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NADA and IRS Avert LIFO Disasters

25 September 1997

NADA and IRS Avert LIFO Disasters

    WASHINGTON, Sept. 25 -- The National Automobile Dealers
Association today reached a landmark agreement with the Internal Revenue
Service that saves new-car dealers from potential financial disaster.  At
issue was the threat of the IRS terminating a dealer's LIFO reserve, thereby
accelerating the income tax due and forcing immediate payment.  The settlement
outlines procedures for franchised new-car dealers with LIFO conformity
problems, allowing dealers to stay in business and benefit from the continued
use of the LIFO accounting method.
    "NADA has achieved a critical victory for dealers after three years of
hard work," said NADA President Ramsay H. Gillman.  "We are extremely pleased
with the results of our settlement and commend the IRS for working
cooperatively to solve this potentially devastating financial issue."
    "NADA achieved all of its goals in reaching the settlement," said NADA
Chief Counsel William A. Newman.  NADA's objectives were to:
    -- make sure no dealers were forced out of business because of conformity
       violations;
    -- keep the number of dealers audited to a minimum;
    -- secure a clear definition of what constitutes a conformity violation;
       and
    -- allow dealers with a conformity violation to remain on LIFO.

    Under the settlement:
    -- Dealers with conformity violations will pay a settlement fee
       of 4.7 percent of their LIFO reserves as of Dec. 31, 1996.
    -- A LIFO adjustment (actual or estimated) made anywhere on the income
       side of the 12th-month factory statement satisfies the conformity
       requirement.  There is no requirement that the adjustment be made
       in the cost-of-goods-sold account.
    -- A dealer with a conformity violation who fulfills the requirements
      of the settlement procedure can remain on LIFO.

    Prior to the settlement, an audited dealership with a conformity violation
was subject to termination of its LIFO election and the income tax owed was
due immediately.  A dealership with a $1 million LIFO reserve would have owed
39.6 percent of $1 million, or $396,000, in tax.  Under the new settlement
procedure, the dealership would pay a settlement fee of 4.7 percent of
$1 million, or $47,000, which may be paid in three equal installments.  The
dealership would be allowed to remain on LIFO with deferral of the income tax
due on the LIFO reserve.
    The National Automobile Dealers Association represents more than
19,500 franchised new-car and -truck dealers holding nearly 40,000 separate
franchises, domestic and import.

SOURCE  National Automobile Dealers Association