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IRS
Technical Advice Memorandum 9909002
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The
Service has ruled in technical advice that an auto dealer's
transfers of customer notes to a finance company were sales and
that an enrollment fee the dealer paid to participate in the
finance company program was a capital expenditure amortizable over
15 years. |
IRS
Technical Advice Memorandum 9909003
|
The
Service has ruled in technical advice that an auto dealer's
transfers of customer notes to a finance company were sales and
that the dealer was required to use the accrual method of
accounting.
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IRS
Technical Advice Memorandum 9840001 |
Transfers
of notes from car dealers to loan servicing companies are sales
and the amount the dealer realized on the sale of the notes is
equal to the cash received from the company, plus the fair market
value of its right to receive monthly payments.
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IRS
Technical Advice Memorandum 9704002 |
It
is well established that the economic substance of the
transaction, not the form, controls for federal tax purposes.
Transfers of notes from a car dealership to a related finance
company must have economic substance, and the benefits and burdens
of the notes must pass to the finance company, in order to have a
transaction which will be deemed a sale within the meaning of
Section 1001 of the code.
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American
National Bank of Austin v. United States (1970) |
In
determining whether a transaction is a sale-repurchase transaction
or a secured-loan transaction, the Court must consider whether the
transferee assumed any rights or risks of ownership, the intent of
the parties, and which party had the power of disposition.
|
Artnell
v. Commissioner (1988) |
The
tax court was ordered to conduct another hearing to determine
whether prepayments for service (i.e. proceeds of advance sales of
tickets and revenues for related future services) must be treated
as income when received or whether the revenues could be deferred
by the accrual basis taxpayer until the games were played or other
services rendered.
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Commissioner
v. Brown (1965) |
The
term “sale” is given its ordinary meaning and is generally
defined as a transfer of property for money which the buyer pays
or promises to pay to the seller.
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Commissioner
v. F. & R. Lazarus & Co. (1939) |
The
label parties affix to a transaction does not determine the
character of the transaction. In the field of taxation,
administrators of the laws and the courts are concerned with
substance and realities, the formal written documents are not
rigidly binding.
|
Commissioner
v. Hansen (1959) |
Amounts
credited to dealers “reserve accounts” on the books of finance
companies must be reported as income accrued during the tax years
in which they are credited to such reserve accounts because,
according to the court, the dealers acquired a “fixed right”
to receive the amounts retained by the finance companies at that
time.
|
Commissioner
v. Indiana-polis Power and Light Co.(1990) |
Where
an accrual basis taxpayer requires customers to make deposits but
the taxpayer holds the deposits for future refund or payment, said
deposits are not advance payments and therefore do not constitute
taxable income upon receipt. Although the taxpayer derives
some economic benefit from the deposits and has complete use and
control over them, the taxpayer does not have requisite
“complete dominion” over the deposits at the time they are
made, the crucial point for determining taxable income, because
the taxpayer’s right to return them is contingent upon events
outside its control.
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Deputy
v. DuPont (1940) |
Business
expenses, defined as the “ordinary and necessary” expenses
paid or incurred in carrying on a trade or business of the
taxpayer, are deductible. In addition, an expense may be
“ordinary” even if it happened only once in the taxpayer’s
lifetime if the transaction which gives rise to the expense is of
common occurrence in the type of business involved. The
determination of whether an expenditure is capital or ordinary
must be based on a careful examination of the particular facts and
circumstances of each situation.
|
Derr
v. Commissioner (1981) |
Transactions
that do not affect one’s beneficial interest other than to
reduce taxes must be ignored for tax purposes. The real purchaser,
the one that actually acquires the benefits and burdens of
ownership, may take applicable deductions.
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General
Gas v. Commis-sioner (1961) |
The
court followed Hansen and held that even though the taxpayer
transferred its “Consumers’” credit purchase notes to
financing agencies without recourse and the dealer’s reserves
included in part finance or service charges, the petitioner
acquired a “fixed right to receive” the reserves.
|
Gregory
v. Helvering (1935) |
A
taxpayer has the legal right to decrease the amount of what would
be his taxes, or altogether avoid them, by means that the law
permits if the means are related to a legitimate business or
corporate purpose.
|
Grodt
& McKay Realty, Inc. v. Commissioner (1981) |
The
economic substance of transactions, rather than their form,
governs for tax purposes. A transaction is a sale if the
benefits and burdens of ownership have passed to the purported
purchaser.
|
Healy
v. Commissioner (1953) |
Having
received salary under a “claim of right,” the taxpayer was
required to report it as income and to pay a tax thereon.
Funds are held under a “claim of right” when received and
treated by a taxpayer as belonging to him, even though the claim
may subsequently be found invalid.
|
Higgins
v. Smith (1940) |
Deductions
are permitted for losses “sustained during the taxable year”.
