Source: http://www.irs.gov/Businesses/Corporations/New-Vehicle-Dealership-Audit-Technique-Guide-2004---Chapter-14---Other-Auto-Dealership-Issues-(12-2004)
Timestamp: 2013-06-19 01:59:11
Document Index: 522281493

Matched Legal Cases: ['§62', '§ 62', '§ 1', '§ 274', '§ 274', '§ 1', '§ 274', '§ 1', '§179', '§1033']

Employers typically claim reliance on Rev. Rul. 68-624, 1968-2 CB 424, as authority for designating a portion of an employee's compensation as a payment for the use of tools and excluding that amount from wages. Rev. Rul. 68-624 considers what percentage of the total amount paid by a corporation for the use of a truck and the services of a driver are allocable as wages of the driver for FICA purposes. The facts specify that the corporation hires a truck and driver to haul stone from its quarry to its river loading dock at a fixed amount per load and allocates one third of the amount paid the employee as wages and two-thirds as payment for the use of the truck. The ruling holds that an allocation of the amount paid to an individual when the payment is for both personal services and the use of equipment must be governed by the facts in each case. If the contract of employment does not specify a reasonable division of the total amount paid between wages and equipment, a proper allocation may be arrived at by reference to the prevailing wage scale in a particular locality for similar services in operating the same class of equipment or the fair rental value of similar equipment. Although Rev. Rul. 68-624 has not been obsolete, it should not be relied upon to exclude tool reimbursement payments for service technicians from wages. The analysis in Rev. Rul. 68-624 does not comport with current law because it does not consider the application of I.R.C §62(c). Under current law, tool reimbursements can be excluded from wages only if paid under an accountable plan. An employment contract that merely allocates compensation between wages and tool reimbursements will not satisfy the requirements of I.R.C. § 62(c). To exclude employee reimbursements or other expense allowance payments from wages, an employer must establish an accountable plan. An arrangement will qualify as an accountable plan if it meets the three requirements of business connection, substantiation, and return of excess.
In addition to the requirement that substantiation be made on a timely basis, such substantiation of expenses must be detailed and complete. Treas. reg. § 1.62-2(e)(2) requires that, for expenses governed by I.R.C. § 274(d), the employee must submit information sufficient to satisfy the requirements of I.R.C. § 274(d) and the regulations, which deal with substantiating the amount, time, place, and business purpose of the expenses to the employer by adequate records. Treas. reg. § 1.62-2(e)(3) requires that, for expenses not governed by I.R.C. § 274(d), the employee must submit information sufficient to enable the employer to identify the specific nature of the expense and to conclude that the expense is attributable to the employer's business activities. Fair tool rental value, regardless of the accuracy of its estimation, does not satisfy this requirement, as it does not provide any information about the amount of, or the specific nature of, any expenses paid or incurred by the employee. The requirements set forth in Treas. reg. § 1.62-2(f) regarding the return of amounts in excess of expenses further clarify that only expenses actually paid or incurred may be treated as paid under an accountable plan. Employees are required to return to the payor within a reasonable period of time any amount paid in excess of expenses substantiated. This section specifies that an arrangement advancing money to an employee to defray expenses will satisfy the requirements of an accountable plan only if the amount of money is reasonably calculated not to exceed the amount of anticipated expenditures and the advance is made on a day within a reasonable period of the day that the anticipated expenditures are paid or incurred. A regular, routine allowance or advance for the rental value or use of tools would not meet this requirement.
