Dealer accountants and NADA are finding that an IRS that's "really here to help" is threatening to strip away two perks that have saved dealers vast sums of money in recent years.

Both issues involve the fixed-operations side of the business: Last-In-First-Out (LIFO) application on parts inventories and "tax-free" rental of tools to service technicians.

Each issue has been stoutly debated by the parties involved, with the LIFO matter aired before a U.S. Tax court. The court ruled this year that Denver's Mountain State Ford Truck Sales had erred in using "replacement cost" instead of "actual cost" in valuing its part inventories.

The impact of the Mountain State ruling, in a case whose dealer legal expenses were partially funded by NADA, is "staggering if it remains a nationwide IRS precedent," says veteran dealer CPA Willard J. DeFilipps, of Mt. Prospect, IL.

He spoke at a Michigan Association of Certified Public Accountants conference in Troy, MI.

Concerns of Mr. DeFilipps and other dealer CPAs were heightened when an NADA-IRS meeting on the issue last summer wound up with no resolution.

IRS officials said they were bound by the Tax Court's interpretation of the Mountain State Ford situation. Dealer attorneys had contended in court sessions that "actual cost" was difficult to determine as a barometer of tax computation.

A measure of relief was expressed at the Michigan CPA gathering by the new IRS motor vehicle industry specialist, Mary Burke Baker of Grand Rapids, MI.

She opened her conference remarks with the statement, "We're really here to help."

Ms. Baker notes that the LIFO issue "is very political" and called for a compliance moratorium on using actual cost until vendors can adapt their software.

She says, "I tell my bosses in Washington constantly that we need above all to be fair and consistent across the country on all policies. The Mountain State case can become a slippery slope for all LIFO-related matters."

Mr. DeFilipps, an expert witness in the Mountain State Ford proceedings, charged that the Tax Court helped the IRS "throw another monkey wrench into dealership tax accounting."

But he also criticized NADA for taking an "unrealistic" stance in its IRS negotiations, saying that Mountain State had falsely used "replacement cost" as "actual cost" and that use of replacement cost as a LIFO determinant had been constantly practiced by all dealers adopting the LIFO concept.

Both Ms. Baker and Mr. DeFilipps agree that Congress should take a look at the issue and define in tax law the true definition of "replacement cost."

The prospect of an appeal by Mountain State could stir legislators to intervene in the matter, Mr. DeFilipps says.

Meanwhile, Ms. Baker and Mr. DeFilipps both take a hard line on the relatively new use of technicians' tools as an income-reducing tax saver.

Introduced on the West Coast and in Florida and now being promoted nationwide, the rental plans are promoted as employer reimbursements to employees for non-taxable business expenses that are not subject to employment taxes.

But Ms. Baker issues a somber warning against use of the plans, asserting that the ones she has reviewed "have not established a clear business expense-related purpose and the reimbursements are excessive for the most part and are like a square peg fitted into a round hole."

Mr. DeFilipps warns that dealers face a "trem-endous" tax liability for all employment taxes if the IRS finally determines that the rental plans are non-accountable, while their technicians could be asked to pay retroactive self-employment taxes deemed as net income.

The IRS to date has not ruled on any specific rental plan, and Ms. Baker told the conference she had seen none that meets tax code regulations.