Attorney-at-Law

AUTOMATIC SHIFT

In Uncategorized on 05/27/2015 at 22:05

James H. Hawse and Cynthia L. Hawse, 2015 T. C. Memo. 99, filed 5/27/15, involves a failed automatic shift, but it’s not in the cars, new and used, that Jim was flogging.

No, Jim switched his inventory from LIFO to specific identification, except he didn’t, or maybe he did. Jim and IRS get tripped up on the various Rev. Procs that switched back and forth in the late Nineties, but Judge Wherry puts them right, and Jim is told he switched twice, neither time with IRS consent, automatic or otherwise.

So IRS wins.

Jim thought that his LIFO inventorying, though it cut his current taxes, built up a huge LIFO reserve on his balance sheet that a purchaser of his dealership would have to pay as deferred tax.

So Jim filed Form 3115, imperfectly, and claims automatic IRS agreement to the shift. Except Jim didn’t follow the Rev. Proc. All his inventory, new and used, cars and parts, have to go to specific identification, and it didn’t.

Jim claimed he’d pay down the LIFO reserve in four installments, and he did.

Jim’s tax gurus caught the error of Jim’s ways, and advised him to file amended returns, going back to LIFO. And clawing back the reserve formerly paid to IRS.

This doesn’t work.

Jim needs consent, whether automatic or upon granted application. It’s not up to the taxpayer to apply for automatic and then not follow the relevant Rev. Procs, thereby telling IRS he changed, and then go off, do what he pleases and claim he didn’t change.

Jim changed when he went to specific identification, even if he messed up the implementation.

So Jim’s amended returns are properly rejected, says Judge Wherry, because he didn’t get IRS consent to drop specific identification and go back to LIFO.

If reading about accounting methods stirs your soul, read Judge Wherry’s accounting textbook at 2015 T. C. Memo. 99, at pp. 5-6.

As for me, after a hard day in State court, I want a drink.

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