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

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matching of revenues and costs. Thus, the objections found with respect to [the Service’s] 24-pool approach<br />

and petitioner’s 1-pool approach are not applicable to a 2-pool approach. To the contrary, the fundamental<br />

purposes of the dollar-value method are enhanced. Therefore, notwithstanding our earlier determination that<br />

one pool for new cars and new trucks is the customary business classification, this factor is outweighed by the<br />

clear reflection of income obtained by utilizing two pools. [emphasis added] See Thor Power Tool Co. v.<br />

Commissioner, 439 U.S. 522, (1979).<br />

We believe this provides an added reason for requiring pools for unlike items where customary<br />

practices are not firmly established.<br />

Inventory Price Index (IPI) Method<br />

Be aware that there are special pooling rules for taxpayers electing to use the Consumer Price<br />

Index (CPI) or the Producer Price Index (PPI) method provided for by Treas. Reg.<br />

section 1.472-8(e)(3). If the CPI tables are used, pools may be established based on the 11<br />

general categories of consumer goods described in the CPI detailed report. If the PPI tables are<br />

used pools may be established based on the 15 general categories of producer goods described in<br />

Table 6 of the Producer Prices and Price Indexes. See Rev. Proc. 84-57 for additional<br />

explanations of the pooling requirements for taxpayers who use this method.<br />

Under this method a new car and new truck dealer could have one pool that would include both<br />

new cars and new trucks. "Transportation Equipment" is one of the 15 categories. Caution: not<br />

all of a car dealer’s inventory falls into this one category. Car radios, car batteries, metal<br />

stampings, and engine components are some examples of dealer inventory that are in another PPI<br />

category.<br />

What constitutes a new item?<br />

Another issue is that of a "new item." In Wendle Ford Sales, Inc. v. Commissioner, 72 T.C. 447<br />

(1979), the judge alluded to perhaps classifying new vehicles as new items after a period of 5, 10,<br />

or 15 years. <strong>Auto</strong> dealers maintain that technological changes are frequent and revolutionary. A<br />

1995 Ford Thunderbird does not even closely resemble a Thunderbird of the early sixties, for all<br />

practical purposes only the name remains the same.<br />

Recently, there was a television commercial comparing a 1965 Mustang to a 1995 Mustang. The<br />

theme of the commercial stated these cars have the same name, but everything else is new.<br />

Therefore, in lieu of everything else, most new vehicle inventory should be reclassified as new<br />

items periodically. This reclassification assumes that dealers will not be able to reconstruct the<br />

base period cost of the items. This issue would be applicable no matter what LIFO method is<br />

used.<br />

Reconstruction is available under both the double extension and link chain methods. For the<br />

double extension method, the reconstruction would be for a period from the current year back to<br />

the base year. The base year is the year of election. For the link chain method, the period would<br />

be from the current year to the prior year only.<br />

The calculation of the current inflation is derived from comparisons within each pool. For the<br />

8-13

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