FOR IMMEDIATE RELEASE

Mountain State Ford Truck Sales Verdict Is In

Stunning Setback in Tax Court For Dealer Parts Inventories

March 5, 1999 --

DENVER—The Tax Court recently issued its verdict on dealers' use of replacement cost for parts inventories on LIFO. The news isn't good. And, it has troubling implications for all dealers, not just for those using LIFO.

Here's what the Court said:

• The use of replacement cost in determining the current-year cost of the dealer's LIFO parts pool is contrary to the LIFO regulations.

• The use of replacement cost does not clearly reflect income.

• The dealer was entitled to no relief because it failed to maintain "detailed inventory records." As a result, the IRS couldn't verify the dealer's inventory computations and their compliance with the regulations.

When the IRS added the entire parts LIFO reserve back into the dealer's income, the Tax Court said this was not the equivalent of terminating the dealer's LIFO election. Perhaps technically so, but as a practical matter...

The Court noted that before electing LIFO, the dealer had made no attempt to determine whether it could have modified its perpetual inventory recordkeeping system so that it could have used invoice prices in valuing its parts inventory at cost. It is doubtful that any dealer has ever done this before electing LIFO for a parts inventory.

Mountain State Ford Truck Sales v. Comm. was filed March 2, 1999 (Docket No. 16350-95, 112 T.C. No. 7). Until clarified, interpretations of this case will vary, and no one knows how far the IRS will push it as precedent.

This case was decided based on the record before the Court. However, it implicates all dealers - whether or not they are on LIFO for parts - because the use of replacement cost to value parts inventories has always been accepted industry practice ... until now.

* Any dealer trade association or publication is free to reprint (with citation) the above information for distribution to its members or readers. Any other reproduction or photocopying without permission is expressly prohibited, and is a violation of copyright law.

Look for full MSFTS coverage in the 1999 issues of the LIFO LOOKOUT. For more on the LIFO LOOKOUT, click here.

We have scheduled special coverage at our 2000 CPA-Auto Dealership Niche Conference to fully address this case, its appeal and its implications.