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Retail Industry ATG - Chapter 5: Code, Regulations and Revenue Rulings, Procedures, Court Cases, and IRMs

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.


Chapter 4 / Table of Contents
Tax Code, Regulations and Official Guidance Search


Chapter 5: Code, Regulations and Revenue Rulings, Procedures, Court Cases, and IRMs


Cited Code Sections

Code Section Description Page
IRC § 38 Investment tax credit 2-27
IRC § 41 Systematic scheme to obtain losses and credits that are not allowable 3-9
IRC § 51 and 51A Work Opportunity Credits or the Welfare to Work Credit 2-26
IRC §61 Gross income consists of all income, from all sources, such as compensation for services, business income, interest, rents, dividends and gains from the sale of property.  Only items specifically exempt may be excluded.  Gross income is the starting point in determining tax liability and is broadly defined. 3-97

IRC § 74(a)

 

Except as otherwise provided in this section or in section 117 (relating to scholarships), gross income includes amounts received as prizes and awards. 3-97

IRC § 102(c)

 

In regards to employee gifts, subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee. 3-97
IRC §162 Specifically focuses on the issue of trade or business expenses 2-25, 3-44
IRC § 168

Specifically includes as 15-year property “any IRC section 1250 property which is a retail motor fuels outlet (whether or not food or other convenience items are sold at the outlet).”

 

3-23, 3-41
IRC § 168 (k) Bonus Depreciation 2-26, 3-41
IRC § 170 Charitable contribution 2-25
IRC § 170(b) Charitable contribution basis 2-24
IRC § 170(e) (3) Charitable contribution-Special Rules 2-25
IRC § 179 MACRS personal property election 2-26, 3-20
IRC § 183 In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section. 3-9, 3-97
IRC § 183(d) If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit. In the case of an activity which consists in major part of the breeding, training, showing, or racing of horses, the preceding sentence shall be applied by substituting “2” for “3” and “7” for “5”. 3-97

IRC § 183(e)(4)

 

 

Time for assessing deficiency attributable to activity.--If a taxpayer makes an election under paragraph (1) with respect to an activity, the statutory period for the assessment of any deficiency attributable to such activity shall not expire before the expiration of 2 years after the date prescribed by law (determined without extensions) for filing the return of tax under chapter 1 for the last taxable year in the period of 5 taxable years (or 7 taxable years) to which the election relates. Such deficiency may be assessed notwithstanding the provisions of any law or rule of law which would otherwise prevent such an assessment.

 

3-97

IRC § 195(b), 

 

Start-up expenditures may, at the election of the taxpayer, is treated as deferred expenses.  
IRC § 197 Depreciation of intangibles such as Goodwill, etc. 3-30, 3-87
IRC § 262 Addresses the disallowance of personal, living and family expenses  
IRC § 263 & 263A Uniform Capitalization Rules 2-22
IRC § 274(d) Expense Issues-Entertainment, Travel, and meals 3-97
IRC § 267 Losses by a related company disallowed 3-74
IRC § 301 (c)

 

Sale of Accounts Receivable

2-17
IRC § 311(b)

 

Sale of Accounts Receivable

2-17
IRC § 280A(c)(1)(A) Expense Issues-Automobile  
IRC §441 Period for computation of taxable income 2-25
IRC §441 (f) Fiscal year – period election 2-25
IRC §446 Accounting Methods-Examiner authority to change 3-34, 3-38
IRC §448 Accounting Methods: limit on use of cash method 3-55
IRC §451-5 Deferral of Income rules 2-15
IRC §453A Deferral gross profit 2-16
IRC §453(b)(2)(A) and (B) Disallow the use of installment method on any dealer disposition and disposition of personal property that would have to be included in inventory if the property were on hand at the close of the taxable year.

3-55

IRC §461 Rule(s) for Year of Deduction  
IRC §471 Inventories must conform as nearly as may be to the best accounting practice in the trade or business and must clearly reflect income 2-17, 3-38, 3-72
IRC §475 Auto dealers to elect section 475 to mark receivables to market value 3-90
IRC §481(a) Adjustment to amounts paid or incurred 3-34, 3-90, 4-21
IRC §482   3-77
IRC §483(f)   3-80, 3-83
IRC §530 Employment Tax 2-28
IRC §1001(b) The amount realized from the sale is the cash plus the fair market value of any other property received. 3-83
IRC §1245 Depreciation  - shorter cost recovery period 2-26, 3-41
IRC §1250 Depreciation – recovery periods 2-26

IRC § 1253

 

Amounts paid or incurred on account of a transfer, sale, or other disposition of a franchise must be capitalized and amortized over the useful life of the franchise, trademark or trade name 2-24

IRC § 1401

 

Imposes taxes upon the self-employment income of every individual. 3-97

IRC § 1402(a) and (b)

 

Define “self-employment income” as the gross income derived by an individual from any trade or business carried on by the individual with certain exceptions and exclusions. 3-97

IRC § 3121 (q)

 

Requires the Employer to match the FICA Taxes of the employee for tips reported.

