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failed to make the requisite showing, and accordingly may not
deduct the Fees until expiration of the VSC’s to which they
relate.
We accept respondent’s interpretation of the economic
performance rule and adopt it as the evidentiary standard for
these cases. However, we do not agree with respondent’s
application of this standard.
One index for measuring the Administrator’s performance may
be found in the provisions of the operative agreements that
govern how the Fees are earned for refund purposes. Under the
refund formula, the Fees attributable to a contract are earned in
proportion to the greater of time elapsed or mileage driven under
the contract. This formula reflects two important aspects of the
Administrator’s performance. First, the Administrator was
obligated to incur substantial costs simply in making certain
resources available at all times for processing claims and
cancellations, whether or not a claim or cancellation notice was
actually filed. Second, the Administrator provided recordkeeping
and reporting services regularly throughout the term of the VSC.
We think that the refund formula represents “a reasonable
manner in which to estimate the amount and timing of the
[Administrator’s] services” for purposes of section 461(h), and
neither party has established the validity of any other
estimation approach. The formula implies that, for any taxable
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