Tax court capitalizes model home display costs.

• Author: O'Driscoll, David

The issue is whether the costs of placing model manufactured homes on retail sales lots to assist local independent salespersons may be currently deducted or should be included in inventory under Sec. 263A.

Facts

A and its related corporations buy and sell manufactured homes, constructed at a factory location and transported directly to the homesites of retail purchasers. Under agreements with independent salespersons, A purchases model manufactured homes and places them on retail sales lots that it leases to display the homes to the public and potential retail customers. Approximately 10% of A's sales consist of homes purchased by retail customers right off the sales lots, after negotiating with the salespersons.

A sells the manufactured homes to the salespersons for the same wholesale price A pays the manufacturers. The salespersons set the price markup for sales to retail customers. While they are located on leased sales lots, the homes are owned by and titled to A. The salespersons are responsible for local media advertising costs, wages (if any) paid to sales assistants, sales commissions, sales taxes and utility fees and insurance premiums on the sales lots.

A deducted the sales lot lease payments, costs to ship model manufactured homes from closed sales lots to other sales lots, and expenses for repairs and maintenance on the model manufactured homes. However, the IRS determined the costs were not currently deductible as ordinary and necessary business expenses and had to be included in A's inventory costs under Sec. 263A.

Analysis

Generally, under Sec. 263A(a) and (b), indirect costs allocable to inventory acquired for resale should be included in inventory. Regulations expressly include transportation, rent, taxes and repair and maintenance costs for property held for resale as examples of indirect costs to be included in inventory; see Regs. Sec. 1.263A-1(e)(3)(ii)(G), (K), (L) and (O).

On-Site Storage Exception

Storage costs associated with property held for resale generally must be included in inventory under Regs. Sec. 1.263A-1(e)(3)(ii)(H). However, under Regs. Sec. 1.263A-1 (e) (3) (iii) (I), storage costs at an "on-site storage...