IRS Guidance on Manufacturer Imaging Payments
The Internal Revenue Service has issued guidance on tax treatment of factory payments for facility upgrade programs.
The guidance considered three types of situations in which a franchisor pays the dealer for upgrades: (1) lump sum payments for a portion of construction costs; (2) payments made quarterly based on dealer purchase of new vehicles if the dealer meets certain goals for the program’s elements; and (3) lump sum payments for a portion of the upgrade costs plus payment per new vehicle sold.
The bulletin noted that taxpayers have been treating the program payments inconsistently. Some have treated them as income, but others have excluded them from income, asserting they are non-shareholder contributions to capital, or that program payments reduce the basis in constructed assets or that they are a purchase price adjustment for vehicles.
The IRS rejected all three analyses that excluded program payments from income. The IRS stated that the program payments must be included in gross income.
A dealer should contact its tax advisor to discuss treatment of payments. The IRS bulletin is here: www.irs.gov/pub/irs-utl/AM2014-004.pdf
Authority of States Officials under the Dodd-Frank Act: It Just Keeps Getting Tougher For Auto Lenders
In April 2014, the State of New York filed a federal lawsuit against a subprime indirect auto lender and its CEO. The suit charged that the lender stole funds from its customers and endangered their personal information. The court immediately granted a temporary restraining order freezing the lender’s funds, and that freeze was extended in May 2014 when a receiver was appointed for the company pending an outcome.
What is unique about this lawsuit is that it is one of the first uses of the expanded authority under the Dodd-Frank act for state regulatory and law enforcement authorities. A little known section of the Act grants authority to state officials, such as attorneys general or heads of state regulatory agencies, to file lawsuits to enforce federal consumer financial laws. The state can then utilize remedies prescribed by the Dodd-Frank, even if state law does not provide for those. That authority was used in the New York lawsuit to freeze the lender’s assets and seek appointment of a receiver.
So why is this important to auto dealers? Because it is more evidence of the fact that it just keeps getting harder for companies providing consumer credit on whom dealers rely heavily. Whether it is fair lending warnings from the CFPB, other investigations by the CFPB, or lawsuits involving alleged violations of federal financial laws by state authorities, the burdens on finance sources keep increasing. And on whom will the increased burdens fall? Dealers, of course. Creditors will simply impose heavier responsibilities on dealers to demonstrate compliance with laws, and financing for motor vehicle purchasers will become more difficult as finance sources become more wary of the burdens surrounding consumer paper.
Do Not Alter Employee Time Records
Do supervisors in your dealership alter employee time records? If so, that is a dangerous practice under the Fair Labor Standards Act, and supervisors should know that their personal assets could be at risk.
In a recent case, health aides working at a home for the disabled found that their reported time had been altered. They were reporting 48-hour shifts because they had to check on residents every two hours, around the clock. However, when they turned in their time sheets, supervisors deducted eight hours to reflect the two four hour breaks to which the aides were entitled. The CEO of the company signed off on the altered time sheets.
Because the employees could not leave the building and had to call the main office every hour, the court found that they were working the full time reported. It held that the company was liable to the employees. To make matters worse, the court found the CEO personally liable with the company for the $500,000 judgment because of the personal role in altering the time sheets.
As we have always written, the best method for determining the hours the employees work is a time clock with employees punching in and out. If an employee makes mistakes or misstatements about hours worked, a supervisor should counsel with the employee, not unilaterally change the time records.