and rules.

• Applicable Rulings
• Technical Advice Memorandum 97404002

Replacement Cost LIFO  

Whether the use of replacement cost in valuing a LIFO inventory complies with the regulatory requirements to value LIFO inventory at cost.  

• The Regulations require a taxpayer that elects the LIFO method of accounting to use actual cost in determining its LIFO inventory value.   
• Dealerships and parts retailers and wholesalers typically maintain a large inventory of parts and accessories. 
• Periodically, the manufacturer provides a price list that includes the manufacturer’s current price for each part. 
• Taxpayers maintain computerized recordkeeping systems that include the part number and the quantity of parts on hand in each category. Actual cost of the parts is not included. 
• Following standard industry practice, the value of the parts inventory is calculated using the inventory quantity on hand at year end and the price for each part as provided in the current manufacturers’ price list (replacement cost). 
• The courts have ruled that:   
• Replacement Cost Does Not Clearly Reflect Income.
• Cost is Actual Cost
• Termination of LIFO is Appropriate. 
• Acting Commissioner Tom Wilson issued a memo on June 23, 1999 requiring all open examinations of replacement cost LIFO be coordinated through the Motor Vehicle ISP.
• Scope of the Issue:
• Potentially affects all dealerships on the LIFO method of accounting.  Issue also may be present in other industries with a large inventory of small items.  As of May 2000, potential resolutions strategies provided by industry representatives were being evaluated.
• Applicable Rulings and Cases
• Technical Advice Memoranda 9443004 & 8906001
• Court Rulings:
• Mountain  State Ford Truck Sales, Inc. 112 T.C. No. 7 (Appeal filed 2-24-00)

Securitization of Auto Receivables

Whether the securitization of automotive retail installment sales contracts (RISCs) should be treated as a sale or a secured financing.

• If a securitization is treated as a sale, then the taxpayer is treated as having retained an ownership interest in the RISCs sold, and a portion of the basis of the RISCs is allocated to the amount retained under section 1286, resulting in a taxable gain. Deferred costs such as dealer participation, and selling expenses are deductible at the time of the sale. Deferred subvention income is recognized. On the other hand, if a securitization is treated as a secured financing, then no gain is recognized, deferred costs continue to be amortized, selling expenses are capitalized and amortized, and subvention income continues to be deferred and amortized. For mark-to-market purposes, securitized RISCs continue to be subject to mark-to-market at the election of the taxpayer if the securitization is treated as a secured financing.

Status: Currently the only published guidance with respect to automotive RISC securitizations is LTR 9839001 (see below under Section F). 

Advice: What does this mean to you  if you have the issue? You should contact either Technical Advisor Tim Taggart or the Motor Vehicle Technical Advisor. 

Stocklifting

Whether the direct and indirect costs incurred to remove a competitor’s stock and replace the merchandise with the stocklifting company’s products are currently deductible or whether the costs must be capitalized.

• Manufacturers and wholesalers may expand their business by “lifting the stock” of a competitor’s products and replacing them with their own parts. 
• The company gives the new customer full credit to be used against future purchases from the new supplier.
• The “lifting” company then either repackages and sells the products or scraps them.
• Costs incurred in a stock lift are substantial and each stock lift is economically feasible only if the customer continues to purchase parts from the new supplier for several years.

Advice: The final 263(a) regulations on the capitalization of intangibles contains an example addressing the treatment of stocklifting costs (2003 TNT 246-4; 1.263(a)-4(l) Example 8). Generally, if the new customer is under no obligation to continue stocking the manufacturer’s or distributor’s parts, then capitalization is not required for the stocklifting costs. The final regulations were published at the end of 2003.

Sub Prime Financing

What is the proper tax treatment of the transfer of sub-prime and/or non-prime vehicle finance notes from the selling dealership to an unrelated finance company?

