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covered by the EWA and was obligated to reimburse the purchaser
for claims covered by the EWA provided the purchaser followed the
proper claims procedures. The purchaser could obtain the repairs
at a repair facility other than the Dealership from which the
vehicle was purchased, so long as the purchaser complied with the
terms of the EWA, which provides:
In the event of a Breakdown [i.e., the failure of
a covered part], you [i.e., the EWA purchaser] must
follow this procedure.
1. Return your vehicle to the Dealer [i.e., each
petitioner]. If this is not possible or practical, you
must call his Claims Service (insurer) [i.e., Western
General] for instructions * * *
Petitioners are accrual method taxpayers. For the years in
issue, petitioners elected to report their income from the EWA’s
using the “service warranty income method” set forth in Rev.
Proc. 92-98, 1992-2 C.B. 512, 514. Rev. Proc. 92-98, supra,
permits certain accrual method sellers of motor vehicles and
other durable consumer goods that receive a lump-sum payment
(advance payment) from the sale of a multiyear service warranty
contract to defer recognition of a portion of the advance payment
generally over the life of the service warranty obligation. The
portion of the advance payment permitted to be deferred under
Rev. Proc. 92-98, supra, is the amount paid by the seller (within
60 days of receipt) to an unrelated third party for insurance
costs associated with a policy insuring the seller’s obligations
under the service warranty contract (the qualified advance
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