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Safe-harbor method to determine market value of motor vehicle cores.

Remanufacturers of motor vehicle parts purchase used parts, or "cores" (e.g., wiper motors, engines, transmissions and alternators), discard the cores' worn or defective components, rebuild them with new and used components and sell the rebuilt cores as replacement parts. Remanufacturers and resellers acquire cores from their customers by offering large credits toward the purchase of a remanufactured part if the customer returns its used core. They also acquire cores from third-party "core brokers"

A dispute existed between the IRS and the remanufacturers and resellers over how to determine the market value of cores; see Consolidated Mfg., Inc., 249 F3d 1231 (10th Cir. 2001), rev'g in part 111 TC 1 (1998). At the request of the Automotive Parts Rebuilders Association, the Service selected this disagreement for its Industry Issue Resolution Program. To resolve the dispute, it issued Rev. Proc. 2003-20, which provides the core alternative valuation (CAV) method--a safe-harbor method that remanufacturers and resellers can use to determine the market value of cores. Under the CAV method, remanufacturers and resellers value cores at the lower of cost or market (LCM).

Determining "Cost" and "Market"

For cores acquired from customers, cost is the amount of the credit offered to the customer.

Market is the "allowable supplier price," which is the price that a remanufacturer or reseller would pay to a core broker at year-end, plus freight-in. For example, if a remanufacturer has purchased a particular type of core from a core broker during the year, the allowable supplier price would be that broker's year-end price, plus freight-in. If the remanufacturer has purchased from several core brokers, the allowable supplier price would be the weighted-average year-end price, plus freight-in, from those brokers. If the remanufacturer has not purchased a particular type of core during the year, it must obtain a quote from the core broker from which it purchases (in dollar terms) the most cores. If none of the remanufacturer's core brokers sells that type of core, the remanufacturer must obtain a quote from a core broker in the geographical area or market in which it regularly participates.

Remanufacturers and resellers are not permitted to write down defective cores until they are offered for sale or scrapped.

Method Change

Remanufacturers and resellers may change to the CAV method (including any necessary concurrent changes to the LCM method and discontinuing LIFO) by following the Rev. Proc. 2002-9 automatic-change procedures. The limits on automatic changes (scope limits) under Rev. Proc. 2002-9 are waived for taxpayers filing for their first tax year ending on or after Dec. 31, 2002 (as long as the core valuation issue is not under consideration in an examination).

Ordinarily, taxpayers must file Form 3115, Application for Change in Accounting Method, with their timely filed original return for the change year. However, taxpayers that have already timely filed their 2002 return may still change to the CAV method, by filing Form 3115 with an amended return within six months of the 2002 return's original due date (without extensions); see Rev. Proc. 2002-9, Section 6.02(3)(b)(i).

Taxpayers changing to the CAV method must compute a Sec. 481(a) adjustment. This adjustment is either favorable or unfavorable; it is either a decrease or increase to taxable income, depending on whether the taxpayer is presently valuing cores higher (e.g., customer credit amount) or lower (e.g., scrap amount) than the CAV-method amount. Favorable Sec. 481(a) adjustments are taken into account entirely in the change year; unfavorable adjustments are spread over four tax years.

Taxpayers changing to the CAV method will receive audit protection for all prior years. In other words, the IRS will not require the taxpayer to change its prior method any earlier than when the taxpayer changed to the CAV method. Further, if a remanufacturer or reseller is already using a method consistent with the CAV method, the Service will not raise or pursue the issue further.


Annette B. Smith, CPA


Washington National Tax Service

PricewaterhouseCoopers LLP

Washington, DC
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Author:Smith, Annette B.
Publication:The Tax Adviser
Date:Jul 1, 2003
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