Rev. Proc. Simplifies LIFO Method for Used-Vehicle Dealers

Rev. Proc. 2001-23 provides an elective alternative LIFO in-ventory computation method for taxpayers that sell used automobiles or used light-duty trucks. The new inventory method, called the Used Vehicle Alternative LIFO Method, is modeled after Rev. Proc. 97-36, which provided an Alternative LIFO Method for taxpayers engaged in the retail sale of new automobiles or new light-duty trucks. According to the IRS, this new inventory method is "a significant milestone in [its] goal to provide clear and specific guidance to taxpayers in the motor vehicle industry."

Background

Sec. 472, and the regulations thereunder, provide rules for use of the LIFO inventory method. To value the cost of its LIFO inventory, a taxpayer may elect to use the dollar-value LIFO method, which measures inventory quantities in terms of fixed-dollar equivalents. Further, in certain circumstances, a taxpayer may use the link-chain method to compute the value of its dollar-value LIFO pool.

Rev. Proc. 2001-23

The Used Vehicle Alternative LIFO Method is a link-chain, dollar-value LIFO inventory method that simplifies LIFO computations. Used-vehicle dealers may apply the method to value the LIFO inventories of previously titled automobiles and light-duty trucks (i.e., gross vehicle weight of 14,000 pounds or less), but not for demonstrator vehicles. A taxpayer using the Used Vehicle Alternative LIFO Method must refer to the average base-vehicle prices found in an official used-vehicle guide to compute the dollar-value LIFO pool index. If the Used Vehicle Alternative LIFO Method is elected, it must be used for all of the taxpayer's used automobile and light-duty truck inventory, and is effective for tax years ending after Dec. 30, 2000.

Special Rules and Submethods

Section 4.02 of Rev. Proc. 2001-23 requires a taxpayer that changes to or adopts the Used Vehicle Alternative LIFO Method to comply with the following special rules and submethods:

1. Average base-vehicle prices must be used to compute the LIFO indexes;

2. Official used vehicle guides must be used to determine the base-vehicle prices. (Note: Changing used-vehicle guides and/or changing the manner in which the used-vehicle guide is used by a taxpayer, for the purposes of computing the Used Vehicle Alternative LIFO Method, represents an accounting-method change.);

3. Separate LIFO pools must be used for all automobiles and light-duty trucks (regardless of manufacturer), for each trade or business that sells used vehicles. (Note: Used hybrid (e.g., vans) and sport-utility vehicles may be placed into either pool, but subsequent placement of like vehicles must be consistent.);

4. The current-year cost of vehicles in ending inventory must include the following:

Purchased vehicles: Purchase price, plus reconditioning, delivery and other allocable (including Sec. 263A) costs;

Trade-in vehicles: Cost (wholesale price listing for a similarly equipped vehicle from an official used-vehicle guide, which covers the day of acquisition), plus reconditioning and other allocable (including Sec. 263A) costs. (Note: The vehicle's actual mileage, condition, options and accessories must be considered when determining its cost.);

5. Inventory-pool index guidelines provided in the revenue procedure must be followed to compute the inventory-pool index and the comparable base-vehicle price. (Note: Specific procedures apply when a prior-year comparable base-vehicle listing does not exist or if there is a short tax year.)

Computation

Section 4.03 of Rev. Proc. 2001-23 contains an eight-step methodology that a used-vehicle dealer must follow to compute the value of each dollar-value LIFO pool in ending inventory.

Change in Accounting Method

Any change by a taxpayer from the present method of accounting for inventory to the Used Vehicle Alternative LIFO Method is a change in accounting method that requires filing Form 3115, Request for Change in Accounting Method.

Additionally, a taxpayer must be using the LIFO inventory method to use the Used Vehicle Alternative LIFO Method. Therefore, a taxpayer that has not elected to use the LIFO inventory method must file Form 970, Application to Use LIFO Inventory Method. Form 970 should contain a reference to the Used Vehicle Alternative LIFO Method and Rev. Proc. 2001-23. Note: For an affected taxpayer, the five-year limit for LIFO reelection will be waived.

A used-vehicle dealer that does not use the inventory price index computation (IPIC) method may change to the Used Vehicle Alternative LIFO Method by following the automatic-change provisions of Rev. Proc. 99-49, as modified by Rev. Proc. 2001-23. The dealer should file the original Form 3115 with its timely filed (including extensions) original Federal income tax return for the tax year of change and should include the phrase "Filed under Rev. Proc. 2001-23" at the top of the form. The dealer should also file a duplicate Form 3115 with the IRS National Office no later than the time the original is filed. This change in accounting method must be made using the cut-off method (i.e., there is no Sec. 481(a) adjustment associated with the change). Note: Changes made for the first or second tax year ending after Dec. 30, 2000 may be made automatically, even if the dealership falls under the scope limitations in Section 4.02 of Rev. Proc. 99-49 (under examination, before an appeals court, before a Federal court, etc.), unless the method of accounting for used-vehicle LIFO is a pending issue.

Although the structure in Rev. Proc. 2001-23, for the most part, mirrors Rev. Proc. 97-36, the nonautomatic-change provisions within these revenue procedures are different. Section 5.03(2) of Rev. Proc. 2001-23 indicates that a taxpayer using the IPIC method of accounting for inventory (for any inventory item) and having goods other than new or used automobiles and light-duty trucks and parts and accessories in inventory may only elect to use the Used Vehicle Alternative LIFO Method under the nonautomatic provisions of Rev. Proc. 97-27. However, under Section 5.02 of Rev. Proc. 97-36, a taxpayer has to use the nonautomatic-change provisions of Rev. Proc. 97-27 to elect the Alternative LIFO Method if it is using the IPIC method for goods other than new or used automobiles and light-duty trucks and parts and accessories. In light of this apparent discrepancy, the authors believe the intent of Rev. Proc. 2001-23 is to follow the language set forth in Rev. Proc. 97-36. Therefore, a taxpayer using the IPIC method of accounting for inventory may elect to use the Used Vehicle Alternative LIFO Method under the automatic-change provisions of Rev. Proc. 99-49, if it is only using the IPIC method for new or used automobiles and light-duty trucks and parts and accessories.

Accordingly, if the taxpayer has any other goods in inventory (other than new or used automobiles and light-duty trucks and parts and accessories) and is using a method other than the IPIC method to account for this inventory (i.e., non-LIFO inventory), the taxpayer may elect the Used Vehicle Alternative LIFO Method under the automatic-change provisions of Rev. Proc. 99-49. However, if the taxpayer is using the IPIC method for inventory other than new or used automobiles and light-duty trucks and parts and accessories (e.g., boats) and wishes to elect the Used Vehicle Alternative LIFO Method, it must use the nonautomatic-change provisions of Rev. Proc. 97-27. As with the automatic provisions, to make an accounting method change under the nonautomatic provisions, the cut-off method must be used.

From Christine Woehrle, CPA, and Irwin Leib, CPA, Washington, DC