• Dealerships frequently provide financing for vehicle purchasers that are unable to secure financing on their own.
• The contract is subsequently transferred to an unrelated finance company.
• The dealer receives a portion of the agreed upon price (typically 50% of the note) upon transfer.
• The finance company pays the dealership additional amounts based on collections (backend distributions) if certain conditions are met.
• Based on the fact and circumstances of each case and applying the reasoning found in the related rulings, generally:
• The transaction might qualify as a sale, not an assignment of the contract or a loan.
• If the transfer is deemed to be a sale, the amount realized from the transfer is equal to the cash received plus the fair market value (FMV) of the right to receive back end distributions.
• FMV of backend distributions must be determined
• Backend distributions are contingent and must be recharacterized into principal and interest.
• New and Emerging Scenario:
• Finance contracts are transferred at 100 percent of book value
• All parties treat the transaction as a sale
• Scope of the Issue:
• Potentially affects all new and used car dealerships, finance companies, motor vehicle manufacturers, and financial institutions.
• Applicable Rulings
• Technical Advice Memoranda:
  • 8940001
  • 199909003
  • 199909002

Whether a vehicle dealership that elected the Lower of Cost or Marketing method of accounting can reduce the value of its used car inventory at year-end.

• Based on the facts and circumstances of each case and the application of existing rulings to the facts generally:
• Dealerships can value a used vehicle taken in trade at a cost determined by reference to an official used car guide.
• Purchased vehicles must be valued at actual cost, i.e. purchase price.
• Substantiated write downs may be allowable
• Dealerships that elect the LIFO method of inventory valuation may not write down vehicles.
• Scope of the Issue:
• Potentially affects all new and used car dealerships.
• Applicable Rulings:
• Revenue Ruling: 67-107
• Technical Advice Memoranda:  8906001
• Cases: Best Auto Sales T.C. Memo 2002-297 

Used Car LIFO

What is the proper method of computing LIFO for used vehicles?

Based on the fact and circumstances of each case and applying the reasoning found in the related rulings, generally:

• To calculate the used vehicle LIFO index, the dealer must compare vehicles based on age i.e. compare the vehicle in the current year’s ending inventory to the previous model year’s vehicle. 
• Adjustments for options, mileage and vehicle condition might need to be made to the prior year’s vehicle to insure that like items are compared.
• Prior year costs can be reconstructed by reference to an official used car guide.
• The cost of a vehicle in ending inventory must be compared to the cost of a similar vehicle 52 weeks prior to its acquisition.
• Scope of the Issue:
• Potentially affects all new and used car dealerships
• Applicable Rulings and Cases
• Technical Advice Memoranda:  9853003
• Revenue Rulings 97-37, 98-60
• Taxpayer can elect Alternative Used Car LIFO 
  • Revenue Procedure 2001-23 

Core Alternative Valuation (CAV)

• The CAV safe harbor method applies to remanufacturers, rebuilders and resellers of motor vehicle parts that use the lower of cost or market inventory method.

Parts Inventory

• Taxpayer can use replacement cost to value used parts inventory.

CCR Payments

• Provides purchasers of auto leases with a safe harbor method of accounting for CCR payments, under which the CCR payment and the first monthly rental payment   made by a lease customer is excluded from the purchaser’s taxable income but reduces the depreciable basis of the vehicle subject to the lease.  Lease acquisition fees are excluded from the safe harbor and must be included in taxable income. Requires consent to change method of accounting.

Release Date: June 17, 2002

Clean-Fuel vehicle property

• Allows a taxpayer who purchases certain clean-fuel vehicle property to rely on a manufacturer’s certification of the incremental cost of the property for purposes of the clean-fuel vehicle property deduction under Code Section 179A.

Car Donations

• The donor’s transfer of a car to a charity’s authorized agent may be treated as a transfer to the charity.

Alternative LIFO for Used Vehicle Dealers

• A simplified method of computing LIFO available to dealers of used vehicles and used light trucks.
• An elective, link-chain method encompassing several special rules and required sub-methods.
• LIFO indexes are computed using base prices from an “official used vehicle guide.”
• Guidelines are provided on how to determine current year cost of vehicles in ending inventory.

