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

specific goods method. If the pooling requirements were such, that a pool had to be established
for each item in the inventory, the results under dollar-value would not be much different than
under the specific goods method. The results would be more accurate in that historic costs
attributable to items liquidated could not be substituted for other items.
The Tax Court in Fox Chevrolet, Inc. v. Commissioner, 76 T.C. 708 (1981) (a new car and truck
dealer with one pool) stated where "* * * a pool of inventory is depleted because sales exceed
purchases during the year, the LIFO reserve is invaded and older "historic" costs flow into costs
of sales. It is self-evident that the greater number of pools the greater the likelihood of such a
liquidation occurring. [emphasis added]." In Fox Chevrolet the Service wanted a pool for each
model line of new cars. The Court noted that model lines change very rapidly and consequently
pools would be liquidated each time a model line was discontinued.
The Tax Court in Richardson Investments, Inc. and Subsidiaries (Formally known as Rich Ford
Sales, Inc.), a New Mexico Corporation v. Commissioner, 76 T.C. 736 (1981) [a new car and
truck dealer] stated "[the Service’s] 24-pool method, [pools by model line], would, in substance,
place petitioner on the specific goods LIFO method."
What is interesting in the Richardson Investment case are reasons stated why a second pool was
required for new trucks. The Court stated:
[t]he use of two pools would not, as a practical matter, prevent petitioner from employing the dollar-value
method. * * *; the two-pool approach succeeds in matching revenues from truck sales with the costs of
producing such trucks, and revenues from the sale of cars with the costs of producing such cars. In addition,
petitioner’s income, for income tax purposes, would be clearly reflected because of this matching of revenues
and costs. Thus, the objections found with respect to [the Service’s] 24-pool approach and petitioner’s 1-pool
approach are not applicable to a 2-pool approach. To the contrary, the fundamental purposes of the
dollar-value method are enhanced.
Now that you have a better understanding of the importance of pooling under the dollar-value
method let’s study the rules for pooling that apply to dealers.
Wholesalers, Retailers, etc.
Treas. Reg. section 1.472-8(c) provides the rules for establishing pools for wholesalers, retailers,
jobbers and distributors. Basically they must pool by major lines, types, or classes of goods. In
determining such groupings customary business classifications of the particular trade in which the
taxpayer is engaged is an important consideration. The regulations mention department stores as
an example of the customary business classification.
Cases on this part of the law have involved new car and truck dealers, two of which have been
noted above. The Tax Court’s reasoning in the Richardson Investments, Inc. case brings another
factor into the determination of the proper number of pools under this section of the regulations.
Near the end of its opinion, the Court stated:
the two-pool [one for new cars and one for new trucks] approach succeeds in matching revenues from truck
sales with the costs of producing such trucks, and revenues from the sale of cars with the costs of producing
such cars. In addition, petitioner’s income, for income tax purposes, would be clearly reflected because of this
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