A loss is sustained when realized by a completed transaction
determining its amount.
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Knetsch
v. United States (1960) |
Transactions
between taxpayers and other entities must have substance.
Deductions are not allowed for “sham” transactions.
|
Mapco
Inc. v. United States (1977)
|
To
determine whether a bona fide sale has occurred for income tax
purposes, the court can consider motive, intent and conduct, in
addition to what appears in written instruments made by the
parties to control rights among themselves. The label the
parties affix to a transaction does not determine its character.
In addition, a transaction will not be disregarded merely because
it was entered into for tax saving motives if it otherwise has
real substance.
|
Milbrew
v. Commissioner (1983) |
Deductions
were not allowed for an “arm’s length contract” or
“purported sale” without a transfer of legal title and without
the payment of any cash to an entity having no tangible assets
because there was no good faith intention to transfer ownership.
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Northern
Indiana Public Services Co. v. United States (1997) |
A
tax avoidance motive is not inherently fatal to a transaction.
A taxpayer has a legal right to conduct his business so as to
decrease the amount of what otherwise would be his taxes.
However, the form the taxpayer chooses for conducting business
that results in tax avoidance “must be a viable business entity
that was formed for a substantial business purpose or actually
engages in substantive business activity.”
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Resale
Mobile Homes v. Commissioner (1988) |
A
seller of new and used mobile homes provided financing to
purchasers through arrangements with finance companies. The
seller sold the consumer paper to the finance companies and, in
return, received the principal amount plus participation interest
that was held in a dealer reserve account. The seller, an
accrual basis taxpayer, was required to report the entire
participation interest in the year the consumer paper was sold to
the finance company.
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Schlude
v. Commissioner (1963) |
The
Commissioner may, in the exercise of his discretion, reject an
accounting system that does not clearly reflect income and may
include as income advance payments made by way of cash, negotiable
notes and contract installments falling due but remaining unpaid
during that year.
|
Smith
v. Commissioner (1983) |
Unless
otherwise authorized by the Commissioner, a dealer must report
income from the sale of used cars by the accrual method because an
inventory is utilized. Under the accrual method, a dealer
must report the face amount of the notes as income in the same
year the notes are received.
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Spring
City Foundry v. Commissioner (1934) |
When
a taxpayer keeps accounts and makes income tax returns on the
accrual basis, it is the right to receive and not the actual
receipt that determines the inclusion of the amount in gross
income. In addition, if a debt is ascertained to be
worthless and it is charged off, the deduction must be made from
the income of the year in which the extent of the uncollectability
was definitely ascertained.
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Town
& Country Food Co., Inc. v. Commissioner (1969) |
A
sale or disposition involves the relinquishment of the substantial
incidents of ownership. If the taxpayer has merely subjected
financial obligations to a lien for the payments of indebtedness,
he does not lose the privilege of reporting the income from the
installment method. The taxpayer may, however, part with
such a substantial portion of his ownership rights in the
obligations as to require the conclusion that he has sold or
disposed of the obligations. Two considerations are whether
the obligors were notified of the transfer of the notes and which
party serviced the notes.
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Union
Planters National Bank of Memphis v. United States (1970) |
Where
the legal characterization of economic facts is decisive, the tax
consequences should be determined by the economic substance of the
transaction and formal written documents are not rigidly binding.
One factor necessary to determine whether a transaction is a loan
or a sale is which party bore the credit risk.
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United
States v. Centennial Savings Bank FSB (1991) |
If
the transactions are sales, then the taxpayer must recognize any
gain or loss for federal income tax purposes under Section 1001 of
the Internal Revenue Code. If the transactions are secured
financings, then the taxpayer does not include the borrowed
amounts in gross income.
|
United
Surgical Steel Co., Inc. v. Commissioner (1970) |
Under
Section 453(d), Gain or Loss on Disposition of Installment
Obligations, the pledge of an installment obligation as collateral
security for a loan is not a “disposition” of that obligation
and the taxpayer is entitled to report income on the installment
method. To determine whether a sale or disposition occurred,
the Court considered whether the transferee realized any income
from the installment obligations; whether the transferee assumed
any risk or received any gain; and whether the customer knew that
he was indebted to the transferee.
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Yancey
Bros. Co. v. United States (1970) |
To
determine whether a sale or disposition has occurred according to
Section 453(d)(1), the Court must consider the intent of the
parties and whether the transferee imposed restrictions on the
operations of the transferor that are consistent with a
lender-borrower relationship.
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IRS
Revenue Procedure 92-74 |
Changes
in accounting periods and in methods of accounting (Inventories).
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IRS
Revenue Procedure 92-98 |
Changes
in accounting periods and methods of accounting (Service Warranty
Contracts). |
