LIFO conformity violation relief for auto dealers.

• Author: Koroghlanian, Michelle R.
• Position: Last-in-first-out inventory method

If the LIFO inventory method is used for tax purposes, it must be used in a company's primary income statements issued to owners (e.g., shareholders) and creditors. Supplemental non-LIFO information may accompany a primary LIFO income statement, provided the information is clearly labeled as supplemental. The LIFO conformity requirement applies to both annual and interim financial statements that can be combined to equal a full year's income (whether audited or unaudited). If the LIFO conformity requirement is violated, the IRS may terminate a company's LIFO election and include the entire LIFO reserve in taxable income.

Franchised automobile dealers, including dealers that sell light-duty trucks (auto dealers), are normally required to issue monthly income statements to their franchisor, who is also typically a creditor of the auto dealer. These monthly statements are often prepared in a format required by the franchisor or on a preprinted form supplied by the franchisor. The twelfth-month statement is normally issued within a few days after the end of the year, and presents the auto dealer's operating results for both the month and the calendar year. It is subsequently amended by another income statement commonly known as the thirteenth-month statement.

For several years, there was uncertainty as to whether certain monthly income statements issued to the franchisor/ creditor violated the LIFO conformity requirement of Sec. 472(c) or (e)(2). In 1997, the Service issued guidance to assist auto dealers in determining whether they had violated the LIFO conformity requirement (Rev, Rul. 97-42). In addition, the IRS also issued guidance to forgive certain LIFO conformity violations by auto dealers that occurred on or before Oct. 14,1997 (Rev. Proc. 97-44).

Conformity Violation

Rev. Rul. 97-42 provides that an auto dealer has violated the LIFO conformity requirement by providing the credit subsidiary of its franchisor with a twelfth-month income statement (in the format required by the franchisor or on preprinted forms supplied by the franchisor) for the tax year if that statement fails to reflect the LIFO inventory method in the computation of net income.

An auto dealer has not violated the LIFO conformity requirement if the twelfth-month income statement issued to the credit subsidiary of its franchisor uses the LIFO inventory method to determine net income for both the twelfth month and the entire year (even if the LIFO adjustment is only a...