Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

Cash 300
Accounts Receivable 300
2. Audit Technique
The agent needs to compare the dealer’s invoice with the purchases Journal and the General
Ledger to determined whether dealer is correctly reporting the "Holdback" amounts. If the
dealer properly books the "Holdback" amount at the time the vehicle is purchased, there
should not be any reference made to the "Holdback," in the sales journal, at the time the
vehicle is sold to the customer.
The Holdback identified as a separately stated charge on the dealer invoice as part of the
dealer cost is for example purpose. The amount may show somewhere on the invoice but as
information for accounting purposes and not as an element of dealer cost.
3. Law
Rev. Rul. 72-326, provides that the dealer cannot include the $300 "Holdback" as an
inventory cost. Thus, the car should be included in inventory at $9,500 and the $300 carried
in a receivable account from the factory/manufacturer. The manufacturer, on the other hand,
is not required to include the "$300 Holdback" in income.
Brooks-Massey Dodge Inc. v. Commissioner 60 T.C. 884 (1973). The amounts of an accrual
basis dealer discount held back by the manufacturer under a plan agreed to by the dealer was
taxable to the dealer in years the amount was credited to the dealership’s account rather than
in years received.
Warranty Advances
Dealers perform work on vehicles, as a result of defective materials or workmanship at the time of
manufacture, for which the dealer is reimbursed by the manufacturer. Because of the time delay
from when the work is completed and the date the manufacturer pays the claim, the manufacturer
issues credit memoranda or advances to the dealerships based on an averaging calculation
(average of warranty claims submitted in a month) thereby reducing the accounts payable of the
dealer for parts purchased from the manufacturer. The purpose of the arrangement is to allow the
dealer a credit against amounts owed to the manufacturer before the warranty bill is processed by
the manufacturer.
The amount of the credit is adjusted at the beginning of each year based on the average of the
previous 12 months warranty claims filed and approved. Since dealers use an accrual method of
accounting, all amounts due it from the manufacturer for warranty work performed through the
end of the taxable year are includable in gross income. Accordingly, the amounts represented by
the credit memorandum issued by the manufacturer, pursuant to the credit arrangement, are not
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