Payments To Automobile Dealers Includable As Gross Income

In a generic legal advice memorandum (GLAM 2014-004), the IRS determined that payments received by automobile dealerships from automobile manufacturers under a facility image-upgrade program were income under Section 61.

The facts in the GLAM indicate that to encourage automobile dealerships to expand, modernize or renovate their facilities, some automobile manufacturers offer payments to the dealerships to upgrade their facilities in accordance with the manufacturers' requirements. The payments also promote a standard brand image. Each dealership's participation in the payment program is voluntary and serves the sole purpose of defraying the dealership's costs for the upgrades.

Upon examination, the IRS has seen dealerships treat these payments inconsistently. Some dealerships exclude the payments from income as nonshareholder contributions to capital under Section 118. Other dealerships assert that the payments reduce the basis of the constructed assets and are not includable as part of gross income. Some dealerships treat the payments as a purchase price adjustment to the vehicles. In a few cases, the dealerships include the payments as income.

The IRS concluded that all the payments are includable in dealerships' gross income under Section 61. It noted that the dealerships, not the manufacturers, own the property that the dealerships construct or improve with the payments. Thus, the dealerships have an accession to wealth over which they have complete dominion and control.

The IRS also concluded that the dealerships must include the full costs of the construction in the basis of the newly constructed property under Section 1012 and include the costs of the capital improvements in the adjusted basis of existing property under Section 1016.

Some dealerships assert that the payments are purchase-price adjustments to the purchased vehicles but the IRS rejected this argument. The IRS stated that the contracts indicated no evidence that the payments were...