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

In Rev. Proc. 97-44, I.R.B. 1997-41, (September 25, 1997), the IRS provided relief for
franchised automobile dealers that have violated the LIFO conformity requirement. This
revenue procedure provides relief for automobile dealers that elected the last-in, first-out
(LIFO) inventory method and violated the LIFO conformity requirement of section 472(c) or
(e)(2)of the Internal Revenue Code by providing, for credit purposes, an income statement
prepared in a format required by the franchisor or on a pre-printed form supplied by the
franchisor (an automobile manufacturer), covering any taxable year ended on or before
October 14, 1997, that fails to reflect the LIFO inventory method. See, e.g., Rev. Rul. 97-42,
1997-41 I.R.B. (Situation 3). Automobile dealers that comply with this revenue procedure
will not be required to change from the LIFO inventory method to another inventory method
as a result of such LIFO conformity violation.
Revenue agents should at a minimum, inquire if the taxpayer elected the above relief. If the
taxpayer did elect the above relief, were the required three payments made.
If the taxpayer did not elect the relief, the agent must check to see if the taxpayer is in
violation of the LIFO conformity requirements under IRC section 472.
Even if they did elect the relief, taxpayers are required to continue to comply with the
requirements of the regulations.
Rev. Proc. 98-46 extended the relief in Rev. Proc. 97-44 to medium and heavy truck dealers.
3. What are the record keeping requirements?
A taxpayer electing LIFO agrees to maintain adequate records to comply with the regulations.
Treas. Reg. section 1.472-2(h) requires a taxpayer electing LIFO to maintain records
supporting the LIFO computations and compliance with the LIFO regulations. Treas. Reg.
section 1.472-2(h) places a substantial responsibility on the taxpayer since, under the LIFO
reverse order principle, the costs in ending inventories relate to years all the way back to the
year of the initial LIFO election. A taxpayer may have the LIFO election terminated for non
compliance. See H.E. Boecking, Jr. and Sally Boecking v. Commissioner, T.C. Memo.
1993-497, CCH 49,362(M). See Treas. Reg. section 1.472-8(e)(1).
4. How do write downs affect the LIFO election?
LIFO is a cost method. Write downs from cost are not permitted. A taxpayer as part of the
election must restore to the base year inventories all cost write downs to items on hand. This
means restoration must be made to the beginning inventory in the first year covered by the
LIFO election.
The write downs that must be restored (and that cannot be subsequently claimed as long as
the LIFO election is in effect) include "lower of cost or market" write downs, Treas. Reg.
section 1.471-4, as well as "subnormal goods" write downs. See Treas. Reg. section 1.471-2,
Rev. Rul. 76-282, and Rev. Proc. 76-28, 1976-2 C.B. 645.
8-18