Taxation of VW Settlement Payments: Don’t Expect Any Advance IRS Guidance

 In Will's blog

On February 14, I participated in a follow-up conference call / discussion hosted by Paul Metrey of NADA (Vice President, Regulatory Affairs) involving several CPA firms whose input NADA sought on whether it would be advisable at this time to seek guidance from the IRS on the interpretation of several key income tax issues arising from the payment of settlement awards by Volkswagen to Volkswagen dealers.

Prior to the “fairness hearing” on January 23, NADA had made the decision to wait to see if any changes were made to the settlement terms … and none were made.

As a result of the conference call and other input, NADA has made the decision to not seek guidance from the IRS on any of the tax issues involved. This was also the recommendation by a VW dealership group.

The almost unanimous conclusions from the CPAs involved in the conference call were that (1) guidance should not be sought from the IRS and (2) that payments received for reduction of the VW franchise goodwill would be, or could be, offset against any basis previously capitalized in connection with the VW franchise.

Accordingly, CPAs will have to reach conclusions on their own as to how much to accrue initially, whether payments are ordinary income, whether long-term capital gain or Section 1231 treatment may be involved, whether Section 1253 comes into play, whether Section 197 is operative, whether installment treatment under Section 453 is a possibility … not to mention the potential for the IRS to invoke the penalty provisions of Sections 6662–6664 if it does not agree with what it finds (if it finds it) in the tax returns when they are filed in just a few months from now.

The take-away from all of this is obvious … It seems that most CPAs are willing to wait in the weeds and see what happens to somebody else. Although many dealers will receive millions of dollars, the tax revenue arising from these amounts is a drop in the bucket compared to many of the other issues that the IRS might want to take on.

As a CPA, at this point, how comfortable are you with all of this?

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