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

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able to tell at a glance whether there is sufficient equity to finance any dealership losses. The agent should be able to quickly add all equity accounts and compare them to losses reported to determine if these arrangements are feasible. Sure, there may be assets included in these equity accounts that may not be liquid, but this method will give the agent an idea where they stand in relation to financial status. Taking this analysis one step further, determine if in having sufficient funds and equity to finance losses, there is sufficient cash or its equivalent to justify asset acquisition, to maintain the debt service stated or maintain certain life-styles. A side benefit to this method of analysis is that it enables the agent to see the "big picture." For instance, previous flow charts prepared have shown a flow of funds from a related non-key entity to finance the losses of several dealerships. Reviewing the flow chart and corporate balance sheets an agent could determine that one entity had a $35 million increase to retained earnings. This was a material increase on this tax return. Questioning of the principal shareholder indicated this increase was due to the sale of various pieces of real property. The corporation then transferred $15 million to one dealership to finance the losses incurred. The lesson here is the use of this method enables the agent to determine material areas to further pursue. Whether a material issue exists or not can be determined in a very short period of time. This type of analysis will steer the agent away from "verification audits" and prove more efficient and time effective. Probability of material adjustments can be determined quickly. If there is no issue the case can be closed with less time then is currently being experienced and the agent can move on to the next case, conserving the valuable resources of both the Government and the taxpayer. 1. Type C Return Information Profit and Loss from Form 1120S Gross Receipts $ 100,000,000 Cost of Sales $ 90,000,000 Gross Profit $ 10,000,000 Interest $ 50,000 Other Income $ 50,000 Total Income $ 10,100,000 Deductions: Officer Compensation $ 100,000 Salaries and Wages $ 5,000,000 Repairs/Maintenance $ 100,000 1-8
Rents $ 500,000 Interest $ 50,000 Contributions $ 50,000 Depreciation $ 300,000 Advertising $ 1,000,000 Total Deductions $ 7,100,000 Distributable Income $ 3,000,000 Balance Sheet from Form 1120S Beginning of End of tax year tax year ASSETS Cash $ 1,000,000 $ 3,000,000 Accounts Receivable $ 2,000,000 $ 1,000,000 Inventories $ 5,000,000 $ 7,000,000 Other Current Assets $ 4,000,000 $ 5,000,000 Loans to Stockholders $ 3,000,000 $ 4,000,000 Total Assets $ 15,000,000 $ 20,000,000 LIABILITIES Accounts Payable $ 5,000,000 $ 7,000,000 Notes and Mortgages $ 1,000,000 $ 2,000,000 Loans from Stockholders $ 2,000,000 $ 3,000,000 Capital Account $ 7,000,000 $ 8,000,000 Total Liabilities and Capital $ 15,000,000 $ 20,000,000 1-9
Page 1 and 2: Internal Revenue Service Market Seg
Page 3 and 4: Preface One of the goals envisioned
Page 5 and 6: Table of Contents Preface .........
Page 7 and 8: The Reinsurance Transaction .......
Page 9 and 10: Part 1 General Focus and Procedure
Page 11 and 12: 1. Type A Return Information Schedu
Page 13 and 14: Percentage has gone down. The incre
Page 15: the principal shareholders to finan
Page 19 and 20: Conclusion "Financial status" is on
Page 21 and 22: Chapter 2 Getting Started The key t
Page 23 and 24: entities and their purpose and rela
Page 25 and 26: It is recommended that officer comp
Page 27 and 28: Chapter 3 Standard Audit Index Numb
Page 29 and 30: Chapter 4 Books and Records Charact
Page 31 and 32: c. Reconcile (2): Beginning Trial B
Page 33 and 34: 3 Repair Order Sales 4 Parts Sales
Page 35 and 36: Conclusion Although intimidating at
Page 37 and 38: Chapter 5 Balance Sheet Why do we c
Page 39 and 40: When an adjustment to a balance she
Page 41 and 42: Part 2 Inventory Chapter 6 General
Page 43 and 44: . Purchasing c. Handling, processin
Page 45 and 46: dealerships use specific identifica
Page 47 and 48: Chapter 7 LIFO Background Overview
Page 49 and 50: A Short History of LIFO Application
Page 51 and 52: improper inflation through unwarran
Page 53 and 54: Introduction Chapter 8 Computing LI
Page 55 and 56: The double extension index formula
Page 57 and 58: as one item, there would probably n
Page 59 and 60: (existing items) and non-comparable
Page 61 and 62: The current-year costs that can be
Page 63 and 64: Assuming the dealership elects LIFO
Page 65 and 66: matching of revenues and costs. Thu
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section 1.471-9. Both of these regu
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providing to the credit subsidiary
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Under elections made prior to Decem
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Base Year Cost 9112 $224,000 You ha
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BLS Sanity Check A simpler means to
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CYC = Current Year Cost. This is th
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Computation of 1993 Increment and R
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This page intentionally left blank.
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Specific Identification Increment M
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which may be identified by a unique
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Step # 3 For each item category, ad
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Step # 10 Compute the total cost of
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1991 Inventory Value at Current Yea
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Dealers may offer the contracts as
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2. Principal/Obligor A principal is
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Rev. Proc. 97-38 provided for an al
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Contract Construction Generally, a
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Rev. Proc. 97-27 provides the admin
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The Court ruled that when the deale
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Considerations for Forming a Produc
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The Reinsurance Transaction To illu
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insurance contract reinsured throug
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(1979). The Service’s position is
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While not all captive situations in
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3. IRC section 845 tax avoidance 4.
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section, seemingly compliant arrang
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2. By owner A dealer may own dealer
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Rules and Regulations Many rules re
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One of the assets specifically iden
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Where a covenant may be enforced it
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1. Spread income over a number of y
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RELATED FINANCE COMPANY CHECKSHEET
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3. Question the taxpayer directly w
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Technicalities Under the provisions
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Cash 300 Accounts Receivable 300 2.
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The dealer sells the note to a fina
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For purposes of this rule, an "empl
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10) relationship of stockholder-off
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purely for services. See Treas. Reg
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Howard Sole, Inc. v. Commissioner,
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Milford Motor Co. v. United States,
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new pool for additional, subsequent
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6. The finance company is entitled
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when the back-end distributions are
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The transfer of the installment con
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Report as a Loan or an Assignment
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Reported as a Sale… (How it Shoul
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Other Sources of Information IRC se
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Part 4 Appendices Appendix A Initia
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2) Adjusting Journal Entries 3) Tax
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k. Do you receive rebates from anyo
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f. Employee Benefits 1) Form 5500?
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Appendix B Balance Sheet Section -
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. Dealership financing If the deale
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f. Dealer Reserve Holdbacks 3. Inve
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Once the existence of a shareholder
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Despite the fact the computation ma
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corporate minutes if material. d. L
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Appendix C Definition of an Item Co
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two cars of the same model can vary
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Appendix D An Analysis of the Wrigh
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(D) also moved (DLRS) income to be
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The court did not allow (D)’s cla
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Appendix E Glossary The following t
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FIFO: An inventory cost flow assump
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PLATFORM: A vehicle platform is the
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Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

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