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

Under elections made prior to December 31, 1981, the restoration had to be made on an
amended return for the tax year immediately preceding the year of the LIFO election. See
Rev. Proc. 76-6. For elections made after December 31, 1981, IRC section 472(d) requires
the restoration to be made pro rata over 3 tax years beginning with the year of the LIFO
election. The 3 year analysis that is required to be attached to the Form 970 provides the
information for the restoration.
5. How can the LIFO election be terminated?
The service can terminate the use of the LIFO method by a taxpayer who has adopted LIFO
without filing Form 970. There may be an exception to this rule if the taxpayer includes all of
the information on the tax return that is required on the Form 970. Fischer Industries Inc.
and Subsidiaries v. Commissioner, 87 T.C. 116 (1986).
The method may also be terminated if the financial reporting requirements are not complied
with (see above), or adequate records are not maintained (see above).
The 1987 Revenue Act added IRC section 1363(d), which requires that a C-Corporation
using the LIFO method who converts to an S-Corporation must recapture its LIFO reserve
and pay the tax over a 4 year period. This provision was effective after December 17, 1987.
For more information, refer to Rev. Proc. 79-23, 1979-1 C.B. 564, 1979.
Computations
Index
The examination of an auto dealership’s LIFO begins with a determination of the appropriateness
of the taxpayer’s indices. A complete examination of the taxpayer’s computations would require a
great deal of both the Government’s and taxpayer’s time and resources. The agent should
determine if issues are likely to exist, before embarking upon a complete examination of these
indices.
The first thing the agent needs to do is to secure the Form 970 and determine which Dollar Value
method the taxpayer has elected to price its inventory. In the auto dealership context, there are
three such pricing methods; the Double Extension Method, the Link Chain Method and the Index
method. The Link Chain Method is the most prevalent in this industry and will be the focus of
this discussion.
The LIFO years should be determined by reviewing the Form 970. From this form the agent can
ascertain the method the taxpayer has elected to determine current year costs of the units in
ending inventory in order to compute the index. Recall many auto dealerships elect the Earliest
Acquisitions Method, also known as the First Purchases Method or the Most Recent Purchases,
also known as the Latest Acquisitions Method. Taxpayers may elect the Most recent Purchases
method but, in fact, may be using the specific identification method. This is not an unauthorized
change in method of accounting if it has been consistently used from the date of election.
8-19