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to use to report income from repairs that they perform on a fee-
for-service basis. In making this assumption they fail to
appreciate that the economic position of the Dealership (as well
as that of the customer) is materially different in the two
situations. When the Dealership sells a motor vehicle without a
VSC, the income it may earn from servicing the vehicle is
contingent in both time and amount; the Dealership would properly
report income in the future as earned by performance of services.
It would be impracticable to accrue this contingent service
income in the year the vehicle is sold, and the conditions for
inclusion in gross income under the all events test would not be
satisfied. By contrast, when the Dealership sells a vehicle
together with a VSC, it assumes the obligation to perform or
finance all covered repairs that may be required over a defined
term in exchange for a fixed price. The sale of the contract
effects a transfer to the Dealership of the risk that the actual
cost of servicing the vehicle over this term will be greater or
less than the fixed price. Thus, the VSC is not a contract for
the sale of specific future services, as petitioners characterize
it, but a service warranty. The purchase price of the contract
likewise corresponds not to the cost of any particular repair
jobs that the Dealership may be called upon to perform in the
future, but to the cost of assuming a defined risk.
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