Profit Drivers
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Profit DriversVolume 2 #21,987 words New Budget Proposals to Close Loopholes The Internal Revenue Service (IRS) and Treasury Department continue to scrutinize a type of transaction used by auto dealer taxpayers that shifts income away from the dealership to related companies, purported to be insurance companies, that are subject to little or no U.S. federal income tax. The transaction generally involves an automobile dealer that offers its customers the opportunity to purchase an insurance contract in connection with the vehicles or services being sold. The insurance provides coverage for repair or replacement costs if the vehicle breaks down or is lost, stolen or damaged. In addition, the insurance provides coverage for the customer’s payment obligations in case the customer dies or becomes disabled or unemployed. Automobile dealers offer the insurance to its customers by acting as an insurance agent for an unrelated insurance company (“Company X”). The dealer receives a sales commission from Company X equal to a percentage of the premiums paid by the customers. The auto dealership forms a wholly-owned corporation (“Company Y”), typically in a foreign country, to reinsure the policies sold. Promoters sometimes refer to these companies as producer owned reinsurance companies or “PORCs.” If Company Y is a foreign corporation, it typically elects to be treated as a domestic insurance company. Company Y takes the position that it is entitled to the benefits of § 501(c)(15) (providing that non-life insurance companies are tax exempt if premiums written for the taxable year do not exceed $350,000), § 806 (providing a deduction for certain life insurance companies with life insurance company taxable income not in excess of $15,000,000) or § 831(b) (allowing qualifying non-life insurance companies whose net written premiums are between $350,000 and $1,200,000 to elect to be taxed solely on investment income). The dealership receives premiums from its customers and remits those premiums (typically net of its sales commission) to Company X. Company X pays any claims and state premium taxes due and retains an amount from the premiums. Under Company Y’s reinsurance agreement with Company X, Company Y reinsures all insurance policies that the dealer sells to its customers. Company X transfers the remainder of the premiums to Company Y as reinsurance premiums. Many of these transactions have been designed to use a reinsurance arrangement to divert income properly attributable to the dealership to its wholly-owned reinsurance company that is subject to little or no federal income tax. The IRS continues to challenge the purported tax benefits from these transactions on a number of grounds. First, depending upon the facts and circumstances, the IRS may assert that Company Y is not an insurance company for federal income tax purposes. For federal income tax purposes, an insurance company is one whose primary and predominant business activity during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies. Income tax regulations provide that a company will be treated as an insurance company for federal income tax purposes only if “more than half of the business” of that company is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies. To determine whether Company Y qualifies as an insurance company, all of the relevant facts will be considered, including but not limited to, the size and activities of any staff, whether Company Y engages in other trades or businesses and its sources of income. If Company Y is not an insurance company, it will not be entitled to the benefits of §§ 501(c)(15), 806 or 831(b). Further, if Company Y is a foreign corporation and is not an insurance company, it will be treated as a controlled foreign corporation. In such a case, the taxpayer will be treated as a U.S. shareholder of Company Y and generally will include in its gross income on a current bases any of Company Y’s insurance income. Second, the IRS may exercise its authority to allocate gross income, deductions, credits or allowances among persons owned or controlled directly or indirectly by the same interests if such allocation is necessary to prevent evasion of taxes or clearly to reflect income. Third, in appropriate cases, the IRS may disregard the insurance and reinsurance arrangements and thereby require the dealership to recognize an additional portion of premiums received from its customers as income if the arrangements are shams in fact or shams in substance. Courts have distinguished between “shams in fact” where the reported transactions never occurred and “shams in substance” where the reported transactions actually occurred but lack the substance their form represents. In determining whether a transaction constitutes a sham in substance, both a majority of the Courts of Appeals and the Tax Courts consider two related factors: economic substance apart from tax consequences and business purpose. Although a taxpayer has the right to arrange its affairs to reduce its tax liability, the substance of a transaction must govern its tax consequences regardless of the form in which the transaction is cast. Earlier this year, the Treasury Department announced a series of legislative proposals included in the President’s fiscal year 2005 budget that are designed to halt these types of abusive tax avoidance schemes. The Administration’s current proposal would prevent individuals from using these particular targeted exemptions, which they claim will generate $1.184 billion in revenue over the next 10 years. These are clearly complex issues that need to be addressed if you currently have or are considering establishing a producer-owned insurance company. For more information, please contact our offices. Parts Management Fraud has become a real threat for automobile dealerships, with the most likely target being a dealer’s inventory. That is because a typical parts inventory contains products that can be easily converted into cash. Even though, what appeared to be fraud turned out to be circumstances arising from deficient internal controls or inefficient paper flow, the possibility of fraud remains. Often the frauds are small scale and difficult to detect. So, how do you know if fraud is being committed in your parts department? Short of catching the person in the act or being tipped off by unusual circumstances, it is difficult to know for certain. There are, however, steps that can be taken to reduce the likelihood of fraud. Fraud TriangleIt is important to know what contributes to fraud. Three