SECTION 4. ALTERNATIVE LIFO

METHOD

.01 In general.

(1) The Alternative LIFO Method is a comprehensive dollar-value, link-chain LIFO method of accounting that encompasses several LIFO sub-methods and may only be used by an automobile dealer engaged in the trade or business of retail sales of new automobiles or new lightduty trucks to value its inventory of new automobiles and new light-duty trucks.

(2) The Alternative LIFO Method is designed to simplify the dollar-value computations of automobile dealers. Under the authority of § 1.446–1(c)(2)(ii), the Commissioner will waive strict adherence of the § 1.472–8 comparability requirement in applying the Alternative LIFO Method, provided a taxpayer uses the compensating sub-methods described in section 4.02 of this revenue procedure, which, in the opinion of the Commissioner, are necessary to ensure that the Alternative LIFO Method clearly reflects income. These sub-methods include requirements that (1) the current-year cost of a new item be used as the prior year cost for the new item, and (2) the automobile dealer use the manufacturer’s base model codes to define items for purposes of § 1.472–8. Generally, the manufacturer’s base model codes used in defining items and identifying new items under the Alternative LIFO Method have an average life of approximately five to seven years.

(3) The Alternative LIFO Method includes, by definition, all its sub-methods. Individual sub-methods used alone, or in combination with some but not all of the sub-methods of the Alternative LIFO Method, may not clearly reflect income. Therefore, use of the Alternative LIFO Method is conditioned upon an automobile dealer computing its LIFO inventory using all the sub-methods, definitions, and special rules provided in section 4.02 of this revenue procedure, and the computational methodology provided in section 4.03 of this revenue procedure. (4) The Alternative LIFO Method will be accepted by the Commissioner as an appropriate method of computing an inventory index, and the use of the Alternative LIFO Method to compute the value of the inventory pool or pools will be accepted as accurate, reliable, and suitable. The automobile dealer’s computations under the Alternative LIFO Method are, however, subject to verification by the district director upon examination of the automobile dealer’s return.

.02 Sub-methods, definitions, and spe- cial rules.

(1) LIFO pools. For each separate trade or business, (a) all new automobiles (regardless of manufacturer), including those used as demonstrators, must be included in one dollar-value LIFO pool, and (b) all new light-duty trucks (regardless of manufacturer), including those used as demonstrators, must be included in another separate dollar-value LIFO pool.

(2) Specific identification increment method. The current-year cost of the items making up a pool must be determined by reference to the actual cost of the specific new automobiles or new light-duty trucks in ending inventory. Therefore, the actual cost of the specific vehicles on hand at year end will be the current-year cost of such vehicles.

hicles in ending inventory is divided by (3) Item of inventory. An item of in come. These sub-methods include

the total prior-year cost of the vehicles in ventory (“item category”) must be deter requirements that (1) the current-year cost

ending inventory to compute the annual mined using the entire manufacturer’s

of a new item be used as the prior year

index for the current year. The vehicles base model code number that represents

cost for the new item, and (2) the automo used to determine the dealer’s own prior- the most detailed description of the base

bile dealer use the manufacturer’s base

year cost of vehicles in the current year’s vehicle’s characteristics, such as model

model codes to define items for purposes

ending inventory must be comparable to line, body style, trim level, etc. The man of § 1.472–8. Generally, the manufac the vehicles used to compute the current- ufacturer’s base model code numbers are

turer’s base model codes used in defining

year cost of vehicles in the current year’s almost always used as part of the vehicle

items and identifying new items under the

ending inventory. For purposes of this identification on each dealer invoice (for

Alternative LIFO Method have an aver revenue procedure, this is referred to as example, a domestic model, trim level, 4 age life of approximately five to seven

the § 1.472-8 “comparability require- door sedan has a specific model code; a

years.

ment.” foreign model, 4-door sedan, trim level,

1997–33 I.R.B. 15 August 18, 1997

5-speed has a specific model code). In the case of conversion vans, an item of inventory must be determined using both (a) the entire manufacturer’s base model code, as described in the preceding sentence, and (b) the most detailed conversion package designation.

(4) Cost of the vehicle used for pur- poses of computing the pool index. The actual base vehicle cost of each of the specific vehicles in ending inventory is used to compute the index under the Alternative LIFO Method. The base vehicle cost of each vehicle is not adjusted for any options, accessories, or other costs. The pool index computed from only the base vehicle cost of vehicles is applied to the total vehicle cost, including options, accessories, and other costs, of all vehicles in the pool at the end of the taxable year.

