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

6. The finance company is entitled to endorse the dealership’s name on any payments made to
the dealership and any other instruments concerning the installment contract and the financed
automobile.
7. The finance company determines whether the note is in default.
8. The finance company can waive any late payment, charge or any other fee it is entitled to
collect.
9. The finance company can repossess and sell or otherwise liquidate the financed vehicle if
default occurs.
10. The dealership’s customers are notified the note will be assigned to the finance company.
11. The finance company may or does pledge the customer notes as security for its own
indebtedness.
12. The finance company bears the credit risk on the customer notes.
13. The dealership is not required to provide financial statements to the finance company in a
manner normally associated with a line of credit or other loan arrangement.
14. There is no state interest rate, maturity date, or other specific details normally associated
with a line of credit or other loan arrangement.
Treatment of a Loan, an Assignment or a Pledge of Collateral
Whether the transfer of the installment contract to the finance company from the dealership is
determined to be primarily in the nature of a loan or an assignment, the tax treatment is similar.
There is no income to the dealership upon receipt of the cash advance and no gain or loss is
recognized at the time of the transfer of the contract. The cash advance is considered a loan.
Collection by the finance company are treated in a dual manner since they must be applied to both
the original installment contract between the purchaser and the dealership (which the dealership
still owns), and the outstanding cash advance loan between the dealership and the finance
company.
Dealership Note Receivable (from vehicle purchaser): Each collection by the finance company
is applied against the outstanding installment note receivable still owned by the dealership. A
portion of each collection is interest income to the dealership, and a portion is applied against
the principal balance of the purchaser’s note.
Dealership Note payable (to finance company): Since the amounts collected are actually
retained by the finance company to apply against the cash advance balance outstanding, a
portion of each amount collected is considered interest expense to the dealership, and the
remainder applied against the advance principal balance. The fixed percentage collection fee
19-18