Read the memo [PDF 86 KB]
*The memorandum is legal advice, signed by executives in the National Office of the Office of Chief Counsel and issued to IRS personnel who are national program executives and managers. The memo is issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. It is not to be used or cited as precedent.
Automobile manufacturers offer dealerships that sell their vehicles, a program—i.e., a facility image upgrade program—to promote a standard brand image. Under this program, there may be changes or renovations required to be made to the dealership facilities, ranging from structural changes to mere cosmetic upgrades.
To encourage dealerships to participate in a facility upgrade program, manufacturers offer payments to the participating dealerships as an incentive. These payments are intended to defray the dealership’s costs for upgrades, and not to reduce the costs of vehicles to the dealership.
The IRS memo explains that dealerships have treated these payments inconsistently—some exclude the payments from income and assert the payments are nonshareholder contributions to capital. Other dealerships asset that the payments reduce the basis of the constructed assets and are not includable in gross income.
The memo examines three factual situations involving payments made to dealerships under a facility upgrade program.
IRS memo conclusions
The IRS Chief Counsel memo concludes that under the facts presented in the three situations, all payments are includable in the dealership gross income under section 61.
As noted in the memo, a dealership receives such a payment to defray the expense for construction of, or improvements to, the property. The IRS memo finds that with these payments, the dealership has an accession to wealth over which it has complete dominion and control, and that as such, the dealership must recognize gross income at the time it receives the payment or appropriately accrue the right to receive the payment.
The IRS memo further finds that:
- The payments do not reduce the basis in the dealership property, and that the dealership must include the full cost of construction in the basis of newly constructed property under section 1012 and include the cost of the capital improvements in the adjusted basis of existing property under section 1016.
- The payments are not purchase price adjustments to vehicles.
- The payments are not nonshareholder contributions to capital under section 118, and the basis of property is not reduced under section 362(c)(2).