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
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Where a covenant may be enforced it must contain two items; a limit on time and a<br />
limit of the geographic restrictions. If one or both of these conditions are not stated or<br />
are unreasonable, the covenant is unenforceable.<br />
Applicable State (California) law allows a limitation of 10 miles on such covenants.<br />
State law also allows existing dealerships to protest against a like kind manufacturer<br />
from entering this radius. A hearing will be held and the new franchise may be refused<br />
by the State Motor Vehicle Department upon a finding of good cause.<br />
The manufacturer in question will authorize dealership locations based on studies.<br />
Manufacturer will not allow a new dealership to open if it jeopardizes an existing one.<br />
Intangibles Settlement Offer<br />
IRC section 197 of the Omnibus Budget Reconciliation Act of 1993 allows the amortization of<br />
intangibles, including goodwill and going concern value, over 15 years on a straight line basis if<br />
purchased after August 10, 1993. Except for limited application to intangibles purchased after<br />
July 25, 1991, the legislation is not retroactive.<br />
Prior to Newark Morning Ledger Co. v. United States, 113 S. Ct. 1620 (1993), the IRS<br />
maintained that certain intangibles, such as covenants not to compete, were inseparable from<br />
goodwill, also known as going concern value, and could not be amortized. The decision in this<br />
case rejected that position and held an intangible could be amortized if the taxpayer could<br />
establish both a value and a useful life. The burden placed on a taxpayer to make such a showing<br />
is significant.<br />
The settlement offer is applicable to those intangible acquisitions for which the IRS had begun an<br />
examination before April 1, 1994. The settlement will not cover any intangible issues raised in an<br />
audit begun after this date.<br />
The settlement was offered because Section 197 of the 1993 Act changed the tax treatment of<br />
these intangibles for future years and court cases would have little precedential value. The<br />
settlement was also offered because Congress, in the legislative history to the 1993 Act,<br />
suggested the IRS do something to save litigation cost for both the Government and affected<br />
taxpayers.<br />
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