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

Milford Motor Co. v. United States, 56-1 U.S.T.C. (CCH) Paragraph 9477 (DC-NH 1956).
The decision by the jury was that the amount paid by the taxpayer to its stockholding
president of $37,500 as salaries was reasonable. The court considered the following factors in
determining the reasonableness of the compensation paid: Compensation paid in prior years;
the nature of and extent and scope of the president’s work; the president’s competency; the
availability of others to do the same sort of work; and any special relationships between the
officer and any other person who is in a position to furnish business to the company or to the
officer.
Key Buick Company v. Commissioner, T.C. Memo. 1976-303, CCH 34,036(M). The Tax
Court redetermined the amount considered to be reasonable compensation to a part-time
president stating that "* * * Although the services of the president were valuable to the
dealership because of his knowledge of the business and his contribution to routine business
decisions, his services were not as valuable as those of a full-time president * * *."
East Tennessee Motor Company v. United States, 453 F.2d 494 (6th Cir. 1971). Jury
decision in which it was determined that the compensation paid to the six officer-shareholders
was unreasonable and, therefore, not deductible.
See decisions where the reasonable compensation issue was addressed in the auto dealership
context:
a. Automotive Investment Development, Inc. v. Commissioner, T.C. Memo. 1993-298, CCH
49,140(M);
b. William Wright and Lynne L. Wright v. Commissioner, T.C. Memo. 1993-328, CCH
49,174(M).
Sub-Prime Issue
For tax purposes, how should a vehicle dealer report the transfer of a sub-prime finance contract
(retail installment agreement) to an unrelated finance company?
What Is a Non-prime or Sub-prime Finance Contract?
Many potential vehicle purchasers cannot obtain financing through traditional means like banks,
credit unions or manufacturers’ finance companies because of poor credit. These individuals are
referred to as "non-prime" or "sub-prime" consumers, depending on their credit rating (non-prime
having a higher credit rating than sub-prime). To tap into this large market, many vehicle
dealerships (particularly used car dealerships) offer their own retail installment agreements to
these customers. These contracts are known in the industry as "non-prime" or "sub-prime"
financing.
How a Non-prime or Sub-prime Plan Works
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