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former employee. The parties have since settled most of these
issues, but the Commissioner hardened his heart against Cox’s
deductions for cash purchases of used cars.
We must decide whether to let them go.
Background
Raleigh Cox grew up in Houston. He is a talented mechanic,
and started a small business, Washington Car Care, in 1986. He
made the better part of his living by buying used cars--often
cars that were nowhere near working order--from local
wholesalers. He then fixed them up, and cleaned them up, and
resold them to other dealers. The business was not in the most
desirable section of Houston; as Cox pointedly testified, the IRS
did not contest his deduction for the cost of a guard dog.
Washington Car Care’s biggest problem, however, wasn’t
crime; it was thin capitalization. There were years when Cox was
just scraping by, and he often had customers who wrote bad
checks. This caused enough of Washington Car’s checks to bounce
that banks became unwilling to finance the business. Cox worked
his way around this problem with an old solution--a trade-
financed floor plan.
He set up the plan with Concord Motors, a used-car
wholesaler that was his main source of supply. He and Concord
would negotiate each car’s price, and he would then sign a draft
for that amount and leave it with Concord along with the car’s
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Last modified: May 25, 2011