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

Dealers are to value the automobiles based on the lower of:
1) Cost: What the dealer actually pays for a vehicle (cash outlay) in an arm’s length
transaction or its actual cash value.
or
2) Market: Treas. Reg. section 1.471-4(a) provides that for normal goods, market is the
aggregate of the current bid prices prevailing at the date of inventory. Thor Power
Tools, 439 U.S. 52 (1979) defines current bid price as replacement cost based on the
normal quantity and quality of the inventory item in the market in which the taxpayer
normally purchases its goods. Subsequent selling price does not necessarily equate to
replacement cost.
Official valuation guides may be consulted to determine the inventory valuation and any
overallowance should be adjusted through cost of sales at the time of trade-in.
Reconditioning expenses are inventorial and added to the cost of the applicable vehicle.
Rev. Rul. 67-107 allows only used vehicles taken in trade to be valued using an official
used car guide. It does not require the use of a specific publisher, but the regulations do
require consistent treatment. To any used vehicle valuation guide, additions and/or
subtractions may be necessary according to options and mileage, and according to the
condition of each vehicle.
Certain vehicles, such as antiques or classics, may have a value that cannot be ascertained
from the usual official guides.
Parts inventory should include properly valued cores and "obsolete" parts in which the
taxpayer retains dominion and control, but has written down or written off.
If the dealership writes down used car or parts inventories year after year, a further
examination of the yearend inventory sheet is in order. Yearend write downs are subject
to compliance with Treas. Reg. sections 1.471-2 and 1.471-4 and the Thor Power Tool
case.
4. Loans to and from Shareholders
The corporate balance sheet should be reviewed for the existence of loan accounts either to or
from the shareholder. However, no entry on the balance sheet for shareholder loan accounts
does not mean there are no outstanding loan balances. In several cases, it was noted the
shareholder loans were included in asset and liability (primarily other current liabilities)
accounts other then the normal loans to and from shareholder account. This is why tax
classification is so important. Thus, during the initial interview the examiner should inquire as
to the existence of loans and the taxpayer’s policies with respect to the loan, repayments,
interest rates, and collateral.
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