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These cases were consolidated for trial, briefing, and
opinion by reason of the presence of common issues regarding the
methods used by certain motor vehicle dealerships to report
income and expense on the sale of multiyear vehicle service
contracts (VSC's). In docket Nos. 16038-93, 16039-93, and 17007-
93 all the adjustments are attributable to these common issues.
In docket No. 14430-94 only the adjustments related to the tax
treatment of VSC's have been consolidated; the remaining
adjustments were settled by the parties separately. Prior to
trial, respondent revised the adjustments on the basis of more
complete information, as a result of which the deficiencies now
asserted are lower than those set forth in the notices of
deficiency. Respondent has also conceded the addition to tax
under section 6653(a) in docket No. 17007-93 and penalties under
section 6662(a) in all dockets to the extent attributable to the
consolidated issues. The issues that remain for decision are:
1. Whether accrual basis motor vehicle dealerships may
exclude from gross income for the year of the sale of a VSC that
portion of the contract price that they were required to deposit
in escrow to secure their obligations under the contract;
2. whether the dealerships may exclude from gross income
the investment income earned by the funds held in escrow; and
3. whether the dealerships may exclude or deduct from
gross income for the year of the sale of a VSC those portions of
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