Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board
Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board 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 * * *." 9-3
which may be identified by a unique model code. If no unique code is present, the item must be identified by its detailed description. The revenue procedure’s language is clear and specific that an item must be identified, not merely by its model code number, but by the most detailed description of the base vehicle. While the term "shared code" is not found in the revenue procedure, it does describe model codes that apply to more than one base vehicle and must be treated as separate items. Cost of the Vehicle Used for Purposes of Computing the Pool Index The actual base vehicle cost of each specific vehicle in ending inventory is used to compute the LIFO index. The pool index computed from only the base vehicle cost is applied to the total vehicle cost of all vehicles in the pool at the end of the taxable year. Definition of a New Item Section 5 of the Revenue Procedure provides three situations when a new item category is created: "i. ii. [iii.] Any new or reassigned manufacturer’s model code * * * that is caused by a change in an existing vehicle, or [A] manufacturer’s model code, * * * created or reassigned because the classified vehicle did not previously exist. Additionally, if there is no change in a manufacturer’s model code but there has been a change to the platform * * * that results in a change in the track width or wheel base, whether or not the same model name was previously used by the manufacturer, a new item category is created." Generally, if there has been a change to the most detailed description corresponding to the base cost of the vehicle, either in the number or description, which is caused by a change in an existing vehicle, a new item category is created. The Motor Vehicle Industry Specialization Program analyzes all vehicles each year to determine whether a new item category is created under the situations specified above. Contact that office to receive a list of new item categories. Treatment of a New Item Not in Existence in the Prior Year The automobile dealer must use the current-year base vehicle cost of the new item category as the prior-year-base vehicle cost of that item category. 9-4
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which may be identified by a unique model code. If no unique code is present, the item must be<br />
identified by its detailed description.<br />
The revenue procedure’s language is clear and specific that an item must be identified, not merely<br />
by its model code number, but by the most detailed description of the base vehicle. While the<br />
term "shared code" is not found in the revenue procedure, it does describe model codes that apply<br />
to more than one base vehicle and must be treated as separate items.<br />
Cost of the Vehicle Used for Purposes of Computing the Pool Index<br />
The actual base vehicle cost of each specific vehicle in ending inventory is used to compute the<br />
LIFO index. The pool index computed from only the base vehicle cost is applied to the total<br />
vehicle cost of all vehicles in the pool at the end of the taxable year.<br />
Definition of a New Item<br />
Section 5 of the Revenue Procedure provides three situations when a new item category is<br />
created:<br />
"i.<br />
ii.<br />
[iii.]<br />
Any new or reassigned manufacturer’s model code * * * that is caused by a change in an existing<br />
vehicle, or<br />
[A] manufacturer’s model code, * * * created or reassigned because the classified vehicle did not<br />
previously exist.<br />
Additionally, if there is no change in a manufacturer’s model code but there has been a change to the<br />
platform * * * that results in a change in the track width or wheel base, whether or not the same<br />
model name was previously used by the manufacturer, a new item category is created."<br />
Generally, if there has been a change to the most detailed description corresponding to the base<br />
cost of the vehicle, either in the number or description, which is caused by a change in an existing<br />
vehicle, a new item category is created.<br />
The Motor Vehicle Industry Specialization Program analyzes all vehicles each year to determine<br />
whether a new item category is created under the situations specified above. Contact that office<br />
to receive a list of new item categories.<br />
Treatment of a New Item Not in Existence in the Prior Year<br />
The automobile dealer must use the current-year base vehicle cost of the new item category as the<br />
prior-year-base vehicle cost of that item category.<br />
9-4
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