One way that some automobile manufacturers motivate dealerships to renovate, modernize and upgrade their facilities is by encouraging them to participate in “facility image upgrade programs.” The goal for manufacturers is to promote a standard brand image so that all dealerships selling their vehicles have a consistent look and appearance.
These programs often provide payments to dealerships to help defray costs. Some dealerships wonder how these payments — referred to by the IRS as “upgrade image support” payments and commonly called “image money” by dealers — should be treated from a tax perspective.
What is the IRS position?
Last April, the IRS issued a General Legal Advice memorandum clarifying its position on this issue. The memo details three different scenarios in which dealerships voluntarily participate in facility image upgrade programs and receive upgrade image support payments.
Although there are factual differences in the scenarios, the IRS’s position is the same for each: The payments are includable in a dealership’s gross income under Internal Revenue Code Section 61. They can be used neither to reduce the basis in constructed assets nor as a purchase price adjustment to vehicles. Nor can they be considered nonshareholder contributions to capital under Sec. 118.
In the memorandum, the IRS points out that Sec. 61 generally provides that gross income means all income from whatever source derived. The term “income” is broadly defined as “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”
Because dealerships have an accession to wealth over which they have complete dominion and control, the IRS requires dealers to recognize gross income at the time they receive payments or appropriately accrue the right to receive payments under their methods of accounting. The guidance also prohibits dealerships from reducing the basis of their property by the image upgrade payments.
Not a legal precedent
Although the General Legal Advice memorandum provides guidance on this issue, it doesn’t serve as legal precedent. Therefore, there’s still some debate as to whether or not dealerships must follow it. Because the proper tax treatment of upgrade image support payments remains somewhat murky, consult with your tax advisor for advice in your specific situation.
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