Important Court Cases
Lucky Stores, Inc. and Subs v. Commissioner 105 T.C. 480 (1995)
Decision relating to the valuation of bread contributed to charitable organization. Many taxpayers will cite this as authority for their valuation of contributed inventory. Unless the fact pattern is similar to the facts in the case, the decision will not be relevant.
RJR Nabisco Inc., et al., v. Commissioner, T.C. Memo 1998-252
Decision relating to package design costs. This decision states that package design costs are a form of advertising and as such are currently deductible.
Jefferson Pilot Corp v. Commissioner 98 T.C. 435 (1992), affd. 995 F2d 530 (4th Cir. 1993)
The court determined that a license is a franchise as defined in IRC Section 1253(b)(1). The courts looked to the legislative history of IRC Section 1253 and found that it does not limit the application of IRC Section 1253 to private commercial franchises. Previously, the IRS held the position that a liquor license had an indeterminate life and therefore costs were not recoverable through depreciation or amortization. As a result of the decision in this case, taxpayers can amortize the cost of their liquor license. See also Tele-Communications Inc. (TCI) v. Commissioner 95 T.C. 495 (1990) affd. 12F3d 1005 (10th Cir. 1993).
Fox Photo, T.C. Memo 1990-348
This decision allowed a small structure to be treated as 5-year property for depreciation purposes.
Commissioner vs. Hansen, 360 U.S. 446, June 22, 1959
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 Par 95-5250, 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. No. 22, June 16, 1997, Affirmed 84AFTR2d 99-5073, 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. 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 1993-325, July 26, 1993, 76 AFTR2d Par. 95-5805, October 29, 1993
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.
City of Santa Rosa, CA v. Commissioner, 120 T.C. No. 12 (May 13, 2003)
The Tax Court has held that proposed bonds that financed a wastewater pipeline (1) did not meet the private business use test of IRC section 141(b)(1), (2) were not private activity bonds, and (3) interest on the bonds is excludable under section 103(a).
Trans-Box Systems Inc. v. United States, AFTR2d (RIA) 6479 (N.D. Cal. 1998) affd. 2000 U.S. App Lexis 12595 (9th Cir. June2, 2000) Payments to Drivers Do Not Comply With Accounting Plan Rules
Amounts paid to employee drivers as reimbursements for mileage expenses were not paid pursuant to the accountable plan. Rejected plaintiff's assertion that a substantial compliance rule applies to accountable plans.
Esobar de Paz vs. Commissioner, T.C. Memo 2000-176, May 26, 2000 Payments to Drivers are Wages, not Wages and Lease Income
All amounts paid to employees for transporting cargo in employee-owned trucks were wages. The employees were not engaged in two separate activities of leasing trucks to their employer and driving the trucks.
Revenue Procedure 2001-23 - This procedure provides an optional LIFO inventory computation method for taxpayers who sell used automobiles or used light-duty trucks. The link-chain, dollar value LIFO inventory method is designed to simplify the dollar-value LIFO computation of used vehicle dealers.
Revenue Procedure 2001-10, 2001-2 I.R.B.
This revenue procedure supercedes Revenue Procedure 2000-22 (below). This procedure provides that the Commissioner of Internal Revenue will exercise his discretion to except a qualifying taxpayer with average annual gross receipts of $1 million or less from the requirements to account for inventories. This revenue procedure also provides the procedures by which a qualifying taxpayer may obtain automatic consent to change to the cash receipts and disbursements method of accounting (the cash method) and to a method of accounting for inventory as materials and supplies that are not incidental.
Revenue Procedure 2000-22, 2000-20 I.R.B.
This revenue procedure provides that the Commissioner of Internal Revenue will exercise his discretion to except a qualifying taxpayer with average annual gross receipts of $1 million or less from the requirements to account for inventories and to use an accrual method of accounting for purchases and sales of merchandise. This revenue procedure also provides the procedures by which a qualifying taxpayer may obtain automatic consent to change to the cash receipts and disbursements method of accounting (the cash method).
Revenue Procedure 98-60 - Procedures are provided under which a taxpayer may obtain automatic consent of the Commissioner to change certain methods of accounting.
Revenue Procedure 97-37 - The July 1997 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to July 31, 1997.
Internal Revenue Code Section 446 - General rule for methods of accounting. Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his/her income in keeping his/her books.
Internal Revenue Code Section 461 - General rule for taxable year of deduction. The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.
Internal Revenue Code Section 481 - Adjustments required by changes in method of accounting.
Leb's Enterprises, Inc., 85 AFTR2d Par. 2000-450, January 24, 2000
U.S. District Court granted summary judgement to the Government.
Drivers that transported vehicles from place to place were employees
of the company.
- Company was responsible for applicable employment taxes.
BMW of North America, Inc., 83 AFTR2d Par. 99-413, February 11, 1999
Valuation of Vehicles Provided to Employees
U.S. District Court granted partial summary judgement to the Government.
BMW cannot use the special valuation rules to determine the fringe benefit value of BMW cars provided to its employees. BMW improperly applied the rule.
Burien Nissan Inc., et al. v. Commissioner, T.C. Memo 2001-116, May 14, 2001
Covenant Not to Compete
The Tax Court determined that the taxpayer's covenant not to compete agreement was entered into after the enactment of IRC 197. The taxpayer was required to amortize the agreement over a period of 15 years as required by IRC 197.
Frontier Chevrolet Co. v. Commissioner, 116 T.C. No. 23, May 14, 2001
Covenant Not to Compete
The Tax Court determined that the taxpayer's covenant not to compete agreement was entered into pursuant to a redemption of his stock. The taxpayer was required to amortize the covenant not to compete over 15 years.
Howard Pontiac GMC, Inc., T.C. Memo 1997-313, July 7, 1997
Covenant Not to Complete
The Tax Court "split the baby in half" ruling that neither the taxpayer nor the Government properly valued a covenant not to compete.
John Jorgl, et ux. v. Commissioner 88 AFTR2d Par. 2001-5079; No. 00-12462 (28 Jun 2001)
Couple Must Recognize Income From Covenant Not to Compete
The Eleventh Circuit, in a per curiam opinion affirming the Tax Court, has held that a couple must recognize income from a covenant not to compete on the sale of their business, because the parties intended to allocate sales price to the noncompete agreement.
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.