2-28

IRC § 4161(a)

 

Imposes a tax on the sale of articles of sport fishing equipment 2-27

IRC § 4161 (b)

 

Imposes a tax on bows, certain bow parts and accessories, certain quivers, and certain arrow components. 2-27

IRC § 4162

 

Enumerates the  tax on the sale of articles of sport fishing equipment 2-27

IRC § 6110(k)(3)

 

All events test 2-13
IRC § 7602(c) Requires that we give taxpayers reasonable notice in advance of all contacts with third parties made regarding the determination or collection of their tax liabilities.  3-29
IRC § 7609(a) Give notice of this third-party summons to the taxpayer and all other persons identified in the summons.  3-29
IRC §   7491(b) Use of Surveys and Statistics

3-30

 

Cited Regulations

Code Section Description Page

Treas. Reg. 1.61-2(a)

 

Wages, salaries, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commission on insurance premiums, tips, bonuses (including Christmas bonuses), termination or severance pay, rewards, jury fees, marriage fees and other contributions received by a clergyman for services, pay of persons in the military or naval forces of the United States, retired pay of employees, pensions, and retirement allowances are income to the recipients unless excluded by law. 3-97
Treas. Reg.1.132-5(o) Defines who is a full-time salesperson, and what qualified automobile demonstration use is. 3-73
Treas. Reg. 1.162-3 Accounting for Materials & Supplies 3-9
Treas. Reg. §1.170A-4A Charitable Contributions-Special rules 2-25

Treas. Reg. §1.182.9.

   

Election to postpone determination with respect to the presumption described in section 183(d) Election to postpone determination with respect to the presumption described in section 183(d) 3-97

Treas. Reg. §1.183-2.

 

Activity not engaged in for profit defined 3-97
Treas. Reg. §1.263A-1. and Treas. Reg. §1.263A-3 Uniform Capitalization Rules 2-22
Treas. Reg. §1.267 (f)-1(f)   3-74
Treas. Reg. 1.446 Accounting Methods 3-52, 3-72
Treas. Reg. § 1.451-5(c ) (3) Any payment received pursuant to a certificate is substantial advance payment 2-15
Treas. Reg. § 1.471-1 Consignments of merchandise to others to sell are not sales since the title of merchandise remains with the consignor 2-15
Treas. Reg. § 1.471-8 Authorizes the use of the retail method of estimating the cost of inventories. 2-20
Treas. Reg. § 1.472-8(e) (3) Authorizes the inventory price index valuation method. 2-22

Treas. Reg. 31.3508-1(a)

 

For Federal income and employment tax purposes, an individual who performs services after December 31, 1982, as a direct seller shall not be treated as an employee with respect to such services, and the service-recipient shall not be treated as an employee with respect to such services. 3-97
Treas. Reg. 31.3508-1(c) The term “direct seller” means any person if such person is engaged in the trade or business of selling (or soliciting the sale of) consumer products to any buyer on a buy-sell or deposit-commission basis for resale by the buyer or any other person in the home or in some other place that does not constitute a permanent retail establishment, or is engaged in the trade or business of selling (or soliciting the sale of) consumer products in the home or in some other place that does not constitute a permanent retail establishment. 3-97

 

Cited Revenue Rulings and Revenue Procedures

Revenue Rulings and Revenue Procedures

Chapter Section

Page

Rev. Rul. 65-188, 1965-2 C.B. 390 and
Rev. Rul. 75-243, 1975-1 C.B. 322
The taxpayers may be treating the demonstrators as independent contractors; however, they are employees.  4-34
Rev. Rul. 67-107 1967-1 C.B. 115 States that used cars taken in trade as part payment on the sales of cars by a car dealer may be valued, for inventory purposes, at valuations comparable to those listed in an official used car guide 3-70
Rev. Rul. 75-18 1975-1 CB 9   3-41
Rev. Rul. 77-12 Comparative Sales Method 2-23
Rev. Rul. 79-229 Prepaid Expenses  
Rev. Rul. 85-63 Self-employment tax deduction  
Rev. Rul. 89-62 Provides the proper methods of deducting the video/DVDs.  It was held that "video/DVDs are subject to section 167 of the Code and may be depreciated in accordance with the straight line method over the useful life of the video/DVDs in the particular taxpayer's business.  Alternatively, the income forecast method may be used."  Section 168(f) (3) of the Code provides that section 168 does not apply to "any motion picture film or video/DVD tape. 3-23
Rev. Proc. 90-63,
                 97-37,
                 98-39 and
  Rev. Rul. 89-23
Package Design Cost  - stating that these costs are capital in nature and depending upon the election a taxpayer makes, are recoverable over four or five years. 4-20
Rev. Proc. 92- 97, 1992-2 C.B. 510 and
Rev. Proc. 92-98, 1992-2 C.B. 512.
If the dealer buys insurance, the income and expenses should be reported accordingly 3-63
Rev. Rul. 94-38 1994-1 C.B. 35 Tank Replacement: Environmental cleanup 3-40, 3-43
Rev. Proc. 97-10, 1997-1 CB 628 Qualifications for a gasoline station as 15 year property. 3-42
Rev. Rul. 97-27 A change to correct the timing of when a taxpayer accounts for purchase rebates 3-34
Rev. Rul 98-25 Underground Storage tank depreciation 3-40
Rev. Rul. 99-7 Expense Issues-Automobile  
Rev. Proc. 2000-7 Underground Storage tank depreciation 3-40
Rev. Proc. 2000-22 Excepts qualifying taxpayers with average annual gross receipts of $1,000,000 or less from the requirements to account for inventories 3-9
Rev. Proc. 2001-10,
             2001-2 I.R.B. (Jan. 8, 2001)
Clarifies and elaborates on Rev Proc 2000-22 3-38

Rev. Proc, 2004-34,
           2004-22 I.R.B.

