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

a facts-and-circumstances analysis [emphasis added]."
In a PLR the National Office stated "A taxpayer’s method of reconstruction should be
considered reasonable if the taxpayer can demonstrate that the method used is an accurate
measure of what the rate of inflation would have been had the new item been in existence in
the prior year, or had the item been stocked by the taxpayer in the prior year. For example,
had X used an index derived from a portion of its vehicles in ending inventory that X could
demonstrate were comparable to a particular new model, application of that index to derive a
reconstructed beginning-of-the-year cost for that new model should be acceptable."
This method of reconstruction (arbitrarily excluding new items when double-extending the
inventory to arrive at an index) is present in almost every LIFO case.
Develop the issue by first determining how the taxpayer computes its index for new items.
Consider following these steps;
a. Interview the individual(s) who did the LIFO computations and ask them how they
handled new items. If the method used does not appear to be reasonable you need more
information.
b. Submit an Information Document Request for either a list of the new items or an
identification of the new items on the double-extension schedules or inventory records.
c. Request the taxpayer to identify new items that existed in the base year (beginning of the
year for a link-chain method) but were not stocked. Start with the tax years under
examination.
d. If items existed but not stocked, the taxpayer should be able to obtain a proper cost either
from existing price sheets or from its suppliers. Ask the taxpayer to obtain the cost prices.
e. Give the taxpayer the opportunity to demonstrate that the index derived for an existing
item is comparable to a particular new item.
f. For the remaining items that are completely new, ask the taxpayer to either reconstruct the
cost using reasonable means or accept the current price as the base or
beginning-of-the-year price.
g. Depending on the results of the revised computations for the current year(s) under
examination, consider either applying the steps above to prior years or adjusting the prior
years using error rates for the current year(s).
Keep in mind that the regulations place the burden of reconstruction squarely upon the
taxpayer. It is not the examiner’s responsibility to either do the reconstruction or even to do a
statistical sample to establish whether or not the taxpayer’s short cut method is accurate and
reliable. The examiner only has to demonstrate with supporting workpapers using the
taxpayer’s records (double-extension schedules and inventory listings) that the comparable
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