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Significant Court Cases, Revenue Rulings, Internal Revenue Codes, and Treasury Regulations - Finance and Insurance

Commissioner vs. Hansen, 360 U.S. 446, June 22, 1959
Finance Reserves

  • Amounts credited to an automobile dealership in a reserve account on the books of the finance company must be reported as income during the tax year in which the amounts are credited to the reserve accounts.

Hinshaws, Inc., T.C. Memo 1994-327, July 18, 1994
Vehicle Service Contracts

  • Auto dealerships must report collections for vehicle service contracts as gross income in the year received.

Malone and Hyde, Inc., 76 AFTR2d 95-5952, August 18, 1995
Related Insurance Company

  • Payments by a parent corporation to a subsidiary for "insurance" are not deductible.
  • Under capitalization or indemnification are important factors in determining whether a transaction is a sham.

Rameau A Johnson, et al, 108 T.C. 448, June 16, 1997, Affirmed 84 AFTR2d 99-5306, July 21, 1999
Extended Service Contracts

  • Auto dealerships must report income from sale of vehicle service contracts in the year sold.
  • Claims are deductible as incurred
  • Investment income on escrow accounts is income to the dealership.
  • Stop loss insurance must be amortized if the taxpayer can demonstrate a reasonable manner in which to estimate the amount (cost) and timing of administrative services.
    - If a taxpayer cannot so demonstrate, a deduction should not be allowed until the end of a contract.

Schlude vs. Commissioner, 372 U.S. 128, February 18, 1963
Extended Service Contracts - Proper Reporting of Income

  • Income is taxable to an accrual basis taxpayer when all events have occurred fixing the right to receive it.

Toyota Town, Inc., T.C. Memo 2000-40, February 8, 2000
Extended Service Contracts

  • Automobile dealerships must amortize insurance premiums ratably over the term of the vehicle service contract.

William L McCurley, T.C. Memo 1997-371, August 14, 1997
Producer Owned Reinsurance Company

  • Distributions from a "shared" PORC are dividends to the individual.
  • The Court noted that an auto dealership PORC may be a "cash cow"
    providing "tax-free and interest free" funds for shareholders.

William Wright et al, T.C. Memo 1993-328, modified 10-29-93 1993 WL 724812, 67 T.C.M. (CCH) 3095, affirmed 73 F.3d 372
Producer Owned Reinsurance Company

  • Transactions between the dealership and the Producer Owned Reinsurance Company (PORC) were characterized as sham transactions.
  • The PORC's corporate form was disregarded and its income deemed received by the dealership owners.

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Page Last Reviewed or Updated: 18-Aug-2016