Indexes are then applied to the value of the ending inventory at current year cost to determine whether an increment or decrement has occurred.

September 28, 1992

Amended and superceded August 18, 1997

Revenue Procedure  97-36

(Previously Revenue Procedure 92-79)

Alternative LIFO for automobile dealers.  

• Provides a simplified LIFO method for dealers in cars and light duty trucks and waives strict adherence to the comparability requirements of Treas. Reg. 1.472-8.

Revenue Ruling

97-42

LIFO Conformity

• No method other than LIFO can be used in financial statements provided to shareholders or creditors.
• R.R. 97-42 provides examples of non-conforming and conforming financial statements.

LIFO Conformity-settlement provisions

• Provided a settlement procedure whereby automobile dealerships conducted a “self audit” to determine whether they had previously issued non-conforming financial statements to the manufacturers’ captive finance companies.
• Dealerships found to have issued non-conforming statements paid an amount equal to 4.7 percent of the LIFO reserve.

Release Date:  September 8, 1998

LIFO Conformity-settlement provision extension

• Extends the LIFO conformity settlement provisions of Revenue Procedure 97-44 to medium and heavy-duty truck dealerships.

Effective Date: June 12, 1992

Elective procedure to report income from the sale of extended service contracts-Service Warranty Income Method (SWIM)

• Allows auto dealerships that sell certain dealer obligor extended service contracts and that met specific criteria to defer the qualified advance payment amount using the Service Warranty Income Method (SWIM).

Release Date:

July, 1972

Proper accounting for payment of “holdback” amounts received by a dealership from the manufacturer

• Holdback charges included in the manufacturer’s invoice price of motor vehicles may not be included in cost of goods or claimed as a deduction by the dealer.

Inventory Values and Rebates                  

• An automobile dealer must record the cost of new automobiles in inventory reduced by the amount of a manufacturer’s rebate which represents a trade discount.

Release Date:

January, 1970

Proper treatment of incentive payments received by dealership employees from manufacturer.

(Note: The payments considered by this issue are not the incentives or rebates paid by the manufacturer to the dealership based on the dealership’s performance.)

• Incentive payments paid by a manufacturer to dealership employees are not remuneration for services performed for the dealership.

§         Amounts are compensation for services performed for the manufacturer.

• Payments are not wages and not subject to employment taxes.
• Publication 3204 issued outlining proper reporting.

Date Opinion Issued  

Court Case

Ruling

December 2, 2002

Best Auto Sales;  T.C. Memo 2002-297

Used car write downs

Ruling

• Without objective evidence such as records to substantiate item-by-item comparisons of cost of market value, a taxpayer’s value estimates could not provide a basis for allowing the inventory write-downs.

February 11, 1999

BMW of North America, Inc.; 83 AFTR2d Par. 99-413

U.S. District Court granted partial summary judgment to the Government.
BMW cannot use the special valuation rules to determine the fringe benefit value of BMW cars provided to its employees.
BMW improperly applied the rule.

June 22, 1959

Commissioner vs. Hansen; 360 U.S. 446

Amounts credited to an automobile dealership in a reserve account on the books of the finance company must be reported as income during the tax year in which the amounts are credited to the reserve accounts.

July 20, 1998

Consolidated Manufacturing, Inc.; 111 T.C. No. 1

LIFO must be elected for an entire “good” and not a portion of the goods such as labor and overhead.
For remanufacturers, cost and market equal the core amount shown on the invoice corresponding to the remanufactured part.
The Court supported the IRS authority to terminate an improper LIFO election.

May 26, 2000

Esobar de Paz. V. Commissioner, T.C. Memo 2000-176

All amounts paid to employees for transporting cargo in employee-owned trucks were wages.  The employees were not engaged in two separate activities of leasing trucks to their employer and driving the trucks.

August 12, 1996

E.W. Richardson; T.C. Memo 1996-368 T.C. Memo 2000-176

An auto dealership made an unauthorized change in method of accounting when it changed its definition of a LIFO inventory item from “vehicle body size” to “model line.”
The decision reaffirmed that the definition of an item for LIFO inventory is a method of accounting and that taxpayers must apply the method consistently.

