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as they became nonrefundable. Under the VSC, the portion of the
contract price to be refunded to the purchaser on cancellation
declines in proportion to the greater of time elapsed or mileage
driven. Yet the Dealerships did not so report the reserves on
their returns and petitioners do not argue that it would have
been appropriate for them to do so.6 The method of accounting
for the reserves that the Dealerships did use is inconsistent
with the characterization of these amounts as deposits. And it
is this method, not the treatment of the reserves as deposits,
that respondent determined did not clearly reflect income. Thus,
when carried to its logical implications, the deposit theory is
not germane to any matter in controversy.
It is worth noting, moreover, that the portion of the VSC
purchase price that the Dealerships reported as their profit on a
sale was also subject to refund on cancellation in accordance
with the same declining balance formula applicable to the
reserves. Yet petitioners do not suggest that the Dealerships
would have been entitled to exclude their profit from gross
income on the ground that it too was merely a customer deposit.
6 Since mileage driven would not have been ascertainable by
the Dealerships, the most likely method of reporting income
consistent with the deposit theory would have been simply to
prorate the amount of the deposit over the maximum period of
coverage provided under the contract in accordance with the
refund schedule. Cf. Highland Farms, Inc. v. Commissioner, 106
T.C. 237 (1996).
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