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

Assuming the dealership elects LIFO for its inventory. Under the full comparability LIFO
method, a dealer may have a pool for:
• New cars
• New trucks
• Parts
• Used cars
• Used trucks
• Other items such as recreational vehicles
Proper pooling must be determined for each trade or business. Some of the factors Chief Counsel
has relied upon are based upon the particular facts and circumstances of the dealership include the
following:
1. The dealership is engaged in the same type of activities (i.e., those related to new and used
vehicle sales and service).
2. Employees including upper-level management, accounting personnel and administrative
personnel can work at other locations, for example, the same employee is the general manager
of multiple locations that sell automobiles and the used car manager manages all used vehicle
sales for all locations and purchases all used vehicles that are not acquired through trade-in
sales.
3. The dealership only has one checking account out of which all payrolls and other expenses are
paid. The dealership has one line of credit that is secured by all inventories, regardless of
location or manufacturer.
Importance of Pooling
The first and probably the most important problem involved in the dollar-value method is
determining the character of the inventory items which may be grouped into a pool. The reason
this question is so important is that the goods grouped in one pool are treated as fungible under
the dollar-value method. Hence, inventory decreases in one item may be offset by increases in
another item contained in the same pool. Under the specific goods method, if you have a quantity
increase in an item of inventory, that increase is valued at the cost prevailing for that item in the
year of the increase, absolutely separate from any other item in the inventory. Each item retains
its own unique history of cost.
Under the dollar-value method, quantity increases or decreases are determined looking at the pool
as a whole with the unit of measure the dollar. Treas. Reg. section 1.472-8(a) states in part "* * *
new items which properly fall within the pool may be added, and old items may disappear from
the pool, all without necessarily effecting a change in the dollar value of the pool as a whole." If
there is a quantity increase, in terms of dollars, that increase is valued at the cost prevailing for the
year of the increase considering all of the items in the pool. Under this concept, historical cost for
items decreasing or disappearing can be substituted for the cost of items increasing in quantity or
new items entering the pool. This is the major difference between the dollar-value method and the
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