(5) Definition of a new item. A new item category, which is an item category not considered in existence in the prior taxable year, is one of the following: (a) any new or reassigned manufacturer’s model code, as described in section 4.02(3) of this revenue procedure, that is caused by a change in an existing vehicle, or (b) a manufacturer’s model code, as described in section 4.02(3) of this revenue procedure, created or reassigned because the classified vehicle did not previously exist. Additionally, if there is no change in a manufacturer’s model code, but there has been a change to the platform (i.e., the piece of metal at the bottom of the chassis that determines the length and width of the vehicle and the structural set-up of the vehicle) that results in a change in track width or wheel-base, whether or not the same model name was previously used by the manufacturer, a new item category is created.

(6) Treatment of a new item not in existence in the prior year. The automobile dealer must use the current-year base vehicle cost of the new item category as the prior-year base vehicle cost of that item category.

(7) Item in existence in the prior year, but not stocked. If an item in ending inventory was not stocked by the automobile dealer at the end of the prior year, but was in existence in the prior year, the automobile dealer must determine the prioryear base vehicle cost for that item by reconstructing what the base vehicle cost

for the item category would have been using a manufacturer’s price list that provides dealer purchase prices. For each such item category, the manufacturer’s price list that must be used by the automobile dealer is the list in effect as of the beginning of the last month of the prior taxable year.

.03 Computational methodology. The following rules are applied to compute the LIFO value for each pool of an automobile dealer’s ending inventory under the Alternative LIFO Method:

STEP 1. Obtain the actual invoice for each vehicle in the automobile dealer’s ending inventory.

STEP 2. For each pool, group all the invoices from Step l by item category, as defined in section 4.02(3) of this revenue procedure.

STEP 3. For each item category, add together the dealer’s base vehicle costs of all vehicles within each item category, from Step 2.

STEP 4. Within each pool, compute an average base vehicle cost for each item category by dividing the result from Step 3 for each item category by the number of vehicles in the item category. This average base vehicle cost for each item will be used in Step 6 of the succeeding year’s computations using the Alternative LIFO Method.

STEP 5. For each pool, compute the total current-year base vehicle cost of the pool by adding together the separate item category totals from Step 3.

STEP 6. For each pool, compute the total base vehicle cost of the ending inventory at prior-year’s base vehicle cost. First, multiply the number of vehicles in the current year’s ending inventory for each item category by the average base vehicle cost of the same item category from Step 4 of the preceding year’s inventory calculation. If the same item was not in the prior year’s ending inventory, see sections 4.02(6) and 4.02(7) of this revenue procedure. Then, add together the total prior-year base vehicle cost of all of the item categories.

STEP 7. For each pool, compute the current-year (annual) index by dividing the amount from Step 5 by the amount from Step 6.

STEP 8. For each pool, compute the cumulative index by multiplying the current-year index from Step 7 by the cumu

lative index at the end of the preceding year (from Step 8 of the preceding year’s computation).

STEP 9. For each pool, compute the total current-year total- vehicle cost by adding together the total invoice cost, including installed options, accessories, and other inventoriable cost(s), of all the vehicles in inventory at the end of the current year.

STEP 10. For each pool, compute the total cost of the current-year’s ending inventory at base-year cost by dividing the total current-year total-vehicle cost of all the vehicles in ending inventory, from Step 9, by the cumulative index from Step 8. STEP 11. For each pool, determine if there is an increment for the current year by comparing the total cost of the pool’s current-year ending inventory at baseyear cost, from Step 10, with the total cost of the pool’s preceding year’s ending inventory at base-year cost, using the amount from Step 10 of the preceding year’s calculation. If the amount from Step 10 of the current year’s calculation is greater, there is an increment.

STEP 12. For each pool, value the current year’s increment at current-year cost by multiplying the increment amount from Step 11 by the cumulative index from Step 8.

STEP 13. If there is no increment for a pool, but, rather, a liquidation (also referred to as a decrement), reduce the LIFO layers in reverse chronological order until the liquidation is fully absorbed.

STEP 14. For each pool, add together the current year’s increment, if any, at current-year cost and the prior years’ increments at each prior year’s current-year cost to compute the total LIFO value for the pool.