Rev. proc. simplifies LIFO method for used-vehicle dealers.

• Author: Madden, David
• Position: Accounting method

Rev. Proc. 2001-23 provides an elective alternative LIFO inventory computation method for taxpayers that sell used automobiles or used light-duty trucks. The new inventory method, called the Used Vehicle Alternative LIFO Method, is modeled after Rev. Proc. 97-36, which provided an Alternative LIFO Method for taxpayers engaged in the retail sale of new automobiles or new light-duty trucks. According to the IRS, this new inventory method is "a significant milestone in [its] goal to provide clear and specific guidance to taxpayers in the motor vehicle industry"

Background

Sec. 472, and the regulations thereunder, provide rules for use of the LIFO inventory method. To value the cost of its LIFO inventory, a taxpayer may elect to use the dollar-value LIFO method, which measures inventory quantities in terms of fixed-dollar equivalents. Further, in certain circumstances, a taxpayer may use the link-chain method to compute the value of its dollar-value LIFO pool.

Rev. Proc. 2001-23

The Used Vehicle Alternative LIFO Method is a link-chain, dollar-value LIFO inventory method that simplifies LIFO computations. Used-vehicle dealers may apply the method to value the LIFO inventories of previously titled automobiles and light-duty trucks (i.e., gross vehicle weight of 14,000 pounds or less), but not for demonstrator vehicles. A taxpayer using the Used Vehicle Alternative LIFO Method must refer to the average base-vehicle prices found in an official used-vehicle guide to compute the dollar-value LIFO pool index. If the Used Vehicle Alternative LIFO Method is elected, it must be used for all of the taxpayer's used automobile and light-duty truck inventory, and is effective for tax years ending after Dec. 30, 2000.

Special Rules and Submethods

Section 4.02 of Rev. Proc. 2001-23 requires a taxpayer that changes to or adopts the Used Vehicle Alternative LIFO Method to comply with the following special rules and submethods:

1. Average base-vehicle prices must be used to compute the LIFO indexes;

2. Official used vehicle guides must be used to determine the base-vehicle prices. (Note: Changing used-vehicle guides and/or changing the manner in which the used-vehicle guide is used by a taxpayer, for the purposes of computing the Used Vehicle Alternative LIFO Method, represents an accounting-method change.);

3. Separate LIFO pools must be used for all automobiles and light-duty trucks (regardless of manufacturer), for each trade or business that sells used vehicles...