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

More documents

Recommendations

Info

Chapter 16 Related Finance Companies What is it? Issues concerning Related Finance Companies refer to the self-financing arrangement pursued by some dealerships, new and used, where individuals for whom financing cannot be obtained through normal channels. The customer is required to make payments usually at the dealership’s location. How does it work? <strong>Dealerships</strong> involved in this practice establish a financing entity, typically an S-Corporation, which acts as the financial institution in the dealership’s selling arrangement. Determining dealership involvement is done by looking at the: 1. Amount of advertising expense (high) 2. Form of advertisements ("Guaranteed credit") 3. Production and sale of notes by multiple financial institutions/entities 4. Market value of trade-ins (low). When the vehicle is sold, and it is determined that the customer needs special credit assistance, the dealership writes the note at term (high interest rate) with recourse as the lender. Then the note is sold at significant discount to the controlled (IRC section 267(b)(3)) entity substantiating the discount by citing high risk. The dealership books a current and deducted loss for the difference between the full contract and the discounted contract and the finance entity accrues income as it becomes earned, of course subject to IRC section 162 deductions. If the dealership is an S-Corporation qualifying as a member of a controlled group under IRC section 267(b)(3), it will be entitled to loss deferral under IRC section 267(f). If, however, an S-Corporation is treated as related to another S-Corporation only under IRC section 267(b)(11) or as related to a C-Corporation only under IRC section 267(b)(12), the S-Corporation does not qualify for loss deferral under IRC section 267(f). Instead, such losses would be disallowed under IRC section 267(a)(1). Adjustment Not all Related Finance Company arrangements require an audit adjustment. Only those that lack economic substance warrant such an adjustment. Where an arrangement lacking such economic substance is found the taxpayer will: 16-1
1. Spread income over a number of years 2. Take a current period "loss" deduction for what should be just another sale. If the transaction has the requisite economic substance the transaction may dictate that: 1. Income is booked in the current period 2. There is no loss creation and deduction. If the Related Finance Company exists only in form and the transactions lack economic substance, the losses on the sale of receivables to the Related Finance Company should be disallowed to the dealership. IRC section 482 also permits the reallocation of income and expenses between related taxpayer’s to clearly reflect income. Lucas v. Earl, 281 U.S. 111 (1930). Possible applicable legal assertions 1. IRC section 267: No deduction shall be allowed for any loss relating directly or indirectly to property exchanges between related parties. 2. IRC section 446(b): The issue has been raised as to whether there has been a change in method of accounting where a related finance company is used to defer dealership income. This issue is under active consideration by National Office. The issue arises from the following two divergent views of a dealership’s use of related finance companies to defer income: a. Those who believe that an auto dealership’s use of a related finance company to defer income results in a change in method of accounting suggest that the aggregate income for the owner of both the dealership and related finance company is the same. Therefore, because only the timing of the income is affected as to the owner, the use of the related finance company results in a change in method of accounting. b. Those who believe that the use of a related finance company to defer income does not result in a change in accounting method argue that the dealership’s income shifted to the related finance company will never be reported by the dealership. Therefore, because the shift of income as to the dealership is permanent rather than temporary, there is no change in method of accounting. 3. IRC section 453(b)(2): An installment sale accounting method cannot be applied to disposition of inventory of the taxpayer. 4. IRC section 482: The examining agent can attribute income among related entities in a manner that clearly reflects income. 5. IRC section 9722: If a principal purpose of any transaction is to evade or avoid liability under 16-2
Page 1 and 2:
Internal Revenue Service Market Seg
Page 3 and 4:
Preface One of the goals envisioned
Page 5 and 6:
Table of Contents Preface .........
Page 7 and 8:
The Reinsurance Transaction .......
Page 9 and 10:
Part 1 General Focus and Procedure
Page 11 and 12:
1. Type A Return Information Schedu
Page 13 and 14:
Percentage has gone down. The incre
Page 15 and 16:
the principal shareholders to finan
Page 17 and 18:
Rents $ 500,000 Interest $ 50,000 C
Page 19 and 20:
Conclusion "Financial status" is on
Page 21 and 22:
Chapter 2 Getting Started The key t
Page 23 and 24:
entities and their purpose and rela
Page 25 and 26:
It is recommended that officer comp
Page 27 and 28:
Chapter 3 Standard Audit Index Numb
Page 29 and 30:
Chapter 4 Books and Records Charact
Page 31 and 32:
c. Reconcile (2): Beginning Trial B
Page 33 and 34:
3 Repair Order Sales 4 Parts Sales
Page 35 and 36:
Conclusion Although intimidating at
Page 37 and 38:
Chapter 5 Balance Sheet Why do we c
Page 39 and 40:
When an adjustment to a balance she
Page 41 and 42:
Part 2 Inventory Chapter 6 General
Page 43 and 44:
. Purchasing c. Handling, processin
Page 45 and 46:
dealerships use specific identifica
Page 47 and 48:
Chapter 7 LIFO Background Overview
Page 49 and 50:
A Short History of LIFO Application
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 99 and 100: 2. Principal/Obligor A principal is
Page 101 and 102: Rev. Proc. 97-38 provided for an al
Page 103 and 104: Contract Construction Generally, a
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 129 and 130: One of the assets specifically iden
Page 131 and 132: Where a covenant may be enforced it
Page 133: This page intentionally left blank.
Page 137 and 138: RELATED FINANCE COMPANY CHECKSHEET
Page 141 and 142: 3. Question the taxpayer directly w
Page 145 and 146: Technicalities Under the provisions
Page 149 and 150: Cash 300 Accounts Receivable 300 2.
Page 151 and 152: The dealer sells the note to a fina
Page 153 and 154: For purposes of this rule, an "empl
Page 155 and 156: 10) relationship of stockholder-off
Page 157 and 158: purely for services. See Treas. Reg
Page 159 and 160: Howard Sole, Inc. v. Commissioner,
Page 161 and 162: Milford Motor Co. v. United States,
Page 163 and 164: new pool for additional, subsequent
Page 165 and 166: 6. The finance company is entitled
Page 167 and 168: when the back-end distributions are
Page 169 and 170: The transfer of the installment con
Page 171 and 172: Report as a Loan or an Assignment
Page 173 and 174: Reported as a Sale… (How it Shoul
Page 175 and 176: Other Sources of Information IRC se
Page 177 and 178: Part 4 Appendices Appendix A Initia
Page 179 and 180: 2) Adjusting Journal Entries 3) Tax
Page 181 and 182: k. Do you receive rebates from anyo
Page 183 and 184: f. Employee Benefits 1) Form 5500?
Page 185 and 186:
Appendix B Balance Sheet Section -
Page 187 and 188:
. Dealership financing If the deale
Page 189 and 190:
f. Dealer Reserve Holdbacks 3. Inve
Page 191 and 192:
Once the existence of a shareholder
Page 193 and 194:
Despite the fact the computation ma
Page 195 and 196:
corporate minutes if material. d. L
Page 197 and 198:
Appendix C Definition of an Item Co
Page 199 and 200:
two cars of the same model can vary
Page 201 and 202:
Appendix D An Analysis of the Wrigh
Page 203 and 204:
(D) also moved (DLRS) income to be
Page 205 and 206:
The court did not allow (D)’s cla
Page 207 and 208:
Appendix E Glossary The following t
Page 209 and 210:
FIFO: An inventory cost flow assump
Page 211:
PLATFORM: A vehicle platform is the
show all

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

Create successful ePaper yourself

Delete template?

Save as template?