• See - Richardson Investments, Inc . 76 T.C. 736

May 11, 1981

Fox Chevrolet, Inc.;  76 T.C. 708

Two separate pools are required for purposes for new car LIFO.
New automobiles. 
Newtrucks

July 18, 1994

Hinshaws, Inc. T.C. Memo 1994-327

Auto dealerships must report collections for vehicle service contracts as gross income in the year received.

July 7, 1997

Howard Pontiac GMC, Inc.; T.C. Memo 1997-313

The Tax Court “split the baby in half” ruling that neither the taxpayer nor the Government properly valued a covenant not to compete.

January 24, 2000

Leb’s Enterprises, Inc.; 85 AFTR2d Par, 2000-450

U.S. District Court granted summary judgment to the Government.
Drivers that transported vehicles from place to place were employees of the company.
Company was responsible for applicable employment taxes.

August 18, 1995

Malone and Hyde, Inc; 76 AFTR2d Par 95-5250

Payments by a parent corporation to a subsidiary for “insurance” are not deductible.
Under capitalization or indemnification are important factors in determining whether a transaction is a sham.

March 2, 1999

Mountain State Ford Truck Sales, Inc.; 112 T.C. No. 7

For LIFO inventory purposes, taxpayers must use actual cost and not replacement cost.
The use of replacement cost does not clearly reflect income.
The IRS did not abuse its discretion by adding the taxpayer’s LIFO reserve back to income since the taxpayer failed to keep adequate records to compute LIFO using any other method.
Case applies to automobile dealerships, parts stores, and other taxpayers that use replacement cost in calculating LIFO for parts or other similar inventory. 

June 16, 1997; July 21, 1999

Rameau A Johnson, etal. 108 T.C. No.22; Affirmed 84AFTR2d; 99-5073

Auto dealerships must report income from sale of vehicle service contracts in the year sold.
Claims are deductible as incurred. 
Investment income on escrow accounts is income to the dealership.
Stop loss insurance must be amortized over the life of the contract.
Administrative fees can be amortized if the taxpayer can demonstrate a reasonable manner in which to estimate the amount (cost) and timing of administrative services.
If a taxpayer cannot so demonstrate, a deduction should not be allowed until the end of a contract.

May 11, 1981

Richardson Investments, Inc.; 76 T.C. 736

An automobile dealership could not use one pool consisting of new cars and new trucks, for LIFO purposes.
The Court determined that the dealership should use one pool for new cars and one pool for new trucks.
See E.W. Richardson T.C. Memo 1996-368

February 18, 1963

Schlude vs. Commissioner; 372 U.S. 128

Income is taxable to an accrual basis taxpayer when all events have occurred fixing the right to receive it.
Case is applicable to auto dealership extended service contract issues.

February 8, 2000

Toyota Town, Inc.; T.C.  Memo 2000-40

Automobile dealerships must amortize insurance premiums ratably over the term of the vehicle service contract.

June 2, 2000

Trans-Box Systems, Inc. v. United States, 84 A.F.T.R. 2d(RIA) 6479 (N.D. Cal. 1998) affd. 2000 U.S. App. LEXIS 12595 (9^th Cir. June 2, 2000)

Amounts paid to employee drivers as reimbursements for mileage expenses were not paid pursuant to accountable plan.  Rejected plaintiff’s assertion that a substantial compliance rule applies to accountable plans.

June 7, 1979

Wendell Ford Sales, Inc.; 72 T.C. 447

The addition of a catalytic converter and a solid state ignition system did not make the 1975 Ford vehicle a different “item” for LIFO purposes than the 1974 Ford vehicle.

August 14, 1997

William L McCurley; T.C. Memo 1997-371

Distributions from a “shared” PORC are dividends to the individual.
Court noted that an auto dealership PORC may be a “cash cow” providing “tax-free and interest free” funds for shareholders.

