Part III. Administrative, Procedural, and Miscellaneous

taxpayer’s replacement cost method was not in accordance with the method elected on its Form 970, Application to Use LIFO Inventory Method . The taxpayer’s Form 970 indicated that it would determine the current-year cost of the items in its ending inventory by reference to the actual cost of the goods most recently purchased or produced in accordance with § 1.472– 8(e)(2)(ii)(a). The court further concluded that even if the taxpayer had elected to use another proper method under § 1.472–8(e)(2)(ii)(d), it could not use the replacement cost of the parts to determine current-year cost because replacement cost does not determine current-year cost on the basis of, or by reference to, actual cost (or in some instances a reasonable approximation of actual cost) in accordance with § 472(b).

.08 Subsequent to the Mountain State Ford decision, the Service has given careful consideration to the following unique circumstances surrounding the use of replacement cost by automobile dealers:

(1) Industry practice . It has been the long-standing and widespread practice of automobile dealers to use replacement cost to determine the cost of their vehicle parts inventory both for financial accounting and federal income tax purposes.

(2) Use of replacement cost required by third party . Automobile dealers are commonly required by their franchisors ( i.e., the vehicle’s manufacturer) to value their vehicle parts inventory using replacement cost, rather than actual cost.

(3) Substantial burden associated with switching to actual cost . The automobile dealer industry has represented that automobile dealers that are presently using replacement cost to value their vehicle parts inventory likely would incur substantial expense if they were required to modify their existing recordkeeping systems to determine the cost of such inventory using actual cost.

(4) Replacement cost approximates actual cost in this industry . The automobile dealer industry has provided data to demonstrate that, on average, in their industry, due to relatively low inflation and high inventory turnover, the replacement cost of vehicle parts approximates the actual cost of such parts.

26 CFR 601.204: Changes in accounting periods and in methods of accounting. (Also Part I, §§ 446, 471, 472, 481; 1.446–1, 1.471– 3(d), 1.472–8, 1.481–1.)

Rev. Proc. 2002–17