- 70 -
year while a VSC is in effect, the cumulative amount of Fees
incurred up to and including that year must bear the same
relation to the total Fees attributable to the contract as the
greater of time elapsed or mileage driven bears to the applicable
limit specified in the contract. In general, while a contract
remained in effect the issuing Dealership would have known only
the amount of time elapsed; it would have had no means of
ascertaining the amount of mileage driven, unless the contract
holder brought the covered vehicle in for repairs. In the
absence of mileage information, the Fees would have been
incurred, and may be recognized, in equal annual increments over
the maximum time period provided for in the contract to which
they relate.11 If for any taxable year the Dealership had
mileage information establishing a higher cumulative amount of
Fees incurred than the amount implied by time elapsed, then a
compensating adjustment would be made for that year.12
b. Timing of Income
Petitioners argue that "proper matching of income and
expense under the accrual method requires deferred recognition of
the portion of the purchase price allocable to Administrator Fees
11 Cf. Hinshaw’s, Inc. v. Commissioner, T.C. Memo. 1994-327
(reaching a consistent result on similar facts).
12 We leave to the parties the task of applying this formula
to each of the VSC’s in the random sample that respondent used to
compute the revised adjustments and that the parties have agreed
to use as the basis for Rule 155 computations.
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