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

1995 1994
Model Base Base Price
Code Description Price Price Diff. Index
U34 XL Utility 4DR 19,948 18,169 1,779 1.0979
U34 XLT Utility 4DR 22,320 20,324 1,996 1.0982
U34 Eddie Bauer Utility 4DR 26,293 22,503 3,790 1.1684
U34 Limited Utility 4DR 30,183 25,455 4,728 1.1857
98,744 86,451 1.1421
The above example illustrates the variance in the inflation rate for vehicles with the same model
code. The index can also vary significantly based on changes in the taxpayer’s product mix.
The following examples illustrate changes in product mix. (Assume no quantity change. EOY =
End of Year; BOY = Beginning of Year)
Example 1
Description Quantity Base Price Total Cost
EOY Limited Utility 4DR 4 30,183 120,732
BOY XL Utility 4DR 4 18,169 72,676
Index - 1.6612
Changing the product mix from low cost vehicles to high cost vehicles results in an abnormally
high index.
Example 2
Description Quantity Base Price Total Cost
EOY XL Utility 4DR 4 19,948 79,792
BOY Limited Utility 4DR 4 25,455 101,820
Index - .7836
Changing the product mix from high cost vehicles to low cost vehicles results in an abnormally
low index.
Inflation is more accurately reflected in clearly defined item categories and both of the above
examples produce distorted indices.
To properly determine an item category, a taxpayer must, as specifically stated in the revenue
procedure, use the "* * * most detailed description of the base vehicle’s characteristics * * *."
Some taxpayers interpret "model code number" to mean only the alphanumeric character. This is
incorrect. Had this been the intention of the Service, any reference to the "most detailed
description" would have been unnecessary. The intention of the Service was that an item must be
determined using "* * * the most detailed description of the base vehicle’s characteristics * * *."
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