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

sheet accounts. The main issue should be the arms length nature of the rent paid by the
dealership to the related entity for the property. The examiner may wish to determine Fair
Rental Value to disallow excessive rent and expand on a constructive dividend issue.
Subsequent to a reconciliation of the building and equipment items, the examiner may wish to
further look at:
a. Large, unusual, or questionable items
b. Like kind exchanges
c. Potentially personal items
d. "Imaging Payments"
1) Manufacturers may reimburse dealers for a portion of the costs to renovate and/or
relocate their stores. Taxpayers may be excluding these "imaging payments" from
income as a contribution to capital. In John B. White, Inc., 458 F.2d 989, aff’g 55
T.C. 729, the court ruled that the payment was includable in income.
6. Accounts Payable, Other Current Liabilities and Other Liabilities
When auditing a payable account, the examiner may wish to focus on the year-end balances.
By doing so, the agent will be able to verify that the taxpayer has not expensed items not
meeting the conditions of IRC section 461(h), Treas. Reg. section 1.461-1(a)(2), or IRC
section 162:
a. The liability must exist
b. The liability can be reasonably determined
c. Economic performance has occurred
d. The expense is ordinary and necessary
e. Expense is directly related to business.
When auditing the liability accounts, the following steps are recommended:
a. Have the taxpayer search for unrecorded liabilities by reviewing the Cash Disbursements
Journal for disbursements after the yearend.
b. Review unpaid liabilities after the close of the taxable year.
c. Review balances due to officer’s and shareholder’s; ascertain business purpose, trace to the
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