LMSB-4-0810-021
Impacted IRM 4.51.3

August 9, 2010

Introduction
Field Directive #1 on the Planning and Examination of IRC §263A Issues in the Auto Dealership Industry was issued on September 15, 2009.  Directive #1 applied to automobile dealerships and suspended examinations of auto dealership §263A issues effective from September 15, 2009 through December 31, 2010.  Dealerships were 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.

Pending Guidance
The IRS Office of Chief Counsel is currently considering additional published guidance related to dealership IRC §263A issues.  It is expected that the guidance will address many of the issues outlined in TAM 200736026 and will apply to various retail motor vehicle dealerships.   

Planning and Use of Examination Resources
In anticipation of the pending guidance, the IRS has determined that it will extend the existing audit suspension period until the date the pending guidance is published in the Internal Revenue Bulletin.     

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

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