Rev. Rul. 75-538

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the positions set forth in Rev. Rul. 54-222, 1954-1 C.B. 19, and Rev. Rul. 60-15, 1960-1 C.B. 22.

The question presented concerns the treatment for Federal income tax purposes of motor vehicles held by a taxpayer engaged in the trade or business of selling motor vehicles.

Section 61(a) of the Internal Revenue Code of 1954 provides, in part, that gross income means all income from whatever source derived, including (but not limited to) gross income derived from business.

Section 1231 of the Code provides, in part, that gains and losses on sales or exchanges, or compulsory or involuntary conversion, of "property used in the trade or business" shall be treated as gains and losses from sales or exchanges of capital assets held for more than six months if the aggregate of such gains exceeds the aggregate of such losses. If the aggregate of such gains does not exceed the aggregate of such losses, such gains and losses shall not be treated as gains and losses from sales or exchanges of capital assets.

Section 1231(b)(1) of the Code defines the phrase "property used in the trade or business," in part, to mean depreciable property used in the trade or business, held for more than six months, which is not property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business.

Section 167(a) of the Code provides, in part, that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) of property used in the trade or business or held for the production of income.

Whether a motor vehicle is held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business is a question of fact that must be determined from all of the facts and circumstances in each case.

A taxpayer engaged in the trade or business of selling motor vehicles is presumed to hold all such vehicles primarily for sale to customers in the ordinary course of the taxpayer's trade or business. To overcome this presumption, it must be clearly shown that the motor vehicle was actually devoted to use in the business of the dealer and that the dealer looks to consumption through use of the vehicle in the ordinary course of business operation to recover the dealer's cost. A vehicle is not property used in the business if it is merely used for demonstration purposes, or temporarily withdrawn from stock-in-trade or inventory for business use. See Duval Motor Co. v. Commissioner, 264 F.2d 548 (5th Cir. 1959), aff'g 28 T.C. 42 (1957); Luhring Motor Co., 42 T.C. 732 (1964); and R.E. Moorhead & Son, Inc., 40 T.C. 704 (1963).

Income derived from the sale of a motor vehicle that constitutes property used in the trade or business qualifies for section 1231 treatment, except to the extent that the provisions of section 1245 of the Code are applicable. In addition, a depreciation deduction is allowable under section 167 with respect to any motor vehicle used in the trade or business of the taxpayer.

Rev. Rul. 54-222 and Rev. Rul. 60-15 are superseded, since the positions set forth therein are restated under current law in this Revenue Ruling.