LB&I Tier III Issue: Motor Vehicle Dealerships and IRC 263A (Uniform Capitalization/UNICAP)
Motor Vehicle Dealerships and IRC 263A (Uniform Capitalization/UNICAP)
Industry: Heavy Manufacturing & Transportation
In the late 1980s, the tax code was modified to require retailers (including motor vehicle retailers) to capitalize costs of carrying inventory that were previously expensed. The majority of dealerships began using a variation of the simplified retail method allowed by the Uniform Capitalization (UNICAP) rules for IRC 263A to calculate capitalized costs.
In 2007, the IRS issued a Taxpayer Advice Memorandum (TAM) which limited the use of the simplified retail method. It also called for capitalization of additional expenses in some cases.
The issue is significant because the TAM contains an interpretation and legal positions not raised before. Compliance risk exists due to the uncertainty regarding:
how to apply a non-precedential guidance document (the TAM),
inconsistent treatment by examiners, and
an industry of 20,000+ that is virtually completely non-compliant (with the TAM).
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