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Focus on Automotive: IRS Announcement Affects Heavy Equipment Dealers

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The IRS recently announced that it will allow heavy equipment dealers to value their parts inventories using replacement cost.
February 1, 2006

IRS Announcement Affects Heavy Equipment Dealers!

The IRS recently announced that it will allow heavy equipment dealers to value their parts inventories using replacement cost. This has been standard industry practice for years not only by most heavy equipment dealers but almost all automobile dealers. In both industries, the computer software used to keep perpetual inventories has been written to allow unit prices to be updated automatically using downloads from the manufacturers.

While replacement cost has historically been close to actual costs this practice has created a unique problem for taxpayers who also used the LIFO method. To be able to use the LIFO method, the Internal Revenue Code requires that taxpayers value their inventories using actual costs.

In the 1999 case Mountain State Ford v. Commissioner, the Tax Court ruled in favor of the IRS against a taxpayer that sold heavy truck parts and used the dollar-value LIFO method to account for its parts inventory. The result was that the taxpayer lost it's LIFO election because of a technicality, which was using replacement costs to value their inventory.

Because of the potential wide spread impact on taxpayers in the industry, the Internal Revenue Service reconsidered the issue and in 2002 announced that, for reasons of administrative convenience, compliance burden and to avoid further controversy, they would accept the use of replacement costs. Unfortunately this announcement only applied to automobile dealers.

This most recent announcement extends these same protections to heavy equipment dealers based on the recognition that the inventory accounting systems they use are practically identical to those used by automobile dealers.

This announcement is especially important to heavy equipment dealers that use the LIFO method and replacement costs to value parts inventories. Taxpayers do not need to do anything to benefit from the protection this announcement provides. If you have any questions about this Revenue Procedure or any other questions regarding inventory accounting issues, please contact us.


Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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