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

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Chapter 7 LIFO Background .......................................... 7 - 1 Overview of the Method ............................................... 7 - 1 Origins of the Method ................................................. 7 - 2 A Short History of LIFO Applications: Auto Dealership LIFO and the IRS ............................................................... 7 - 3 Chapter 8 Computing LIFO: Pre Revenue Procedure 97-36.................. 8 - 1 Introduction.......................................................... 8 - 1 LIFO Concepts ...................................................... 8 - 1 Pooling ........................................................... 8 - 11 Foundation Principles................................................. 8 - 14 The LIFO Election................................................... 8 - 16 Computations ...................................................... 8 - 20 Chapter 9 Alternative LIFO for Auto Dealers ............................. 9 - 1 Summary of Rules .................................................... 9 - 1 Computations ....................................................... 9 - 5 Other Considerations .................................................. 9 - 9 Information to request when examining the Alternative LIFO Method ............ 9 - 10 Part III Aftersale Financial Products Chapter 10 Automobile Dealership Aftersale Financial Products .............. 10 - 1 Introduction........................................................ 10 - 1 Extended Service Contracts ............................................ 10 - 1 Credit Life Insurance; Credit Accident and Health Insurance ................... 10 - 2 Chapter 11 Extended Service Contracts.................................. 11 - 1 Agent versus Principal/Obligor.......................................... 11 - 1 Dealer "Agent" Extended Service Contracts................................ 11 - 2 Dealer "Obligor" Extended Service Contract ............................... 11 - 2 Service Warranty Income Method (SWIM) ................................ 11 - 3 Contract Construction ................................................. 11 - 6 Change in Accounting Method Concerns and IRC section 481(a) ................. 11 - 6 Chapter 12 Extended Service Contracts – "Dealer Reserve Accounts" .......... 12 - 1 Chapter 13 The Producer Owned Reinsurance Company (PORC) ............. 13 - 1 Introduction......................................................... 13 - 1 Introduction to Reinsurance............................................. 13 - 1 Considerations for Forming a Producer Owned Reinsurance Company ............................................................... 13 - 2 vi
The Reinsurance Transaction ............................................ 13 - 4 Producer Owned Reinsurance Company Issues .............................. 13 - 5 The Captive Transaction ............................................... 13 - 7 Reinsurance and Auto Dealership After Sale Financial Products................. 13 - 13 The Future......................................................... 13 - 14 Part IV Stand Alone Issues Chapter 14 Advertising Associations .................................... 14 - 1 Introduction........................................................ 14 - 1 Advertising Associations .............................................. 14 - 1 Association Tax Returns .............................................. 14 - 2 Potential Issues ..................................................... 14 - 3 Rules and Regulations ................................................ 14 - 4 Audit Techniques.................................................... 14 - 5 Chapter 15 Covenant Not to Compete ................................... 15 - 1 Case Study ........................................................ 15 - 1 Intangibles Settlement Offer............................................ 15 - 4 Chapter 16 Related Finance Companies.................................. 16 - 1 What is it? ......................................................... 16 - 1 How does it work? .................................................. 16 - 1 Adjustment ........................................................ 16 - 1 Possible applicable legal assertions........................................ 16 - 2 Conclusion.......................................................... 16 - 5 Chapter 17 Passive / Non-Passive Considerations .......................... 17 - 1 Introduction........................................................ 17 - 1 Should this issue be considered?......................................... 17 - 1 The Typical Scenario ................................................. 17 - 1 Audit Techniques.................................................... 17 - 1 Law............................................................... 17 - 2 Conclusion.......................................................... 17 - 3 Chapter 18 Voluntary Employees’ Benefit Associations ...................... 18 - 1 What is a VEBA to which IRC sections 419 and 419A apply? ................... 18 - 1 What do I need?...................................................... 18 - 1 Audit Potential....................................................... 18 - 1 Technicalities........................................................ 18 - 2 Exceptions.......................................................... 18 - 2 Sources of Information ................................................ 18 - 3 vii
Page 1 and 2: Internal Revenue Service Market Seg
Page 3 and 4: Preface One of the goals envisioned
Page 5: Table of Contents Preface .........
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 and 16: the principal shareholders to finan
Page 17 and 18: Rents $ 500,000 Interest $ 50,000 C
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
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as one item, there would probably n
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(existing items) and non-comparable
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The current-year costs that can be
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Assuming the dealership elects LIFO
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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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