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year of inception of an EWA, plus the imputed income represented
by the interest-equivalent factor in each of the years of the
contract term.
In the notices of deficiency, respondent determined that the
service warranty income reported by petitioners had been computed
incorrectly for the years in issue.7 Respondent contends that
petitioners incorrectly computed their deduction for insurance
costs in the year a policy was purchased by taking a full year’s
worth of amortization rather than amortization measured from the
actual date of the policy’s inception and payment of the premium.
In the absence of information regarding the actual dates of sale
of EWA’s, respondent recomputed petitioners’ amortization
deductions on the assumption that the transactions had occurred
ratably over the years in issue.
In their petitions, petitioners alleged that respondent
erred in recomputing the amortization deductions, contending that
their amortization of insurance expense should be computed using
the same methodology as that used in computing receipt of EWA
income; that is, the convention deeming qualified advance payment
amounts as having been received on the first day of the taxable
year should likewise apply for amortization of insurance expense,
7 In the case of the Zamoras, the deficiency was determined
on the basis of the Zamoras’ distributive share of comparable
adjustments made to the warranty income of their S corporation,
Wondries Chevrolet.
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Last modified: May 25, 2011