Multi-year service contracts taxable in year of sale
The Eighth Circuit has upheld a Tax Court ruling that required a car dealership to declare in its income the full price of vehicle service contracts (VSCs). The ruling, which was issued in the 'Johnson' case (1999), involved a taxpayer that sold refundable VSCs along with vehicles and thought that it should pay taxes only when services were performed under these contracts. The Eight Circuit disagreed with the taxpayer and upheld the IRS's argument that the taxpayer should have recognized income from the sale of the VSCs in the years when these contracts were actually sold. However, the appellate court also ruled that the Tax Court had erred when it refused to allow the taxpayer to deduct payments made to the administrator in the year these payments were made.
Publication Name: Practical Tax Strategies
Intrafamily sales of appreciated assets offer attractive wealth transfer opportunities
One method for the older generation to transfer assets to the younger generation while minimizing tax liability and retaining cash flow involves either private annuities or self-cancelling installment notes. These financial vehicles allow the assets to be transferred to adult children in return for payments over the lifetime of the older generation, with payments terminating at death. A call option transfer has some of the same benefits but is more risky.
Publication Name: Journal of Taxation of Investments
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