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The dealership accounted for the new, used, and classic cars
consistently. Every car was treated as inventory and assigned an
individual stock number. Costs associated with the purchase and
restoration of the classic cars were posted to the car’s stock
number, which allowed a running total of the dealership’s cost
basis in each car. The dealership did not deduct any costs as
they were incurred, nor did the dealership depreciate any of the
cars. No part of the dealership’s cost basis in any classic car
was recognized except when the car was sold or disposed of. The
dealership included the sales price of the car, whether new,
used, or classic, in the dealership’s gross receipts and included
all accumulated costs of each specific car in the costs of goods
sold.
Whenever a car was sold, whether new, used, or classic, the
dealership reported the gain or loss on the sale at ordinary
income rates. For all years prior to the years at issue, the
dealership reported sales on 11 classic cars at ordinary income
rates. During the years at issue, the dealership reported sales
on 69 cars, also at ordinary income rates.9
9For example, the dealership acquired the 1939 Packard in
1989, sold it for $330,000 in 1990, and had total accumulated
costs of $160,260. After paying a commission on the sale of
$26,400, the dealership reported an ordinary gain of $143,340 on
its tax return for the tax year ended June 30, 1991.
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Last modified: May 25, 2011