Could a Texas rental or leasing company use vehicles retired more than 18 months earlier for the fair-market-value deduction?

Plain-English summary

The Texas Tax Administration Division denied a request to use vehicles retired more than 18 months earlier as fair-market-value deductions on current replacement purchases.

The agency's position required an eligible vehicle to be retired from service, offered for sale, and claimed within 18 months. Management concurred with the denial.

The appended internal memo is unusually candid: Texas Tax Code § 152.002(c) authorized the deduction, and Rule 3.73 described valuation, but neither stated the 18-month deadline. The memo said the deadline arose from an industry agreement and had been applied in letters, audits, and refund reviews; it recommended adding the limit to the rule.

What this means for you

Rental and leasing companies

The 1991 denial rested on administrative policy rather than an express deadline in the cited statute or rule.

Fleet managers and refund claimants

Do not assume the 18-month policy remains current; verify the modern rule and refund standards.

Common questions

Q: Did the agency allow vehicles retired more than 18 months earlier?

A: No.

Q: Was the 18-month limit in the statute or Rule 3.73?

A: The appended memo said no.

Q: Why did the agency enforce it?

A: It described consistent letters, audits, and refund policy.

Citations and references

• Texas Tax Code § 152.002(c) — quoted for the fair-market-value deduction.
• 34 Tex. Admin. Code Rule 3.73 — identified as the historical valuation rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MVT
• Opinion: https://star.comptroller.texas.gov/view/9107L1124D07

Original ruling text

July 31, 1991

Dear **:

Thank you for the written request concerning motor vehicle fair
market value deduction.

You are requesting that COMPANY ABC be allowed to use vehicles
which were retired longer than eighteen months ago as replaced
vehicles in computing tax on current purchases. You have stated
several good reasons why this should be allowed.

It is this agency's position that an eligible vehicle to be used
as a replaced vehicle must have been retired from service and
offered for sale no more than eighteen months prior to being
claimed against a new vehicle purchase. Although no administra-
tive rule addresses the requirement, responses have been given to
taxpayers consistently indicating the 18 month requirement.
Audits have consistently been performed under the same position.

As I indicated I have asked agency management to review this
response and they have concurred.

This opinion is based on the facts presented. If there are addi-
tional or different facts, the opinion may change.

Please feel free to call on me if I may be of assistance.

Sincerely,

Curt Swenson
Tax Administration

Date: July 26, 1991

To: Lucy

From: Larry

Subject: Motor Vehicle Fair Market Value Deductions

We have received a request from **, president of COMPANY J,
to extend the 18-month time limit on the use of vehicles retired
from lease and rental fleets as fair market value (FMV) deductions.
He is requesting this time period extension only for COMPANY ABC.

This is how the FMV deduction works: When a vehicle is retired from
a lease or rental fleet, its value can be used like a trade-in on
the purchase of the new vehicle. This deduction can be taken even
if the retired vehicle has been sold to someone and COMPANY ABC, for
example, has received cash for the sale. If the vehicle has not been
sold when the new vehicle is purchased, the leasing company can use
the depreciated book value of the car as the FMV deduction.

History of this amazing concession to industry: In 1971,
the motor vehicle statute was amended to allow this tax
deduction for automobile dealers only. It was used when
courtesy cars, vans, and demos were replaced. The new car
dealers argued that they had to pay full price to the
manufacturers because the manufacturers didn't accept trade-
ins. This change allowed them to "trade the car in to
themselves." In 1977, the statute was again amended to
extend the deduction to motor vehicle rental and leasing
companies. 152.002(c) provides that:

"A person who is in the business of selling, renting, or
leasing motor vehicles, who obtains the certificate of title
to a motor vehicle, and who uses that motor vehicle for
business or personal purposes may deduct its fair market
value from the total consideration paid for a replacement
vehicle if:

(1) the person obtains the certificate of title to the
replacement motor vehicle;

(2) the person uses the replacement motor vehicle for
business or personal purposes; and

(3) the replaced motor vehicle is offered for sale."