July 26, 1993 Amended October 29, 1993

William Wright et al; T.C. Memo 1993-325 76 AFTR2d Par. 95-5805

Transactions between the dealership and the Producer Owned Reinsurance Company (PORC) were characterized as sham transactions. 
The PORC’s corporate form was disregarded and its income deemed received by the dealership owners.

LIFO

• New recreational vehicles should be pooled separately from new cars and new trucks.
• Used cars and used trucks must be pooled separately.
• The use of current replacement cost for valuing parts ending inventory is a non-cost-based inventory method.
• Vehicle comparison must consider options and accessories. 
• Trade-in values may be determined with reference to values listed in an official used car guide. 

LIFO

• Beginning of the year costs of new items cannot be reconstructed using an annual LIFO index derived by excluding new items from the computation.
• Dual index methods are not permissible.
• Increment valuation should be based on costs incurred during the current year not costs incurred in the prior year.
• Mini vans built on a car platform can be included in the dealership’s car pool.

Replacement Cost LIFO

• Replacement cost is an unacceptable method of valuing a taxpayer’s LIFO parts inventory pool.

Luxury Tax – Sport Utilities

• Sport Utility vehicles with a gross vehicle weight in excess of 6,000 pounds do not qualify as “passenger autos” and are not subject to the luxury tax.

Equipment Leasing - Inventory

• Ruling concluded that the equipment was properly includible in inventory.
• Majority of the company’s income was generated from sales not leases.

Demonstrator Vehicles

• The inventory value of new demonstrator vehicles may not be written down at year-end.
• The dealer replaces the demos with new vehicles and not the used cars listed in an official used car guide that the taxpayer used.

LTR 9535005

LTR 9535006

LTR 9535007

Luxury Tax

• A leasing dealership is responsible for collection of the luxury tax, not the finance company to which the dealership transferred the lease
  • The lease qualifies as the “first retail sale”
  • The lease acquisition fee relates to the lease transfer not the first retail sale and is not subject to the luxury tax.

Related Finance Companies

• Transfers of automobile finance contracts from an auto dealership to the dealership’s related finance company (RFC) are shams.
  • Transfers were not arms-length and lacked economic substance..

Producer Owned Reinsurance Company

• Payments made by an auto dealership through a “fronting’ insurance company to the dealer’s Producer Owned Reinsurance Company (PORC) were not deductible as insurance premiums.

LIFO Recapture

• Transfer of a dealership corporation’s LIFO inventory to a subsidiary did not trigger the recapture provisions of IRC 1363(d).

Demonstrator Vehicles

• To exclude the value of demonstrator vehicles provided to dealership sales employees, the dealership must satisfy the detailed substantiation requirements of IRC §274.
• If the use of a demonstrator vehicle does not qualify as a working condition fringe benefit, the fair market value of the use must be included in gross income.
• Dealers may not use the lease value rules to determine the fair market value of demonstrator vehicles unless it properly elects the method and complies with all requirements.

Equipment Leasing - Depreciation

• Equipment primarily held for lease can be depreciated rather than inventoried.

Residual Value Insurance for Leases

• A vehicle leasing company must amortize the cost of residual value insurance over the term of the vehicle lease.

Transfers of Automobile Loans

• Transfer of automobile loans to a trust was secured financing and not a sale.

October 1998

March 1999

March 1999

LTR 9840001

LTR 199909003

LTR 199909002

Sub-Prime/Non-Prime Financing

• The transfers of customer notes from a used car dealership to an unrelated finance company are sales.
• The dealer’s amount realized on the sale equals the cash received from the finance company plus the fair market value of the dealer’s right to receive future distribution payments.
  • The FMV of the future payments is not necessarily  $0.
  • The distribution payments are contingent and subject to the rules of IRC §483(f).
  • Each distribution payment must be allocated to principal and interest.

Used Car LIFO

• Used car dealership must reconstruct the beginning-of-the-year cost of an item by reference to:
  • The value of the previous year’s model
  • 52 weeks prior to the date the vehicle was acquired.
• Dealership’s dual index method did not clearly reflect income.

