Audit Suspension For Auto Dealer UNICAP Issues Now Open-Ended

Posted on 08.23.10

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In a memorandum posted to its website, IRS has announced that it will suspend examination of auto dealership Code Sec. 263A issues until it publishes additional guidance. Earlier, IRS had suspended examinations on these issues for the Sept. 15, 2009, through Dec. 31, 2010, period.

Background. Auto dealerships generally are subject to the UNICAP rules of Code Sec. 263A, and therefore must include in inventory costs the direct and indirect costs properly allocable to property that is inventory. In a Technical Advice Memo (TAM) issued as PLR 200736026, IRS rejected an auto dealer’s hybrid self-developed method of capitalizing additional Code Sec. 263A costs, and set forth in detail its views on how a typical auto dealer should handle costs, including repair/installation of parts on customer owned cars (treated as handling costs, not as a production activity), installation by the dealer or a subcontractor of parts to new and used vehicles owned by the dealer (these constitute production activities), and storage costs (depends on whether on-site or off-site).

IRS has classified auto dealership Code Sec. 263A issues as a Tier III issue (risks that represent the highest compliance risk for a particular industry) because of a high level of taxpayer noncompliance.

Earlier suspension. To encourage compliance and give auto dealers a chance to voluntarily change their methods of accounting to comply with the legal reasoning outlined in PLR 200736026 , IRS in October of 2009 announced that it was suspending examination of auto dealership Code Sec. 263A issues effective Sept. 15, 2009 and continuing through Dec. 31 2010. During this period, examiners were instructed not to raise these issues on auto dealership examinations (but were told to continue to evaluate and examine other dealership issues, including other inventory issues, if appropriate).

Those auto dealership exams in process as of Sept. 15, 2009 could continue to develop Code Sec. 263A issues, but dealers that were under exam for which these issues are under consideration, as defined in Rev Proc 2008-52, 2008-2 CB 587, Sec. 3.09(1) , could elect to change their method of accounting, and Rev Proc 2008-52, Sec. 6.03(4) (relating to director consent to a change in method of accounting by a taxpayer under examination), was deemed to apply. IRS said that effective Jan. 1, 2011, exams of auto dealership Code Sec. 263A issues would resume.

Now suspension is open-ended. IRS says its Office of Chief Counsel is currently considering additional published guidance related to dealership Code Sec. 263A issues. It is expected that the guidance will address many of the issues outlined in PLR 200736026 and will apply to various retail motor vehicle dealerships. In anticipation of the pending guidance, IRS says it will extend the existing audit suspension period until the date that pending guidance is published in the Internal Revenue Bulletin.