CCA 200004002: IRS lacks facts to decide lease down payment income issue

Plain-English summary

An automobile lessor asked whether a lessee's cash down payment or trade-in value received by a dealer had to be included in the lessor's income when the lease began. The dealer could retain the amount and reduce the price it charged the lessor, or pass it to the lessor and charge the full price. Field counsel raised a constructive receipt question because the lessor had discretion over that arrangement. Chief Counsel said the record lacked enough facts to analyze or answer the issue. The memo did not decide whether the lessor had taxable income from the payment or trade-in.

Ruling snapshot

• Question: Must the lessor include the lessee's down payment or trade-in value received by the dealer in income?
• Outcome: Advice given: insufficient facts to reach a conclusion.
• Key authorities: IRC § 451; constructive receipt issue identified in the memo.

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Number: 200004002
Release Date: 1/28/2000

July 29, 1999
CC:DOM:FS:IT&A


UILC: 451.00-00

    INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE


MEMORANDUM FOR DISTRICT COUNSEL, OHIO, CLEVELAND


FROM:                     Deborah A. Butler
                          Assistant Chief Counsel CC:DOM:FS

SUBJECT:


This Field Service Advice responds to your memorandum dated April 29, 1999. Field Service
Advice is not binding on Examination or Appeals and is not a final case determination. This
document is not to be cited as precedent.


LEGEND:

A            =
B            =

ISSUE:

      Whether the automobile leasing transaction at issue requires lessor (A) to recognize
income equal to the cash down payment and/or vehicle trade-in value received by the automobile
dealer from the lessee at the inception of the lease.

CONCLUSION:

       We have insufficient facts to analyze this issue.
FACTS:

       A is a subsidiary of B and is engaged in automobile leasing. The leasing transactions
have several variations, but the form identified so far is as follows.

        A lease agreement is entered into between A, as lessors, and the automobile lessee. The
lease document is a preprinted form of A’s creation, bearing A’s trademark, and setting forth
standard terms which they require in all similar leases. The automobile dealer is not a party to
the lease agreement, and does not sell the automobile to A subject to the lease, but rather sells it
outright to A (at a reduced price reflecting the down payment or trade-in value received and
retained by the dealer from the lessee). You note that A is not a mere assignee of the lease, but
rather is a party to it and is responsible for its terms.

        As a participant in the formation of the lease, A has discretion regarding how the down
payment is handled. If the dealer gives the down payment to A, then it must charge A full price
for the automobile. Conversely, if the dealer retains the down payment, it must reduce the sales
price charged A for the automobile by a like amount. A would be in a favorable tax position if,
upon determining that a dealer will keep a down payment, such payment is not includible in A’s
income.

        You raise the question of whether, given the discretion that A possesses at the formation
of the lease to direct whether the down payment is retained by the dealer or turned over to A, A
has sufficient dominion and control over the down payment to be considered in constructive
receipt of it.

ANALYSIS:

       We find that we have insufficient facts to respond to your request for field service advice.

CASE DEVELOPMENT:



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      DEBORAH A. BUTLER



By:
      GERALD M. HORAN
      Senior Technician Reviewer
      Income Tax & Accounting Branch
      Field Service Division




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