IRS provides safe harbor methods for auto dealers using UNICAP
The IRS on Nov. 8, 2010, released a revenue procedure (Rev. Proc. 2010-44) that provides guidance on some of the automobile dealership uniform capitalization (UNICAP) issues raised by a 2007 technical advice memorandum (TAM 200736026).
The taxpayer addressed in the TAM was a franchised automobile dealership that sold new and used vehicles as well as vehicle parts and accessories. The taxpayer repaired customer-owned vehicles and installed parts onto customer- and taxpayer-owned vehicles. The TAM addressed numerous issues. Specifically, the TAM addressed whether the installation of parts on customer- and taxpayer-owned vehicles would constitute "production" for purposes of the UNICAP regulations. The TAM concluded that the installation of parts on the taxpayer-owned vehicles constitutes production while the installation of parts on customer-owned vehicles does not constitute production. Additionally, the TAM addressed whether the taxpayer's facility would be a "retail sales facility."
New safe harbors
The revenue procedure provides two safe harbor methods of accounting for "motor vehicle dealerships" that relate to UNICAP. It defines a "motor vehicle dealership" as a dealership that primarily purchases and resells to retail customers one or more of the following: (1) automobiles, (2) light-duty trucks, (3) medium-duty trucks, (4) heavy-duty trucks, (5) recreational vehicles, (6) motorcycles, (7) boats, (8) farm machinery and equipment, and (9) construction machinery and equipment.
The new safe harbor methods are: (1) the retail sales facility safe harbor method and (2) the reseller without production activities safe harbor method. It is important to note that the revenue procedure specifically provides that a motor vehicle dealership that removes Section 471 costs from ending inventory by treating those costs as negative amounts ("negative additional Section 263A costs") in the numerator of either its simplified resale method or simplified production method may not use either of the safe harbors.
The "retail sales facility safe harbor" provides that a motor vehicle dealership may treat its entire sales facility from which it normally and routinely conducts on-site sales to retail customers, including any lot that is an integral part of its sales facility and that is routinely
Under the "reseller without production activities safe harbor," a motor vehicle dealership may treat itself as a reseller without production activities for purposes of Treas. Reg. Sec. 1.263A-3. Specifically, the revenue procedure provides that activities that a motor vehicle dealership or a contractor perform on dealership- and customer-owned vehicles are handling activities under Treas. Reg. Sec. 1.263A-3(c)(4) that would be deductible to the extent they are incurred at a taxpayer's retail sales facility. The cost of parts to make repairs to dealership-owned vehicles must still be capitalized as an acquisition cost of the vehicle. A motor vehicle dealership using the "reseller without production activities" safe harbor method may use the simplified resale method under Treas. Reg. Sec. 1.263A-3(d) for its vehicles and other eligible property.
The revenue procedure is effective as of November 9, 2010, and provides rules for obtaining automatic consent to use either or both safe harbor methods. Specifically, Rev. Proc. 2010-44 modifies Rev. Proc. 2008-52 to add new section 11.07 to the Appendix. The automatic procedures would allow a taxpayer to make a concurrent change to no longer include negative additional Section 263A costs in its simplified production method or simplified resale method calculation. The scope limitations contained in Rev. Proc. 2008-52 do not apply to this accounting method change for a taxpayer's first or second taxable year ending after Nov. 9, 2010. Multiple automatic UNICAP changes may be made on one Form 3115 as long as the taxpayer enters all applicable automatic change numbers and complies with all applicable terms and conditions.
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