IRS provides safe-harbor methods for auto dealers using UNICAP.

• Author: Shevak, Richard
• Position: Uniform capitalization

On November 8, 2010, the IRS released Rev. Proc. 2010-44, which resolves some of the issues raised by Technical Advice Memorandum (TAM) 200736026. The TAM (described in more detail below) addressed numerous uniform capitalization (UNICAP) issues affecting automobile dealerships under Sec. 263A. The taxpayer 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-owned and taxpayer-owned vehicles. The TAM specifically addressed whether the installation of parts on customer-owned vehicles, and on 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.

The TAM also addressed whether an automobile dealership could continue to be treated as a retail sales facility in light of certain "off-site" sales that occurred at the dealership. The TAM caused a significant amount of concern because treating the automobile dealer's installation activities as production activities and not treating the automobile dealership as a retail sales facility would both have a profound effect on an automobile dealership's UNICAP calculation. Fortunately, Rev. Proc. 2010-44 provides two safe-harbor methods of accounting to deal with issues raised by the TAM and provides automatic procedures for taxpayers seeking to use those safe-harbor methods of accounting.

This item first summarizes the relevant rules of law--including the TAM and relevant IRS directives--and then describes Rev. Proc. 2010-44 in detail.

Rules of Law

Sec. 263A provides that the direct costs and indirect costs properly allocable to property that is inventory in the hands of the taxpayer must be included in inventory costs. Regs. Sec. 1.263A-l(e)(1) provides that taxpayers subject to Sec. 263A must capitalize all direct costs and certain indirect costs properly allocable to property produced or property acquired for resale.

Regs. Sec. 1.263A-3(c) provides certain favorable rules in connection with storage and handling costs incurred at a retail sales facility and at an on-site storage facility. Regs. Sec. 1.263A-3(c)(4)(i) provides that handling costs and storage costs incurred at retail sales facilities need not be capitalized. This rule (i.e., deduction of storage and handling at a retail sales facility) applies to producers that incur storage and handling costs as well as resellers. Regs. Secs. 1.263A-3(c)(5)(i) and (ii) also contain rules allowing the deduction of storage...