Securitizations

• Based on the analysis of which party bore the risk of loss and which party had the potential for gain following the securitization of automotive retail installment sales contracts (RISCs) by an auto manufacturer, the IRS ruled that the securitization should be treated as a secured financing (debt) instead of a sale of the RISCs.

LIFO Pooling for Auto Dealerships

• Based on the specific facts and circumstances, a franchised auto dealership could maintain one inventory pool for new cars and one pool for new trucks..

Accounting for Manufacturing Molds

• Molds used in automobile parts production are unique items for purposes of IRC §460(f).
• The manufacturer must account for the related long-term contracts using the percentage-of-completion accounting method.

Capital Cost Reduction Payments (CCR)

• Technical Assistance Memo outlining 5 scenarios and the appropriate treatment of each.

LTR 200242009

LTR 200241013

LTR 200240049

Like Kind Exchanges

• IRS ruled in all three that the transfers of vehicles followed by the acquisition of replacement vehicles, are deferred exchanges, each qualifying for non-recognition of gain or loss under section 1031

April 26, 2002

Dealer Participation

• FSA holds that dealer participation is subject to capitalization and is not treated as a currently deductible transaction cost.

September 3, 2002

Subvention

• Subvention payments made by a manufacturer or distributor to it’s wholly-owned finance subsidiary are deductible in the year paid. Further,  the subvention payment transaction is a method of accounting requiring  the Commissioner’s consent to change.

Auto CPA Group

A nation wide association of CPA firms that specializes in providing services to auto dealerships.
Downloadable newsletter.
Links to manufacturers’ sites.

Auto Team America

A consortium of CPAs serving the auto dealership community.
Contains analysis, member firms, and information on conferences and meetings.

Auto World

Contains news, informational databases, and reviews on activity in the original equipment manufacturing industry.

Automobile Magazine

News, buying guides, layman’s manual, industry events

Automotive Digest

Coverage of significant events and activities in the automotive industry including manufacturing and dealerships.

Automotive Engine Rebuilders’ Association (AERA)

Provides consumer information, convention information and registration, technical information, and links to other sites.

Automotive Warehouse Distributors Association

Sponsor of the University of the Aftermarket
Advocates for automotive warehouses

Automotive Executive Magazine

Official magazine of the National Automobile Dealers Association.
Current news and information plus archives of older articles.

Automotive Industry Action Group (AIAG)

A volunteer organization that addresses industry issues in supply, manufacturing, engineering, quality, and finance.
Site contains industry news, information on upcoming conferences, publications, and links to other sites.

Automotive News

Published by Crain Communications, Automotive News is a respected source of new affecting the entire automotive industry.
Portions of the website are accessible only to those who subscribe to the magazine.
Public information includes daily news, events, and links to other industry sites.

Automotive-general

A publication of the Detroit Free Press, the site contains daily industry coverage, reviews, and links to other sites.

Automotive Parts Rebuilders Association

Provides news, events, classified ads, and links to other sites.

Autopedia

An automotive encyclopedia.
The site contains information related to autos, boats, trucks, minivans, motorcycles, recreational vehicles, and sport utilities.

Car Connection:

In-depth analysis, concept vehicle photos, maintenance questions answered, links to other sites.

Edmund’s Vehicle Guides

New and used car and truck prices.
Consumer Advice.
Safety Advice.
Information on holdback, current rebates and incentives.

LIFO Systems, Inc

Specializes exclusively in LIFO accounting.
Contains general LIFO news and automotive LIFO news.
Copies of relevant LIFO rulings.
“Learn LIFO” - frequently asked questions on general LIFO and automotive LIFO.
Contains forms needed for LIFO such as Form 970, Form 3115.

Motor and Equipment Manufacturers Association

Provides news and research material related to automobile manufacturers.