Unfortunately, the statute does not specify when the
deduction may occur. To settle this issue, sometime after
the '77 statute amendment, industry members were polled as
to the maximum time period between the removal of a fleet
vehicle and the replacement of it. The answer given was 18
months. A general agreement was reached that retired
vehicles had to be used as a FMV deduction within 18
months; they then dropped from the available FMV deduction
pool.

Rule 3.73, "Determination of Fair Market Value for Replaced
Vehicles," became effective May 19, 1978, and has never been
amended. It merely gives instructions on how the FMV is to
be computed if the replaced vehicle has not been sold.
There are no references either to the 18-month qualification
or to when the deduction must be claimed.

In October 184, we revised pamphlet # 96-141, which was
originally published around May of 181, to include a
statement about the 18-month limitation. This pamphlet,
however, was not mass-mailed, but merely distributed to
enforcement and audit offices.

So, basically, on the 18-month limitation, we have nothing
in the statute, nothing in the rule, a statement in a
pamphlet with a hit-or-miss distribution plan and a few
letters to individual rental or leasing companies on
microfiche. There appear to have been many more letters
sent to taxpayers that were not microfiched.

However, Tom, Curt and Adina think that we have always
maintained our 18-month policy on all refund requests. I
have not been able to find any case where we allowed anyone
to get around this limitation.

In summary, I think that we definitely can and should deny
*'s request to allow them to use vehicles retired all the
way back to September 87. We will immediately begin a
rewriting of the rule that would include the 18-month
limitation and require that the deduction must be taken at
the time of purchase and registration of the replacement
vehicle.

Of course, ****'s next move will be to request a 4-year
refund for COMPANY ABC. This brings us to some more interesting
policy decisions from yesteryear. We allowed several
companies to receive 4-year refunds if they could show that
(a) they did not know of the existence of the FMV deduction
OR (b) the deduction was not taken because of some
"clerical" error; i.e., the dealer's bookkeeper or clerk
forgot to put the FMV of the replaced vehicle on the green
tax affidavit. Once again, it must be emphasized that we
still held these taxpayers to the 18-month limitation; that
is, for refunds granted on purchases 4 years in the past,
the vehicle used for the FMV deduction had to be retired no
longer than 5 years and 6 months in the past.

COMPANY ABC never took any deductions until December of 1990,
according to Stan. Curt checked on this and found only a
handful of deductions taken in COMPANY ABC's name by a very few
dealers, all in West Texas, before December 190. These
could very well have been taken without COMPANY ABC's knowledge.
At any rate, I think we could assume these were de minimis
and grant a 4-year refund. This brings up the "one-bite"
policy for refunds. We have allowed each company that could
claim they fell under qualifications (a) or (b) above to get
one refund, either through a field audit or a refund
processed in Revenue Accounting. Several leasing or rental
companies tried to come back a second time four years later
and get another one and we denied it.

Recommendation: assuming **** can reasonably assert that
COMPANY ABC falls under (a) or (b), we should grant a refund, with
the 18-month restriction, if he files the request before the
effective date of our yet-to-be-written rule amendment.

One last note on *'s arguments: he has referred to our
dealings with COMPANY X (). COMPANY X was refunded almost $ 1
million on a 4-year refund request. ** postulates that the
auditor(s) who verified the refund either did not check into the
retirement dates of the replaced vehicles to document that the 18-month
limitation was followed or that we did not have the ability
to cross-check all the vehicles to document the limitation.

I talked to Harold Lee about this, and he doesn't remember
anyone disregarding the limitation. However, I told ****
that regardless of how the refund audit was conducted, our
policy stance on the 18-month limitation would not be
affected.

I recommend that we send out Curt's denial of the extension
of the limitation period, keep quiet about the 4-year
refund, and let * make the next move.

Finally, a concluding remark on this overly-wordy memo: What
are your feelings about getting legislation to eliminate
this deduction altogether? Besides the millions of dollars
lost annually to the leasing companies, the rental companies
also are able to lower their minimum motor vehicle tax
liability on their fleets. In my opinion, the entire
concept of this deduction resulted from a "deal" with an
extremely powerful lobby, even though they obviously got the
legislation passed.