Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board
Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board
Rev. Proc. 97-38 Example Facts: 5 Contracts Sold January 1, 1992, @ $1,600 = $8,000 5 Contracts Sold December 1, 1992, @ $1,600 = $8,000 Total $16,000 Term - 5 Years Insurance Premium AFR 10 percent $ 1,200 each Qualified Advance Payment Amount [2] $12,000 x .2398 = $2,878 [1] Non Deferred Income $4,000 [1] From tables found in Rev. Proc. 97-38 based on term of years (5) and the AFR (10%). [2] Definition of terms used in this example can be found in Rev. Proc. 97-38. 1992 1993 1994 1995 1996 1997 Non Deferred Income $4,000 Deferred Income $2,878 $2,878 $2,878 $2,878 $2,878 $6,878 $2,878 $2,878 $2,878 $2,878 Amortization Taxable Income $5,578 $478 $478 $478 $478 Total $6,390 Non Deferred 4,000 Additional Income $2,390 [3] [3] This additional income is based on the add on AFR interest. This is the cost to the taxpayer for deferral of income and use of the Government’s money during this time. 11-5
Contract Construction Generally, a dealership should be fully aware when they are a principal. Most contracts explicitly state the dealer is a principal or an obligor. Try to ascertain whether the dealer entered into this contract free of mistake or duress of the insurance company. Absent such a finding, the dealership should not be allowed to use parol evidence to interpret the contract, having it conform to the dealership’s immediate needs. Some dealers may claim they are not principals, even though the contract explicitly states they are. The courts have followed the IRS’s interpretation of these contracts determining the dealer a principal, where the facts warrant. They have held that the surrounding circumstances and parol evidence of a transaction may be considered by the IRS if the contractual terms of an agreement are unclear or ambiguous. The court determined in, Rochester Development Corporation v. Commissioner, T.C. Memo. 1977-307, CCH 34,630(M), that the surrounding circumstances and parol evidence of a transaction may be considered by the IRS if the contractual terms of an agreement are unclear or ambiguous. See Commissioner v. Danielson, 378 F.2d 771 (3rd Cir. 1967) cert. denied, 389 U.S. 858 (1967), Joan S. Schatten v. United States, 746 F.2d 319 (6th Cir. 1984), and Johnie Vaden Elrod v. Commissioner, 87 T.C. 1046 (1986). However, parol evidence will not be allowed where there is no such ambiguity and the terms are clear. Where the contract is not vague and ambiguous the courts have indicated they will narrowly construe the terms of the contract and uphold its clear meaning. For a taxpayer to challenge the Commissioner’s construction of an agreements clear and unambiguous form, some federal circuit courts have held the taxpayer must show proof that the agreement was unenforceable because of mistake, undue influence, fraud, or duress. See Rochester Development Corporation v. Commissioner, T.C. Memo. 1977-307, CCH 34,630(M). Change in Accounting Method Concerns and IRC section 481(a) Treas. Reg. section 1.446-1(a) defines method of accounting as not only the overall method of accounting of the taxpayer, but also the accounting treatment of any item. A method of accounting is established by the proper treatment of an item in the first year that the taxpayer has the item or by improper treatment of the item in the first 2 years that the taxpayer has the item. A material item is one involving the timing of its inclusion or deduction. A change in method does not include correction of mathematical or posting errors or tax computation errors or of an item not involving a question of timing. Treas. Reg. section 1.446-1(e)(2)(ii), states a material item is any item which involves the proper time for the inclusion of the item in income or the taking of a deduction. A method of accounting involves the consistent treatment of a material item. A material item is any item that involves the proper time for the inclusion of an item in income or the taking 11-6
- Page 51 and 52: improper inflation through unwarran
- Page 53 and 54: Introduction Chapter 8 Computing LI
- Page 55 and 56: The double extension index formula
- Page 57 and 58: as one item, there would probably n
- Page 59 and 60: (existing items) and non-comparable
- Page 61 and 62: The current-year costs that can be
- Page 63 and 64: Assuming the dealership elects LIFO
- Page 65 and 66: matching of revenues and costs. Thu
- Page 67 and 68: section 1.471-9. Both of these regu
- Page 69 and 70: providing to the credit subsidiary
- Page 71 and 72: Under elections made prior to Decem
- Page 73 and 74: Base Year Cost 9112 $224,000 You ha
- Page 75 and 76: BLS Sanity Check A simpler means to
- Page 77 and 78: CYC = Current Year Cost. This is th
- Page 79 and 80: Computation of 1993 Increment and R
- Page 81 and 82: This page intentionally left blank.
