In Rev. Proc. 2008-23, the IRS provides retail dealers and wholesale distributors of cars and light-duty trucks (collectively, automobile resellers) the option to use an alternative dollar-value last-in, first-out (LIFO) pooling method. Under the vehicle-pool method, automobile resellers may establish one new-vehicle pool for most new vehicles and one used-vehicle pool for most used vehicles. This taxpayer-favorable IRS guidance alters previously upheld IRS positions that required automobile resellers to use separate pools for cars and light-duty trucks.
Under Regs. Sec. 1.472-8(a), a taxpayer may use the dollar-value LIFO method to account for inventories, with items grouped into a pool or pools. Regs. Sec. 1.472-8(c)(1) requires that resellers establish dollar-value pools based on major lines, types, or classes of goods.
Previous case law and IRS guidance required automobile resellers to establish two separate pools—one for cars and one for light-duty trucks. In Fox Chevrolet, Inc., 76 TC 708 (1981), the Tax Court noted that cars and light-duty trucks did not constitute a single class of goods because cars appealed to the general public, while trucks often were bought for business use; also, the registration and other legal requirements for the operation of trucks were more stringent than those for cars. In Richardson In vestments, Inc., 76 TC 736 (1981), the Tax Court rejected a Ford dealer’s argument that cars and light-duty trucks should be assigned to a single pool, noting that Ford’s advertising campaign distinguished the commercial nature of Ford trucks and the personal nature of Ford cars.
Based on this case law, the IRS required automobile resellers to maintain separate pools for cars and light-duty trucks. For example, under the alternative LIFO method provided in Rev. Proc. 97-36, automobile resellers were required to establish one pool for all new cars and a separate pool for all new light-duty trucks. Likewise, under the used-vehicle alternative LIFO method provided in Rev. Proc. 2001-23, automobile resellers were required to establish separate pools for used cars and used light-duty trucks.
As a result of a submission to the IRS Industry Issue Resolution Program on behalf of the automobile industry, the IRS announced that it would publish guidance on dollar-value LIFO pooling for crossover vehicles (IR-2007-39). Crossover vehicles include SUVs, minivans, and pickup trucks used as substitutes for cars. The IRS acknowledged that the line between cars, light-duty trucks, and crossover vehicles had blurred since the 1981 decisions in Fox Chev rolet and Richardson Investments.
Rev. Proc. 2008-23 allows automobile resellers subject to the dollar-value LIFO pooling rules of Regs. Sec. 1.472-8(c)(1), Rev. Proc. 97-36, or Rev. Proc. 2001-23 to use the vehicle-pool method. Under this method, an automobile reseller with new vehicles (i.e., new cars, new light-duty trucks, and new crossover vehicles, including SUVs, vans, minivans, and other similar vehicles) may establish a new-vehicle pool for all new vehicles. Similarly, an automobile reseller may establish a used-vehicle pool for all used vehicles. Rev. Proc. 2008-23 specifically notes that the new- and used-vehicle pools may not include a vehicle with a gross vehicle weight that exceeds 14,000 pounds, thereby excluding many commercial trucks from the pools.
Rev. Proc. 2008-23 provides additional guidance to automobile resellers that use the alternative LIFO method under Rev. Proc. 97-36 or the used-vehicle alternative LIFO method under Rev. Proc. 2001-23 and that decide to continue maintaining separate pools for new cars and new trucks or used cars and used trucks (in lieu of the vehicle-pool method). Section 4.02(1) of Rev. Proc. 2008-23 states that automobile resellers must assign new crossover vehicles to either the new-car pool or the new-truck pool, whichever is more reasonable based on the facts and circumstances. Similar rules apply for used crossover vehicles.
Changing to the Vehicle-Pool Method
Rev. Proc. 2008-23 grants an automobile reseller automatic consent to change to the vehicle-pool method provided that the taxpayer follows the provisions of Rev. Proc. 2002-9. The change is made on a cutoff basis (i.e., without a Sec. 481(a) adjustment) and must comply with Regs. Sec. 1.472-8(g).
Also, instead of using the earliest tax year for which the taxpayer adopted the LIFO method for any items in the pool, the taxpayer must use the year of change as the base year when determining the LIFO value of the pool for the year of change and subsequent tax years. The taxpayer must restate the base-year cost of all layers of increments in a pool at the beginning of the year of change in terms of the new base-year cost. If a taxpayer is changing concurrently to the alternative LIFO method under Rev. Proc. 97-36 or the used-vehicle alternative LIFO method under Rev. Proc. 2001-23, the taxpayer should file only one Form 3115, Application for Change in Method of Accounting.
Impact on Automobile Resellers
The theoretical justification for the LIFO method is that income is reflected more clearly by matching current costs with current revenues. However, when a decrease (decrement) in the pool occurs during the year because sales exceed purchases, older costs flow into cost of goods sold. In many instances, the decrement will result in higher taxable income to the taxpayer. Therefore, it usually is advantageous for a taxpayer to establish the fewest number of pools permitted by the IRS to prevent a decrement from occurring (i.e., a decrease in one pool can be offset by an increase in another pool).
Rev. Proc. 2008-23 permits automobile resellers to use one pool for all new cars, new light-duty trucks, and new crossover vehicles (and one pool for all used cars, used light-duty trucks, and used crossover vehicles). As a result, decrements that otherwise might occur with separate pools can be avoided.
Annette B. Smith is with Washington National Tax Services PricewaterhouseCoopers LLP in Washington, DC
Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.
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