NADA

NADA Official Pricing Guides

Published by the National Auto Dealers Association, the NADA guide is a leading source of new and used car pricing information.
The site contains low, average, and high retail values for vehicles.
Wholesale prices are not included in the web site but are included in the guide available for purchase.
Available prices include automobiles, trucks, boats, recreational vehicles, aircraft, and “power sports.”  
Power sports include motorcycles, snowmobiles, personal watercraft and ATVs.

National Automobile Dealers Assoc.  (NADA)

NADA represents over 19,600 franchised new car and new truck dealerships holding almost 40,000 domestic and import franchises.  
The site contains news, consumer information, and industry data.

National Independent Auto Dealer Association

NIADA represents independent automobile dealerships.
Independent dealers are generally non-franchised used car dealers.

Office for the Study of Automotive Transportation

Part of the University of Michigan Transportation Research Institute.
Site offers research, articles, news, notices of conferences, and links to other sites.

Production Engine Remanufacturers Association

Provides information on the annual convention, technical information, training information, and links to other sites.

Society of Automotive Engineers

Provides technical information for automotive engineers, information on the annual convention, and continuing professional education.

Willard DeFilipps, CPA

Consultant to auto dealer CPAs.
Publishes Dealer Tax Watch, LIFO Lookout, and Dealer Directions.
Information of conferences and seminars.
Links to other sites.
Various - Each manufacturer/distributor, many dealerships and accounting firms have their own website that offer information and links to other sites.

Association of International Automobile Manufacturers (AIAM)

1001 19^th Street North; Suite 1200
Arlington VA 22209

Trade association that represents United States subsidiaries of international automobile companies doing business in the United States.
Members include: American Honda, American Suzuki, Daewoo Motor America, Hyundai Motor America, Mitsubishi Motor Sales of America, Nissan North America, Toyota Motor Sales, U.S.A. and others.
Provides information, analysis, guidance, and advocacy on global business issues, including taxation.

Automotive Engine Rebuilders Association (AERA)

330 Lexington Drive; Buffalo Grove IL 60089-6998

A non-for-profit trade association serving the engine rebuilder/remanufacturing industry, machine shops, equipment parts and services suppliers. 

Automotive Industry Action Group (AIAG)

26200 Lasher Road, Suite 200; Southfield, MI 48034

A volunteer organization that addresses industry issues in supply, manufacturing, engineering, quality, and finance.
The group works toward improving trading partner relationships, developing new technologies, provides member training, and provides an opportunity for members to discuss common issues.
Operates a truck and heavy equipment sub-group.

Automotive Parts Rebuilders Association (APRA)

4401 Fair Lakes Court, Suite 210; Fairfax, Virginia 22033-3848

Represents rebuilders of small parts such as brakes
Advocates remanufacturing as an “earth friendly” operation
Advocate for favorable tax consideration

Automotive Parts & Service Alliance (APSA)

4600 East-West Highway, Suite #300; Bethesda, MD 20814

A combined government affairs advocacy group made up of  the Automotive Parts & Accessories Association (APAA), the Automotive Service Industry Association (ASIA) and the Automotive Warehouse Distributors Association (AWDA), 

Automotive Warehouse Distributors Association

9140 Ward Parkway, Suite 200; Kansa City Mo. 64114

A membership organization of warehouse distributors and their respective suppliers of parts, accessories tools and other supplies for the automotive aftermarket. 

Motor and Equipment Manufacturers Assoc

10 Laboratory Drive; P O Box 13966; Research Triangle Park; NC 27709

MEMA is the only national vehicle products association whose members are exclusively manufacturers. 
The Heavy Duty Manufacturers Association, MEMA's Heavy Duty Division, the only national trade group representing manufacturers of product or products that service Class 6 and above trucks, buses, tractors, and off-road equipment. 

National Automobile Dealers Association (NADA)

8400 Westpark Drive; McLean Virginia 22102

Represents franchised new car and truck dealerships.
Provides counsel on legal and regulatory matters.
Represents dealers on Capitol Hill.
Develops research data on the automobile industry.
Operates training and service programs to improve dealership business operations, sales, and service practices. 