                                   991

Gift Certificates redeemable for services governing rev. procs. 2-16
Rev. Proc. 2002-09,
            2002-03 I.R.B
Change its method of accounting for the cost of smallwares to the smallwares method provided in this Rev. Proc. must follow the automatic change in method of accounting provisions. 4-23
Rev. Proc. 2004-23 Guidance on accounting method changes for capitalization of intangibles. This revenue procedure only applies for a taxpayer’s first taxable year ending on or after December 31, 2003. 4-21
Rev. Proc. 2005-09 Guidance on accounting method changes for capitalization of intangibles - for the taxpayer’s second year ending on or after December 31, 2003. 4-21

 

 

Cited Court Cases

Court Cases Cite Page
Barragan v. Commissioner, TC Memo 1993-92 aff’d 76 A.F.T.R.2d 95-5629, 95-2 U.S.T.C. 50,624 (9th Cir, 1995).  3-31
Brooks-Massey Dodge, Inc. v. Commissioner 60 T.C. 884 (1973) 3-71
Bros. Holding Inc., et al. v. Commissioner T.C. Memo. 2001-150, aff’d., 320 F.3d 507 5th Cir., Jan. 29, 2003 4-22
Cebollero v. Commissioner T.C. Memo 1990-618, aff’d, 967 F.2d 986 (4th Cir. 1992) 4-14
Columbo v. Commissioner T.C. Memo 1975-162. 3-39
Commissioner v. Hansen 360 U.S. 446 (1959) 3-62
Fox Photo Inc. v. Commissioner, TC Memo 1990-348 3-41
Frierdich v. Commissioner, 1989-103 aff’d. 925 F.2d 180 (7th Cir 1991).  3-39
Green Forest Manufacturing Inc. v. Commissioner T.C. Memo. 2003-75; No. 1596-01 4-22
JFM, Inc. v. Commissioner, T.C. Memo 1994-239 3-43
Kikolos v. Commissioner 2004 TNT 57-10 2-6
Ketler v. Commissioner T.C. Memo 1999-68 2-6
Leb's Enterprises, Inc v. Commissioner 85 AFTR2d Par. 2000-450 3-73
Ng v. Commissioner T. C. Memo, 1997-248 2-7
Michas v. Commissioner T.C. Memo, 1992-161 2-10
Marcor,Inc. v. Commissioner 89 TC 181 (1987), nonacq., 1990-2 C.B. 1 2-16
McQuatters, et al. v. Commissioner T.C. Memo 1973-240 4-15
Nabisco, Inc., et al., v. Commissioner T.C. Memo. 1998-252). 4-20
O’Shaugnessy v. Commissioner (Eighth Circuit) 332 F. 3d 1125 (8th Cir. 2003), rev’g 2001 U.S. Dist. LEXIS 227838 (D. Minn. 2001) 4-22

 

Pearl v. Commissioner

T.C. Memo 1977- 262.) 3-72
Smith v. Commissioner T. C. Memo. 1983-472 3-55

 

Stafford v. Commissioner

T.C. Memo 1992-637 3-30
Surtronics, Inc. v. Commissioner

T.C. Memo 1985-277.

 

3-38
Thor Power Tool Co. v. Commissioner

439 U.S.

522 (1979)

3-72
Webb v. Commissioner 394 F.2d 366 373 (5th Cir. 1968) 2-7
Whiteco v. Commissioner   3-41, 3-43
Wilkinson-Beane v. Commissioner 420 F.2d 352 (1st Cir, 1970) 3-38

 

IRMs

IRMs Section

Page

IRM  4.10.3.8.4 Cash on hand, cash hoard   4-10
IRM  4.10.4.3.2 Minimum Income Probes  2-3
IRM  4.10.4.5.3.6 Specific Items Method 2-6
IRM  4.10.4.3.3.6 Bank Deposit Analysis 2-7
IRM  4.10.4.6.4 Source and Application or Cash T 2-8
IRM  4.10.4.6.5 Markup Method 2-8
IRM  4.10.4.6.6 Percentage Markup Method of Determining Income 2-8
IRM  4.10.4.6.7 Net Worth Method 2-10
IRM  4.43.1.3 Retail Inventory 2-19
IRM  4.43.1.3.1 Retail Inventory Method (RIM) 2-20
IRM  4.43.1.3.1.3 Last In, First Out (LIFO) 2-22
IRM  4.43.1.3.2.5.4 Stock Ledger (Inventory) 2-22

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Page Last Reviewed or Updated: 07-Mar-2014