conditions must exist in order for it to occur: situational pressures, opportunity and rationalization. Combined, these make up what is known as the “fraud triangle:” a need (usually financial), together with the chance to commit and hide a dishonest act (usually a theft) combined with a self-rationalization that the act is justified. Situational pressures are generally social in nature such as improving a lifestyle, “keeping up with the Joneses,” or the need for additional money. These pressures can encourage an otherwise honest employee to consider fraud. Opportunities are circumstances within the business that allow employees to commit fraud and conceal it, assuming they won’t get caught; i.e., a delivery person in collusion with someone in shipping or a counterperson ringing up false returns and keeping the refund. Rationalizing is justifying actions. In many cases, the employee may feel underpaid or more deserving for his/her efforts. The best way to deter fraud is to remove elements of the triangle. For example, situational pressures and rationalization may exist; but if opportunity is removed or decreased, the likelihood of fraud will diminish. To combat actual fraud or possible fraud circumstances arising, five actions—identified by the acronym CLEAR: Check, Lock, Enforce, Access and Record—are recommended. Consider the following basic measures for each action: Check: Perform random “bin checks” or a “perpetual inventory.” Investigate unusual consumptions or shortages immediately. Routinely check outgoing freight, especially the parts department’s delivery trucks. The quantity and type of parts being delivered must agree with the delivery tickets. Check incoming freight against bills of lading and packing slips. Record discrepancies and note any changes. Review purchase orders regularly. They should be filled out completely and include a corresponding work order or parts ticket. Perform a physical inventory annually. Check cash register balances regularly. Require customer’s full name, address and telephone number for refunds issued against returns. Randomly call to verify returns are legitimate. Check new employees’ references. Spot check trash periodically to be sure saleable items are not being removed. Lock: Securely lock entrances and exits after business hours. Require the parts department to have separate access from the rest of the dealership. Consider having a locked security area with limited access for valuable items. Store all inventory items in a locked or secured area after business hours. Enforce: Inform all parts department employees of your security policy; emphasize that no exceptions are made. Require all parts department personnel to administer the policy. Limit access to parts department employees. Post signs indicating “no admittance” areas. Require employees from other departments to have clear authorization and to be accompanied by parts department personnel to enter parts department. Rigidly control parts department keys. Install entrance locks unique to the parts department. Limit inventory file access to authorized parts department staff; change restricted computer passwords frequently. Use parts counters as adequate barriers with no open access. Design layout of bins to assure a clear view of access doors, including shipping and receiving areas. Install mirrors to monitor hidden areas. Record: Document all parts leaving the inventory. Maintain accurate records. Number counter tickets sequentially and account for them daily. Document parts on loan to the service department. Record “at no charge” on invoice if parts used by the owner are provided at no charge. Document returns to the manufacturer or supplier and check against any credits. A counter ticket can be used as documentation. Have only parts personnel charge parts against shop work orders. GLB Act Secures Financial Info Several years ago Congress enacted the Gramm-Leach-Bliley (GLB) Act establishing a variety of legal requirements for businesses—including automobile dealers—relating to financing buyers’ vehicles. The law details specific steps that must be taken to secure customer records and the data a dealer collects when providing financial services. It also provides an opportunity for dealers to review their process, system and staff to ensure compliance with the GLB Act and maximize the efficiency of the dealership’s operation. Dealers can show their customers that they are responsible in handling private information and maintaining good privacy policies. The following action items could be used to document how responsibility is discharged in order to implement the GLB Act.
Appoint an employee with an overall understanding of dealership systems and auto archiving to serve as information security program coordinator. Safeguard customer credit data. Physical storage of paper data, electronic files, transmissions, record disposal and system security should be part of your plan. Include management and staff training in your overall security measures. Use vendors and suppliers to reduce the cost of implementing your plan. Suppliers that provide data processing, telephone, Internet and security services can address the law more efficiently than your staff. Address risk assessment to ensure that your plan is reasonable and cost-effective. Coordinate a disaster plan that includes safeguarding customer data. Generally, the information security program coordinator oversees the plan’s implementation and staff training. Establish an independent audit and review mechanism to monitor the compliance program’s success. A review by an outside contractor, such as an accounting firm, is valuable. It shows the regulatory agencies that you employed measures to ensure compliance and to reduce the possibility of collusion, which may result in any fraud and noncompliance penalties being waived. If you would like assistance in establishing or reviewing your procedures, please contact our office today. Directory: wp-content -> uploads -> sites sites -> 587 Return function, r i(X) r i(0) r i(1) r i(2) r i(3) 1 0 2 4 6 Thermal Station, I 2 0 1 5 6 3 0 3 5 6 10 sites -> Medical Radiography Program sites -> Background on the Haitian Earthquake sites -> Desk review yemen sites -> Safe Transitions for the Elderly Patient (step) sites -> District profile Haripur Introduction sites -> Germanie VanTrease and Tyler Tetzloff sites -> For more information sites -> To be completed by the cerf secretariat. Type of submission sites -> Sponsor Content Above the Clutter with Pete Krainik Download 23.72 Kb. Share with your friends:
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