IRS Office of Chief Counsel - Facility Upgrade Payments Are Includible in Income

On May 9, the IRS Office of Chief Counsel released a memorandum addressing the tax treatment for amounts that automobile dealerships receive from manufacturers under Facility Image Upgrade Programs.

The memorandum addresses three different situations in which dealerships are receiving facility upgrade payments. In all three situations, dealership participation was voluntary and payments were made to encourage the dealership’s compliance and completion of the facility upgrades and not to encourage the dealership’s purchases or sales of vehicles.

In all three situations, the memorandum concludes that the payments are includible in the dealership’s gross income under Section 61 of the Internal Revenue Code (Code). The memorandum further concludes that dealerships in these situations cannot rely on Section 118(a) of the Code to exclude the payments from gross income. Further, because the payments are not nonshareholder contributions under Section 118, the basis of the newly constructed or improved property cannot be reduced under Section 362(c) (2). Additionally, the memo concludes that the payments cannot be treated as vehicle purchase price adjustments.

The analysis given for the conclusions are that the dealerships, not the manufacturers, own the property that the dealerships construct or improve and the payments are to defray the cost for that construction or improvement. By receiving the payments, the dealerships have an accession to wealth over which they have complete dominion and control. As such, the dealerships must recognize gross income at the time they receive the payments or appropriately accrue the right to receive payments under their method of accounting.    

Note that a Chief Counsel Memorandum is written advice or instruction prepared and issued by the Office of Chief Counsel to field or service employees of the IRS or Office of Chief Counsel. The advice is issued to assist IRS personnel in administering their functions; it is not to be used or cited as precedent. However, it is considered substantial authority and represents the probable litigation position of the IRS.

The memorandum makes it clear what the IRS’ position will be for dealerships participating in programs that meet, or are very similar, to the ones stated in the memorandum. However, there are many different programs and many may not be similar to the fact patterns listed in the memorandum. Accordingly, dealerships should consult with their tax advisors to review the facts and circumstances unique to their individual programs in order to determine the correct tax treatment.

Contact Kathy Petrucci at 614 586-7214 or for more information on this article.

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