IRS New Vehicle Dealership Audit Technique Guide 2004 - Chapter 11 - Related Finance Companies (12-2004)
NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
A "Related Finance Company" or RFC, is a financing company owned by an automobile dealership. It provides financing for customers that cannot obtain financing through normal channels. The customer is required to make payments usually at the dealership's location. This type of arrangement is usually advertised by the dealership as a "buy here pay here" plan. The "buy here pay here" plan is common with stand alone used car dealerships, but many new car dealerships utilize this type of plan for their used car sales.
How does it work?Dealerships involved in this practice establish a financing entity (herein referred to as a "Related Finance Company" or RFC), typically an S Corporation, which acts as the lender in the dealership's financing arrangement. The same shareholders that own the dealership usually own the S Corporation.
When the vehicle is sold, and it is determined that the customer needs special credit assistance, the dealership writes the note at term (high interest rate) with recourse to the RFC. The note is sold at a significant discount to the RFC substantiating the discount by citing high risk. The dealership books a current and deducted loss for the difference between the full contract and the discounted contract. The RFC accrues income as it becomes earned, subject to IRC section 162 deductions.
Legitimate Uses of a Related Finance CompanyThere are several valid business purposes for establishing an RFC. An effective RFC removes the collection burden from the dealership; allowing dealership personnel to operate the dealership.
Some RFCs are so well managed that their discount rates can be lower than those offered by a third party. The RFC may be more familiar with the contracts it purchases due to its close relationship with the dealership, allowing the dealership to be more selective when it offers credit. An RFC may allow a dealership relief from regulatory restrictions, and to distance itself from adverse publicity resulting from collection activity.
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A valid RFC should have the following characteristics:
When the finance contract is sold to the RFC, title has been transferred to the RFC in accordance with title and lien holder laws
The discounting of the car dealer's receivables are sold to the RFC at their fair market value
There is a written arms-length contract between the dealership and the RFC
The finance contracts are normally sold without recourse between the two related parties
The RFC is responsible for repossessions
The RFC is operated as a separate entity from the dealership and has the following characteristics:
Adequate capital to pay for the contracts
Meets all state and local licensing requirements
Maintains its own bank accounts
Has its own address and phone number and operates as a separate entity from the dealership
Maintains its own books
Has its own employees and they are compensated directly by the RFC
Pays its own expenses
The customers are making payments to the RFC, not to the dealership
How does it work?Dealerships involved in this practice establish a financing entity (herein referred to as a "Related Finance Company" or RFC), typically an S Corporation, which acts as the lender in the dealership's financing arrangement. The same shareholders that own the dealership usually own the S Corporation.
When the vehicle is sold, and it is determined that the customer needs special credit assistance, the dealership writes the note at term (high interest rate) with recourse to the RFC. The note is sold at a significant discount to the RFC substantiating the discount by citing high risk. The dealership books a current and deducted loss for the difference between the full contract and the discounted contract. The RFC accrues income as it becomes earned, subject to IRC section 162 deductions.
Legitimate Uses of a Related Finance CompanyThere are several valid business purposes for establishing an RFC. An effective RFC removes the collection burden from the dealership; allowing dealership personnel to operate the dealership.
Some RFCs are so well managed that their discount rates can be lower than those offered by a third party. The RFC may be more familiar with the contracts it purchases due to its close relationship with the dealership, allowing the dealership to be more selective when it offers credit. An RFC may allow a dealership relief from regulatory restrictions, and to distance itself from adverse publicity resulting from collection activity.
back to the top
A valid RFC should have the following characteristics:
When the finance contract is sold to the RFC, title has been transferred to the RFC in accordance with title and lien holder laws
The discounting of the car dealer's receivables are sold to the RFC at their fair market value
There is a written arms-length contract between the dealership and the RFC
The finance contracts are normally sold without recourse between the two related parties
The RFC is responsible for repossessions
The RFC is operated as a separate entity from the dealership and has the following characteristics:
Adequate capital to pay for the contracts
Meets all state and local licensing requirements
Maintains its own bank accounts
Has its own address and phone number and operates as a separate entity from the dealership
Maintains its own books
Has its own employees and they are compensated directly by the RFC
Pays its own expenses
The customers are making payments to the RFC, not to the dealership
Sourced from the IRS Web Site read the entire article here: http://www.irs.gov/businesses/article/0,,id=137739,00.html
Sell your auto notes, buy here pay here notes for cash. We get top dollar for your auto paper.
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