Tier III - Field Directive on the Planning and Examination of IRC § 263A Issues in the Auto Dealership Industry

LMSB-4-0909-035
Impacted IRM 4.51.3

September 15, 2009

Introduction
This memorandum is intended to provide direction to the field to effectively utilize resources in the evaluation and examination of auto dealership issues under Internal Revenue Code (IRC) § 263A.   For purposes of this Directive, auto dealerships are defined as businesses that sell and service new and/or used passenger vehicles, light trucks, and medium and heavy duty trucks. 

This Directive is not an official pronouncement of the law or the position of the Service and cannot be used, cited, or relied upon as such. 

Background
IRC § 263A and the accompanying regulations require that certain taxpayers include in inventory costs the direct and indirect costs properly allocable to property that is inventory.  Generally, auto dealerships are subject to the provisions of IRC § 263A.

Although a Technical Advice Memorandum (TAM) is not authoritative guidance, the legal reasoning included in TAM 200736026 may be instructive for auto dealership examinations. The TAM is a comprehensive document addressing multiple issues and sub-issues and must be reviewed in its entirety to properly analyze all issues.  However, in part, the TAM concluded that when the taxpayer or a subcontractor installs parts to new and used vehicles owned by the dealership, the activities may constitute production activities under IRC § 263A(g)(1) and Treas. Reg. § 1.263A-2(a)(1)(i).  Costs attributable to repair/installation activities with respect to customer-owned vehicles may constitute handling costs under section Treas. Reg 1.263A-3(c)(4).  Additionally, vehicles sold at wholesale, vehicles sold to another dealership at cost, leased vehicles, and some parts sales generally are not on-site sales to retail customers.

IRC § 263A issues are methods of accounting, and taxpayers who desire to change their method of accounting must file a Form 3115 Change in Method of Accounting.  In some cases, a change in method of accounting to comply with IRC § 263A requires the advance consent of the Commissioner.  

The IRS classified auto dealership § 263A issues as a Tier III issue because of a high level of taxpayer non-compliance.   Tier III issues include industry risks that represent the highest compliance risk for a particular industry.  A Tier III issue management team was formed and tasked with assessing the level of industry compliance and the development of audit tools to assist examiners in evaluating and examining the issues.  The audit tool kit for IRC § 263A is intended to encourage a consistent approach to the issue and consists of (1) Information Document Requests (IDR), (2) a 12 step Audit Plan, (3) multiple Key Terms and Definitions documents keyed to the audit plan steps, and (4) a computational spreadsheet. (See the links at the end of this document for the tool kit items.)

Planning and Use of Examination Resources
In order to encourage compliance and to allow taxpayers in the auto dealership industry an opportunity to voluntarily change their methods of accounting to comply with the legal reasoning outlined in TAM 200736026, the IRS has determined that it will suspend examination of auto dealership § 263A issues effective September 15, 2009 and continuing through December 31 2010.

During this period, examiners are instructed not to raise IRC § 263A issues on auto dealership examinations.  Other dealership issues, including other inventory issues, should continue to be evaluated and examined if appropriate.   IRC § 263A issues in other industries should also continue to be evaluated and examined if appropriate.

Auto dealership examinations in process as of September 15, 2009 may continue to develop § 263A issues.  However, dealers currently under examination for which § 263A issues are issues under consideration, as defined in Revenue Procedure 2008-52, 2008-2 C.B. 587, section 3.09(1), may elect to change their method of accounting, and Rev. Proc. 2008-52 section 6.03(4) will be deemed to apply.

Effective January 1, 2011, examination of auto dealership § 263A issues will resume and examiners are encouraged to utilize the audit tool kit discussed above.  Additionally, upon the expiration of the suspension period, examiners are instructed to consider and apply all appropriate penalties.

Issue Tracking
The following UIL codes apply:
263A.01-01, 
263A.01-02, 
263A.02-11,
263A.02-12,
263A.04-00,
263A.04-04,
263A.04-05,
263A.04-06

Exhibits

Audit Plan

Terms and Definitions

Methodology Template (Computational Spreadsheet)

If you have any questions, please contact Motor Vehicle Technical Advisor, Terri Harris at 616-365-4601.

cc: Commissioner, LMSB
      Deputy Commissioner, LMSB
      Division Counsel, LMSB
      Commissioner, SBSE
      Chief, Appeals
      Director, Performance, Quality and Audit Assistance