- Page 83 and 84: Specific Identification Increment M
- Page 85 and 86: which may be identified by a unique
- Page 87 and 88: Step # 3 For each item category, ad
- Page 89 and 90: Step # 10 Compute the total cost of
- Page 91 and 92: 1991 Inventory Value at Current Yea
- Page 93 and 94: This page intentionally left blank.
- Page 95 and 96: Dealers may offer the contracts as
- Page 97 and 98: This page intentionally left blank.
- Page 99 and 100: 2. Principal/Obligor A principal is
- Page 101: Rev. Proc. 97-38 provided for an al
- Page 105 and 106: Rev. Proc. 97-27 provides the admin
- Page 107 and 108: The Court ruled that when the deale
- Page 109 and 110: Considerations for Forming a Produc
- Page 111 and 112: The Reinsurance Transaction To illu
- Page 113 and 114: insurance contract reinsured throug
- Page 115 and 116: (1979). The Service’s position is
- Page 117 and 118: While not all captive situations in
- Page 119 and 120: 3. IRC section 845 tax avoidance 4.
- Page 121 and 122: section, seemingly compliant arrang
- Page 123 and 124: 2. By owner A dealer may own dealer
- Page 125 and 126: Rules and Regulations Many rules re
- Page 127 and 128: This page intentionally left blank.
- Page 129 and 130: One of the assets specifically iden
- Page 131 and 132: Where a covenant may be enforced it
- Page 133 and 134: This page intentionally left blank.
- Page 135 and 136: 1. Spread income over a number of y
- Page 137 and 138: RELATED FINANCE COMPANY CHECKSHEET
- Page 139 and 140: This page intentionally left blank.
- Page 141 and 142: 3. Question the taxpayer directly w
- Page 143 and 144: This page intentionally left blank.
- Page 145 and 146: Technicalities Under the provisions
- Page 147 and 148: This page intentionally left blank.
- Page 149 and 150: Cash 300 Accounts Receivable 300 2.
- Page 151 and 152: The dealer sells the note to a fina
Rev. Proc. 97-38 Example<br />
Facts:<br />
5 Contracts Sold January 1, 1992, @ $1,600 = $8,000<br />
5 Contracts Sold December 1, 1992, @ $1,600 = $8,000<br />
Total $16,000<br />
Term - 5 Years<br />
Insurance Premium<br />
AFR 10 percent<br />
$ 1,200 each<br />
Qualified Advance Payment Amount [2] $12,000 x .2398 = $2,878 [1]<br />
Non Deferred Income $4,000<br />
[1] From tables found in Rev. Proc. 97-38 based on term of years (5) and the AFR<br />
(10%).<br />
[2] Definition of terms used in this example can be found in Rev. Proc. 97-38.<br />
1992 1993 1994 1995 1996 1997<br />
Non Deferred Income $4,000<br />
Deferred Income $2,878 $2,878 $2,878 $2,878 $2,878<br />
$6,878 $2,878 $2,878 $2,878 $2,878<br />
Amortization <br />
Taxable Income $5,578 $478 $478 $478 $478 <br />
Total $6,390<br />
Non Deferred 4,000<br />
Additional Income $2,390 [3]<br />
[3] This additional income is based on the add on AFR interest. This is the cost to the<br />
taxpayer for deferral of income and use of the Government’s money during this time.<br />
11-5
Change language