Each tool reimbursement arrangement should be reviewed to determine whether the accountable plan rules are met. In addition to the factors previously discussed, there are other factors to take into account. It is relevant to know when the employer began compensating its employees in part with a tool reimbursement program. It should be ascertained whether the arrangement is written, and, if so, the writing should be reviewed to determine if its terms comply with the requirements of an accountable plan. Such writing may be in the form of a lease, an employee handbook, or an employment contract. Whether the written terms of the arrangement are actually followed is important. The service technicians' understanding of the arrangement also should be considered. Employers frequently assert that it is industry practice to pay service techs for the use of their tools. There is no "industry practice" exception to the accountable plan requirements. After analyzing the tool reimbursement arrangement, a determination can be made whether it meets the accountable plan requirements. Documents to Request - Service Technician Tool Reimbursement
Business Connection Substantiation
Example From "window sticker": MSRP
Destination Charges 400
Vehicle Factory Wholesale Price $9,000
IRC section 446(a) provides, in pertinent part, that taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books. IRC section 451 provides that the amount of any item of gross income shall be included in gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be accounted for as of a different period.
The dealer sells the note to a finance company that agrees to pay the dealer a 20 percent commission on
the finance charge, or $180.
In order to use any of the first three methods, the driver of the demonstrator vehicle must qualify as a full-time salesperson and the dealership must have a written policy. A sample written policy is included in Appendix A and B of the revenue procedure. The rules to qualify as a full-time salesperson are: [ref. IRC 132-5(o)(5)]
For each demonstrator, the dealer must record the mileage at the end of the day and again at the beginning of the following day. The miles driven during this time cannot exceed the salesperson's commute plus 10 miles. The employer must determine if the personal miles exceed an average of 10 miles per day, no less often than monthly. If the average personal miles are less than 10 miles per day, and all other requirements of this section are met, the salesperson's use of the demonstrator is not taxable. The taxpayer is required to maintain the following records:
The dealer can use this method for used car demonstrators. Questions 33 and 34 address scenarios for used car demonstrators. Documents to Request
The dealer has a qualified written policy, the policy was communicated to employees, and there is no evidence that the salesperson violated the written policy. Documentation of communication to employees of the policy may include a copy of a poster notifying employees, a copy of a letter or electronic communication, or signed statements by the employees acknowledging receipt of the written policy. Payroll records should indicate that withholding and income are properly accounted for on a monthly basis
The dealer should be able to support the determination of the value of the demonstrators. If the dealer has multiple franchises, locations and/or has used vehicles for demonstrators, the dealer must be consistent in the valuation method
that is employed. If a dealership does not qualify for one method, the dealer may still qualify to use one of the other methods described in the revenue procedure.7
Inquire about fair market value of donated car- possibly overvalued? Was a used car-pricing guide considered in determining the fair value? Inquire if the dealership is acting as a 3rd Party and making payments to the charity for the donated vehicles during fund raising programs. If so, the donated goods exception (section 513(a)(3)) to the unrelated business income tax provisions might not apply. Contact Exempt Organizations for assistance. An EO referral Form 5666 for a collateral examination request may be necessary.
To be eligible for the deduction under §179A, a motor vehicle must: Meet the applicable federal and state emissions standard respect to each fuel by which the vehicle is propelled
02 Internal Revenue Service's Acknowledgment. The Internal Revenue Service will review the original signed certification and issue an acknowledgment letter to the original equipment manufacturer (or, in the case of a foreign original equipment manufacturer, its domestic distributor). This acknowledgment letter will state whether purchasers may rely on the certification.
03 Purchaser's Reliance. Copies of the certification and acknowledgment may be made available to purchasers. Except as otherwise provided in the acknowledgment, a purchaser of a hybrid vehicle may rely on the certification concerning the incremental cost of permitting the use of electricity to propel the vehicle.
This methodology is being promoted by tax consultants, manufacturing industries and accounting firms; and under study by the Large and Mid-Size Business division. J. Oldsmobile Dealer Franchises and Involuntary Conversion (Internal Revenue Code §1033) treatment - The treatment of payments for Oldsmobile dealers is still being discussed. This section will be updated as the law changes. In July 2002 Senate Bill 2726 was introduced due to the decision of General Motors to eliminate the Oldsmobile product line in December 2000. GM offered Oldsmobile dealers other dealership opportunities to assist in the phase-out of that line. A revenue ruling is pending at the writing of this section. There is a private letter ruling issued in 2002 which applies specifically only to that dealership.