Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

Once the insurance company has established a reserve based o the dealership claim experience, the
retro typically is calculated and payable on an annual basis, with a negative amount carried over
and offset against a future positive amount. The percentage of the profit that is shared can be up
to 100 percent. In this case the insurance comply retains an administrative fee and earns
investment income, while the dealership receives all of the underwriting profit.
There are a number of issues that an agent could raise dependent upon the facts and
circumstances a particular situation.
1. Is the underlying reason behind a retrospective arrangement to circumvent a state-imposed
cap on commissions generated from the sale of credit life and disability insurance? If yes,
consider reclassifying the arrangement as a commission contract.
2. Is the retrospective payment diverted from the dealership and not reported as income by the
dealership or the dealer? In one situation, the retrospective arrangement was negotiated
separately by the dealer. No one at the dealership was aware of the arrangement. All
payments were sent individually to the dealer at his place of residence.
3. Is the timing of the retrospective payment properly accrued by the dealership, considering the
all events test?
4. Is there an "oversubmitted" aspect of the original premium that is held in a related escrow or
reserve account? How did the dealership treat this "oversubmit" and who ultimately receives
it?
5. What access does the dealer have to the reserve? If any, is there corporate separateness
between the insurance company and the dealership. See Moline Properties, 319 U.S. 436,
63 S. Ct. 1132.
6. Is the "retro" arrangement a disguised form of self-insurance?
The decision in Malone & Hyde, Inc., above, greatly impacts this section. In addition to the
issues developed above, the following is a listing of other recommended issues to consider with
PORCs (dependent upon the facts and circumstances), developed jointly between the Motor
Vehicle Industry Specialist and the Captive Issue Specialist (not in any particular order and note
that some of these may be factors favoring assertion of one or more of the other issues to be
raised):
1. Substance versus form (Gregory v. Helvering, 293 U.S. 465 (1935))
2. Assignment of income doctrine / IRC section 61 / Lucas v. Earl, 281 U.S. 111 (1930) ’to
hang the fruit on the tree from which it came’
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