Production Engine Remanufacturers Assoc

415 W Golf Rd; Suite 43; Arlington Heights IL 60005

The organization’s primary purpose is to give its members the information they need to produce remanufactured engines equal or superior to original engines in quality and performance

Society of Automotive Engineers; SAE World Headquarters

400 Commonwealth Drive; Warrendale, PA 15096-0001 USA

An organization that provides technical information and expertise used in designing, building, maintaining, and operating self-propelled vehicles for use on land or sea, in air or space.
State and Local Automobile Dealer Associations
Various - Affiliated with NADA and provides similar services on a state and local level.

Auto World

Monthly - Subscription – Free

Wards Communication.
Provides news and analysis of the original equipment manufacturing industry.

Automotive News

Weekly - Subscription - $114

Published by Crain Communications.
Contains news and information related to the entire automotive industry including manufacturing and dealerships.

Car Dealer Insider

Monthly - Subscriptions - $319 per year

Newsletter. 

Dealer Business

Monthly -  Subscription - Free

Published by Intertec Publishing Company -Wards Communications.
Contains information pertinent to auto dealerships.
Publishes a list of the Top 100 megadealers and Top 500 dealers annually.

Automotive Executive

Monthly -  Subscription - $24 per year

Published by the National Automobile Dealers Association.
Contains news and information related to the auto dealership industry.

Part IV Subsection 42(14)

Income Tax Examinations

Industry specialization has been established to ensure uniform and consistent treatment of issues nationwide and to provide better identification and development of issues.

Part IV Subsection 42(14)2

Income Tax Examination

Provides an overall description of the industry specialization program.

Part IV Subsection 42(14)5.21

Income Tax Examination

Instructions to the District Case Managers examining cases within an industry including:

• Be directly advised by the Technical Adviser (previously - Industry Specialist) when their case has been included as an identified industry case.
• Be regularly provided with the Technical Adviser (previously – ISP) Digest.
• Advise the Technical Adviser (previously - Industry Specialist) of any CEP case that is engaged in the business activity of an ISP that is not an identified industry case.
• Consult with the appropriate Technical Adviser (previously -Industry Specialist) for planning input on industry cases.
• Consult with the appropriate Technical Adviser (previously - Industry Specialist) prior to submitting a Request for Technical Advice on industry issues.
• Follow the decisions on coordinated issues formulated by the Technical Adviser (previously - Industry Specialist).
• Resolution of a coordinated issue on a basis different than that formulated by the Technical Adviser (previously - Industry Specialist) requires approval of the Adviser and the National Industry coordinator.
• Decisions to avoid pursuit of a coordinated issue also require the concurrence of the Adviser

Part IV Subsection 42(14)5.22

Income Tax Examination

Instructions to group managers examining cases within an industry including:

• Be regularly provided with the Technical Adviser (previously – ISP) Digest.
• Ensure that coordinated issues are included in the examination plan.
• Ensure that examiners review digests and consult with Specialist when appropriate.
• Consult with the appropriate Technical Adviser (previously - Industry Specialist) prior to submitting a Request for Technical Advice on industry issues.
• Follow the decisions on coordinated issues formulated by the Technical Adviser (previously - Industry Specialist).
• Resolution of a coordinated issue on a basis different than that formulated by the Specialist requires approval of the Specialist and the National Industry coordinator.
• Decisions to avoid pursuit of a coordinated issue also require the concurrence of the Technical Adviser.

New Vehicle Dealership Audit Technique Guide

Used Car Dealership Audit Technique Guide

Included in Retail Guide

• The guide is a joint effort of IRS and the National Independent Automobile Dealers Association.
• Issued identified include method of:
  • accounting;
  • underreporting of income;
  • incorrect inventory valuation;
  • independent contractor vs. employee issues;
  • personal use of business cars; 
  • and related Finance Companies. 

Cost Segregation Audit Technique Guide

Provides assistance to examiners in the proper evaluation of depreciation if the taxpayer has segregated the costs associated with large purchases to accelerate the depreciation deductions.