Safe-harbor method to determine market value of motor vehicle cores.

• Author: Smith, Annette B.

Remanufacturers of motor vehicle parts purchase used parts, or "cores" (e.g., wiper motors, engines, transmissions and alternators), discard the cores' worn or defective components, rebuild them with new and used components and sell the rebuilt cores as replacement parts. Remanufacturers and resellers acquire cores from their customers by offering large credits toward the purchase of a remanufactured part if the customer returns its used core. They also acquire cores from third-party "core brokers"

A dispute existed between the IRS and the remanufacturers and resellers over how to determine the market value of cores; see Consolidated Mfg., Inc., 249 F3d 1231 (10th Cir. 2001), rev'g in part 111 TC 1 (1998). At the request of the Automotive Parts Rebuilders Association, the Service selected this disagreement for its Industry Issue Resolution Program. To resolve the dispute, it issued Rev. Proc. 2003-20, which provides the core alternative valuation (CAV) method--a safe-harbor method that remanufacturers and resellers can use to determine the market value of cores. Under the CAV method, remanufacturers and resellers value cores at the lower of cost or market (LCM).

Determining "Cost" and "Market"

For cores acquired from customers, cost is the amount of the credit offered to the customer.

Market is the "allowable supplier price," which is the price that a remanufacturer or reseller would pay to a core broker at year-end, plus freight-in. For example, if a remanufacturer has purchased a particular type of core from a core broker during the year, the allowable supplier price would be that broker's year-end price, plus freight-in. If the remanufacturer has purchased from several core brokers, the allowable supplier price would be the weighted-average year-end price, plus freight-in, from those brokers. If the remanufacturer has not purchased a particular type of core during the year, it must obtain a quote from the core broker from which it purchases (in dollar terms) the most cores. If none of the remanufacturer's core brokers sells that type of core, the remanufacturer must obtain a quote from a core broker in the geographical area or market in which it regularly participates.

Remanufacturers and resellers are not permitted to write down defective cores until they are offered for sale or scrapped.

Method Change

Remanufacturers and resellers may change to the CAV method...