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Source: North Central District Office of the Internal Revenue Service; headquarters in St. Paul, MN

New Practitioner Hotline Number

In North Dakota, South Dakota, and Minnesota, the phone number for the Practitioner Hotline has changed. The new number is: 314-342-9325.

As in the past, this is for account-related calls only from practitioners who have a valid power of attorney from the taxpayer for the type of tax and period in question.

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Court Reaffirms Summons of Taxpayer Records

Regarding: Misc. No. 4-96-39, United States District Court, District of Minnesota, Fourth Division

A local federal magistrate's ruling earlier this year addressed an important issue: Namely, can the Internal Revenue Service summons taxpayer records, normally protected by Fifth Amendment privilege, that are in a third party's possession?

On January 22, 1997, U.S. Magistrate Judge John M. Mason ordered attorney Darren Knight to produce records of his client that were in his possession to the IRS.

Knight's client, Supplee, had provided personal records, including a check register, to his return preparer for the purpose of preparing his tax return. Later, when the civil examination started, this check register was still in the preparer's possession, which the revenue agent had access to but did not copy.

After a criminal investigation was initiated, a summons was served on the preparer who still had possession of the records. Knight obtained these records from the return preparer and later returned them to him except for the check register. Based upon advice from District Counsel, a summons was then issued to Knight for the check register.

Knight argued that the court should not rely upon Couch v. United States in asserting that Supplee waived his right to claim a privilege under the Fifth Amendment when he gave his check register to his accountant. "Couch does not stand...for the proposition that the taxpayer may never assert his Fifth Amendment privilege as to documents that aren't in his actual possession," he said. "The Fifth Circuit Court of Appeals, in United States v. Casmere (ph. ), held that a taxpayer may assert his Fifth Amendment privilege as to document that had been in his accountant's possession but were transferred to his attorney pursuant to an attorney-client relationship."

The government's position was argued by Department of Justice attorney Rachel Cramer. She noted that Knight had stated that the government had already had access to these records. Because of that position, it's very hard to understand what Fifth Amendment privilege or attorney-client privilege remain in those records. They were voluntarily-produced business records. "One of the things that the Couch decision stands for is that the rights of the parties are fixed at the time that a summons is served."

Without further argument, the court overruled Knight's objections and ordered him to produce all records responsive to the summons.

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Some Tips on Valuing Used Equipment Inventory

At the end of each year implement dealers are faced with a dilemma--what is the used equipment sitting on their lot worth, and what should it be valued at for tax purposes?

Most farm implement dealers use one of two bases for valuing their inventory: (1) cost, or (2) cost or market, whichever is lower. Cost is defined as purchase price. Market is generally defined as replacement cost. In other words, at the time inventory is taken how much you would have to pay for an identical item.

Setting the inventory value on new equipment is relatively simple. How much did you pay for it: That is what the inventory value should be set at. Under the lower of cost or market basis, the only time the inventory value of new equipment should be written down is if you could actually purchase identical new equipment for a lesser amount.

Setting the inventory value on used equipment is a different matter because the normal source of used equipment is through trade-ins. There is no way of determining exactly what was "paid" for the used equipment. Regardless of what valuation basis is chosen, any second-hand equipment taken in trade should be valued at bona fide selling price less direct cost of disposition.

If the cost basis of valuation is used, once the used inventory value is set there should be no further reduction until the item is either sold or scrapped. Under the lower of cost or market basis, once the used inventory value is set there should only be a reduction in that value when either the bona fide selling price is reduced or the direct cost of disposition is increased.

Bona fide selling price means the price at which the inventory is offered for sale during a period ending not later than 30 days after the inventory date. The correctness of such prices will be determined by reference to the actual sales for a reasonable period after the date of the inventory. Prices which vary materially from the actual prices will not be accepted as reflecting the market.

The phrase, "Direct cost of disposition," is not defined in the tax law. One definition would be "those costs which would not be incurred had the inventory not been sold." The following are commonly accepted as direct costs of disposition in regards to used farm equipment:

(1) Selling commissions,

(2) Delivery,

(3) Reconditioning costs incurred as part of the sale. The reconditioning would only be a direct cost of disposition if included in the selling price is an agreement that reconditioning will be performed. When setting the inventory value, there should be no reduction from the bona fide selling price for reconditioning that has already been performed. Nor should there be any reduction if the selling price offered is for the inventory "as is."

(4) Other costs incurred directly as a result of selling a particular piece of equipment.

Two other items that should be mentioned are not so clear -- price discount and profit margin. These items don't fit into the definition of direct costs of disposition. Price discount refers to the reduction in price between what you advertise or offer to sell equipment for and what you can actually sell it for. Profit margin refers to the difference between the actual sales price and the inventory value you have assigned to the equipment.

The tax law specifically states, "...second-hand goods taken in exchange should be valued at bona fide selling prices less direct cost of disposition .... Bona fide selling price means actual offering of goods during a period ending not later than 30 days after inventory date." However, nowhere is price discount or profit margin mentioned.

For purposes of valuing used farm equipment, the IRS will allow, as a reduction from the bona fide selling price, a reasonable profit margin. Similarly, the IRS will also allow a reasonable and supportable price discount off the advertised price, where the advertised price is the starting point and the taxpayer can show that they normally make such a price discount.

The price guide published by the North American Equipment Dealers Association can also be helpful in setting the value of used equipment inventory. Where price quotes exist, the inventory value should never be set lower than the "Average Wholesale Value" after adjusting for hours and options. If the inventory value is set lower than wholesale, you must be able to verify it. It is important to understand that the IRS will not be bound by any price quote in any published price guide where it is determined that the price quote does not reasonably reflect replacement cost. In other words, the IRS will only allow a wholesale price quote from a price guide where such a quote reasonably equates to the bona fide selling price less the direct costs of disposition and a reasonable profit margin, as previously mentioned.

To summarize, here is a simple example of an inventory valuation on a tractor in ending inventory as of December 31, 1996. The numbers used are assumed and make no inference as to what may or may not be reasonable.

Advertised Price $ 50,000 (during period 12/1/96 to 1/31/97)

Less: Price Discount $5,000; (must be reasonable and supportable)

Bona Fide Selling Price $ 45,000

Less Direct Costs of Sale:

Selling Commission $250

Delivery $500

Reconditioning $2,000; (tractor is advertised as though reconditioning has already been performed. However, it won't be completed until actually sold)

Other Direct Sales Costs $200

Less Other Reductions Allowed:

Profit Margin $4,500; (must be reasonable and supportable)

12/31/96 Ending Inventory Valuation $ 37,550

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