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
(FIR)’s capital contribution was a $1,000 receivable from (D). (M) set up (FIR) in an "office" that was no more than a prop. (FIR)’s actual presence in Nevada was nonexistent. The reinsurance agreements structured for (D)’s benefit by (M) allowed (D) to "avoid tax and prepare for his retirement" in three distinct areas: 1. Credit Life Contracts (M) had reinsurance agreements drawn up between (CBL) and (L). (L) was a company controlled by (M). Then (M) had a reinsurance agreement drawn up between (L) and (FIR). Each agreement provided for payment to the reinsurer of 100 percent of the premiums. Modifications to this arrangement needed to be in writing. A reinsurer assumes the risk of the ceding company who gives up the risk. This principle applies to the case as follows: Agreement [1] - Contract between (CBL) and (L) (CBL) cedes (gives up risk) to (L) (L) re-insures (assumes risk) of (CBL) Agreement [2] - Contract between (L) and (FIR) (L) cedes (gives up risk) to (FIR) (FIR) re-insures (assumes risk) of (L) (CBL) charged (L) a ceding fee of 10 percent for reinsuring (CBL)’s original business. (L) charged (FIR) a total fee of 11 percent, retaining 1 percent on the (L) and (FIR) reinsurance agreement. (L) also received a 10 percent "float" because (CBL) ceded monthly to (L), whereas (L) ceded to (FIR) quarterly. State law required (CBL) to hold reserves for payments of future claims. Under the agreements, (CBL) required (L) to maintain reserves on deposit. (L) required (FIR) to maintain reserves on deposit. The reserve requirements were "met" through a $500,000 letter of credit from (DLRS). Per statements of (D), (DLRS) had no connection with (FIR). (FIR) deducted from income, reserves required by (L). (D) expressed a goal to establish "reserves in an amount necessary to cover the projected income of (FIR)." (M) intervened on (D)’s behalf. (M) had no prior training or expertise to compute the separate reserves needed for both credit life and credit disability. (M) erroneously overstated the reserves for both. The effect of these erroneous computations was a negative surplus (i.e., (FIR) owes more than it is worth) and understated (FIR) income. D-2
(D) also moved (DLRS) income to be under reported by arranging with (CBL) to pay (DLRS) less than the maximum amount for commissions. This reduction increased the net premium to (CBL), increased the premium ceded to (L), and ultimately, increased the portion ceded to (FIR). (DLRS) deduction was overstated. The increased (FIR) income was already "protected" against taxation by erroneously overstated expenses. 2. Service Contracts (D) diverted monies to (FIR) that should have been reported as income by (DLRS) through "over-submits" to the service contract administrator (ADM). (D) would pay to (ADM) an amount in excess of (DLRS) cost of the contract. (D) had exclusive control over where these excess payments, "over-submits," were sent. Checks equal to the amount of these "over-submits" were forwarded by (ADM) to (D). These amounts were then deposited to the (FIR) bank account, over which (D) had exclusive control. (FIR) did nothing to earn these monies. (DLRS) under reported its income by taking an inflated expense for the"over-submits." The amounts includable in (FIR) income were "protected" against taxation by erroneously overstated reserves. Personal commissions of (DLRS) employees were decreased, because cost, including the "over-submit" amounts, were subtracted from the consumer price to arrive at commissions. 3. Annuities In later years, service contracts sold by (DLRS) were administered by (N). Under this program (DLRS) would have no continuing liability on service contract claims. The remittance by (D) to (N) was spread as follows: (N) retained a portion as an administrative fee. A portion is used to purchase stop-loss insurance for potential consumer claims from licensed insurance companies. Another portion is used to invest in an annuity. The amount deposited in the annuity was intended to be equal to anticipated consumer claims based on actuarial studies conducted by (N). Under terms of the annuity, funds functioned as a reserve out of which consumer service contract claims were paid. (N) filed bankruptcy. The receiver found the true owner of the annuities was (DLRS). (D) wanted to ensure the success of his retirement plan. The goal is to build up a large principal and have the interest pay the consumer claims. The plan is successful if all outstanding claims over the life of the individual service contracts can be paid without touching the principal. Upon termination of the last service contract (D) would have been able to appropriate the principal to his own use without inclusion in income. D-3
- Page 151 and 152: The dealer sells the note to a fina
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- 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
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- 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
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(D) also moved (DLRS) income to be under reported by arranging with (CBL) to pay (DLRS)<br />
less than the maximum amount for commissions. This reduction increased the net premium to<br />
(CBL), increased the premium ceded to (L), and ultimately, increased the portion ceded to<br />
(FIR). (DLRS) deduction was overstated. The increased (FIR) income was already<br />
"protected" against taxation by erroneously overstated expenses.<br />
2. Service Contracts<br />
(D) diverted monies to (FIR) that should have been reported as income by (DLRS) through<br />
"over-submits" to the service contract administrator (ADM). (D) would pay to (ADM) an<br />
amount in excess of (DLRS) cost of the contract. (D) had exclusive control over where these<br />
excess payments, "over-submits," were sent. Checks equal to the amount of these<br />
"over-submits" were forwarded by (ADM) to (D). These amounts were then deposited to the<br />
(FIR) bank account, over which (D) had exclusive control. (FIR) did nothing to earn these<br />
monies.<br />
(DLRS) under reported its income by taking an inflated expense for the"over-submits." The<br />
amounts includable in (FIR) income were "protected" against taxation by erroneously<br />
overstated reserves.<br />
Personal commissions of (DLRS) employees were decreased, because cost, including the<br />
"over-submit" amounts, were subtracted from the consumer price to arrive at commissions.<br />
3. Annuities<br />
In later years, service contracts sold by (DLRS) were administered by (N). Under this<br />
program (DLRS) would have no continuing liability on service contract claims. The<br />
remittance by (D) to (N) was spread as follows:<br />
(N) retained a portion as an administrative fee. A portion is used to purchase stop-loss<br />
insurance for potential consumer claims from licensed insurance companies. Another portion<br />
is used to invest in an annuity. The amount deposited in the annuity was intended to be equal<br />
to anticipated consumer claims based on actuarial studies conducted by (N).<br />
Under terms of the annuity, funds functioned as a reserve out of which consumer service<br />
contract claims were paid.<br />
(N) filed bankruptcy. The receiver found the true owner of the annuities was (DLRS).<br />
(D) wanted to ensure the success of his retirement plan. The goal is to build up a large<br />
principal and have the interest pay the consumer claims. The plan is successful if all<br />
outstanding claims over the life of the individual service contracts can be paid without<br />
touching the principal. Upon termination of the last service contract (D) would have been<br />
able to appropriate the principal to his own use without inclusion in income.<br />
D-3
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