IRS Looks at Changing from LIFO Method for Lost Auto Franchise

In Chief Counsel Advice 200935024 the IRS took on a question that ties in to the recent shrinkage of dealerships by General Motors and Chrysler. The question that was posed to the Chief Counsel’s Office was whether a car dealer that either lost one of its franchises or even its only new car franchise could continue to use the four year adjustment period under §481(a) if it elected in that final year the automatic to terminate its election to use LIFO for the dollar value pool that included the vehicles of the lost franchise.

The issue is that with the lost franchise, the old low basis vehicles would end up coming out of inventory under the cost flow assumption, raising income in the final year due to the elimination of all LIFO pools. If the four year adjustment period could be used, the inventory could be restated to another cost flow method and the increase in inventory would be evenly spread over four years. But if the business is treated as terminated, the §481(a) period would be treated as terminated and all of the difference would again flood into the current year’s income.

The CCA author concluded that so long as the taxpayer continued operating its trade or business, the four year period was not terminated with immediate recognition of the adjustment.

However, if the dealer maintained one pool for all of its new vehicles, it could not “carve out” only the portion of the pool related to the last franchise for the automatic change. Rather, the taxpayer had two alternatives. It could make the automatic change of method for the pool that included all new vehicles under Revenue Procedure 2008-52 or it could make two method changes—the nonautomatic change under Revenue Procedure 97-27 to a method of pooling based on vehicles sold under each franchise (where the 3115 must be filed before the year end) and then make the automatic change noted above under 3115 for the pool that included the new vehicles of the lost franchise.

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