Fox Chevrolet, Inc. v. Comm'r of Internal Revenue
| Decision Date | 11 May 1981 |
| Docket Number | Docket No. 11483-77. |
| Citation | 76 T.C. 708 |
| Parties | FOX CHEVROLET, INC. (MARYLAND), PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, a retail automobile dealership, elected the dollar-value LIFO method of computing its inventory. One pool was kept for all its new vehicles. Respondent contends that multiple pools are required corresponding to model lines of vehicles sold. Held, two separate pools are required to be maintained, one for new automobiles and another for new trucks. Sec. 1.472-8(c), Income Tax Regs. Held, further: Respondent did not challenge petitioner's method of calculating a price index under the double-extension method until trial. Due to this untimeliness as well as the substantial prejudice which would result, we will not consider the issue. Leslie J. Schneider, Michael Farbman Soloman, and Jay W. Glasmann, for the petitioner.
R. Dale Eggleston and Irwin Leib (recognized for this case only), for the respondent.
Respondent has determined the following deficiencies in petitioner's Federal income tax:
+------------------------------+
¦Taxable period ¦Deficiency ¦
+-----------------+------------¦
¦ ¦ ¦
+-----------------+------------¦
¦1972 ¦$48,725 ¦
+-----------------+------------¦
¦1973 ¦79,284 ¦
+-----------------+------------¦
¦1974 ¦90,512 ¦
+------------------------------+
This case presents the following issues for our decision: (1) Whether petitioner, an automobile dealership engaged primarily in the purchase and retail sale of automobiles and trucks and which uses the dollar-value LIFO method of inventory valuation, may include all new vehicles in a single pool (or should include each model line of vehicle in a separate pool), and (2) whether respondent timely raised the issue of whether, assuming petitioner's use of one pool for all new vehicles is proper, petitioner may treat all of its vehicles as a single item for purposes of computing a price index (or should treat each model of new vehicles as a separate item for such purposes).
Some of the facts have been stipulated. The stipulation of facts and the attached exhibits are incorporated herein by this reference.
Fox Chevrolet, Inc. (Maryland) (hereinafter referred to as petitioner or Fox) is a Maryland corporation having its principal office located in Baltimore, Md., at the time of the commencement of this suit. During the taxable years here in issue, petitioner timely filed its Federal income tax returns with the Internal Revenue Service Center at Philadelphia, Pa.
Petitioner is currently, and was during the taxable years 1972, 1973, and 1974, engaged in the purchase and retail sale of new and used automobiles and trucks under a franchise agreement with the General Motors Corp. (hereinafter referred to as G.M.). Under this agreement, Fox must stock and sell Chevrolet (a division of G.M.) automobiles and light trucks, service them, and carry their spare parts. Fox markets Chevrolets exclusively, carrying no other G.M.-made vehicles nor those of other manufacturers. Fox does not have a heavy-duty truck franchise.
The operation of petitioner's business involved four departments during the taxable years here in question: a new vehicle department, a used vehicle department, a service department /body shop, and a parts department. A separate manager was employed to direct the operations of each department. These managers worked independently of each other, and their compensation was determined in part by reference to the relative performance of their respective departments.
The new vehicle department was responsible for the retail sale of all new automobiles and light-duty trucks. The department employed approximately 50 salespersons. Each salesperson had the right to sell any new vehicle carried by Fox. Selling commissions were based on a percentage of the profit on the unit sold. Since the gross profit was fairly constant regardless of the selling price of the vehicle (as will be explained shortly), the commissions were to a degree independent of the model being sold.
Pricing of the new vehicles for sale is initially done by the manufacturer at the factory. This is the “sticker price,” or manufacturer's suggested retail price, which is required to be posted on every new vehicle. These sticker prices are the same for every dealer of the particular vehicle. This price, however, is not necessarily the price for which the vehicle is intended to be sold.
Fox is not bound by the “sticker price” and often sells its inventory for a considerably less amount. Ignoring the suggested retail price, Fox determines what it hopes to eventually realize upon resale by adding a mark-up to its cost for the unit. This mark-up is not a percentage of the cost, but rather is a fixed dollar amount. An effort is made to maintain a constant mark-up which does not vary from unit to unit nor model to model. Thus this mark-up, or gross profit, ideally would be the same whether the vehicle being sold had a dealer cost of $4,000 or $10,000. In practice, however, deviations often occur as an additional profit can be realized when the model is in great demand or short supply. Conversely, a lesser profit must be accepted when the model is out of favor with the consumer. The following chart indicates Fox's actual profit per unit by model line for each of the years here under consideration:
+------------------------------------------------------------------------------------+
¦ ¦1972 ¦1973 ¦1974 ¦
+------------+-----------------------+-----------------------+-----------------------¦
¦ ¦Units ¦Gross profit ¦Units ¦Gross profit ¦Units ¦Gross profit ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Model line ¦sold ¦per unit sold ¦sold ¦per unit sold ¦sold ¦per unit sold ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Regular ¦907 ¦$355 ¦885 ¦$383 ¦561 ¦$404 ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Monte Carlo ¦167 ¦450 ¦227 ¦713 ¦243 ¦469 ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Chevelle ¦425 ¦353 ¦479 ¦361 ¦440 ¦378 ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Camaro ¦35 ¦387 ¦75 ¦427 ¦169 ¦482 ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Nova ¦425 ¦346 ¦376 ¦378 ¦383 ¦365 ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Vega ¦358 ¦400 ¦608 ¦372 ¦447 ¦426 ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Monza ¦--- ¦--- ¦--- ¦--- ¦1 ¦627 ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Economy ¦45 ¦426 ¦33 ¦439 ¦29 ¦444 ¦
¦trucks ¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Light-duty ¦176 ¦344 ¦213 ¦417 ¦291 ¦457 ¦
¦trucks ¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Medium-duty ¦18 ¦370 ¦18 ¦463 ¦84 ¦461 ¦
¦trucks ¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Heavy-duty ¦1 ¦648 ¦4 ¦763 ¦29 ¦643 ¦
¦trucks ¦ ¦ ¦ ¦ ¦ ¦ ¦
+------------+-------+---------------+-------+---------------+-------+---------------¦
¦Total ¦2,557 ¦367 ¦2,918 ¦407 ¦2,677 ¦419 ¦
+------------------------------------------------------------------------------------+
What concerns Fox is how many units are sold—it is basically a volume business. The sales managers and the sales staff are ordinarily unconcerned about which models they sell and at what price, for both receive commissions based on a fixed percentage of a fairly constant amount—the gross profit on the unit sold.
Naturally, Fox would like to maintain an inventory consisting primarily of the models in the greatest demand. In practice, however, Fox has relatively little control over what it is required to stock. G.M. allocates its Chevrolets to its dealers based on each dealership's past percentage of sales of the particular model being distributed. The number of orders placed with the factory is irrelevant to this procedure.
Naturally, this entails a situation whereby the dealer must accept the good with the bad. Of course G.M. is concerned with satisfying the consumer public, and to this end conducts extensive market studies. But demand for a certain model can shift abruptly, and it often takes a great deal of time for the factory to switch over production to a new model line. G.M. will not allow returns of models which are not selling, and Fox's inventory therefore includes many units which are slow sellers. Consequently, each dealership has a...
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