8/4/2009 - Senate Hopes to Clear "Clunkers" Bill Before Recess 8/4/2009 - Collection Proceedings Were Not Abuse of Discretion(Willock, TCM) 8/4/2009 - Subsidiary's Redetermination of FSC Commissions Barred by Assessment Statute of Limitations; Regulation Reasonably Interpreted (Abbott Laboratories, CA-FC) 8/4/2009 - Overstatement of Basis Was Not Omission of Gross Income; Six-Year Assessment Limitation Period Did Not Apply (Salman Ranch Ltd., CA-FC)
State Headlines: 8/4/2009 - All States --Sales and Use Tax: SST Panel Asked to Rule on Viability of Origin-Sourcing Option 8/4/2009 - California --Corporate, Personal Income Taxes: FTB Clarifies Tax Treatment of "Cash for Clunkers" Vouchers 8/4/2009 - Connecticut --Multiple Taxes: Governor's Third Budget Proposal Contains Some Tax Increases
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But is it actually a sale or exchange? It's NOT valued at the FMV of the vehicle given up, but at a government set price. Also, although passed through to the consumer, it is the DEALER who applies for the amount. Since the government doesn't actually take possession, I don't see constructive receipt as applying either. Vehicles are titled property. Is the U.S. government recording a new title for their acquisitions? NO. It's NOT a sale.
Is this a taxable government benefit? Maybe*. Perhaps it should be reducing the basis of the acquired vehicle instead, which has no current tax effect, just as any other rebate would. Therefore, it's not recognized until this new vehicle is later sold. (*-Congress declared it isn't, at least federally, in the bill itself).
Is this a 1031 exchange? Not entirely. Although the dealer may be an accomodator and it might be a 1031 to the consumer, where's the taxable amount coming out? The consumer gives up a used vehicle and additional cash for the difference (less $3,500 or $4,500) and gets a new vehicle. However, as the consumer has paid IN, there's no taxable result to him. His basis in the new vehicle is the old vehicle's basis plus the cash he paid. However, with the dealer and the government, it's NOT even a sale - as the government never takes possession or title. (For purposes of 1031, I'm ignoring the business property requirement for the moment.)
So, where's the position that the CA FTB has taken that yields a taxable result to the consumer? Is the FTB's only premise that it's income based on IRC 61 - anything not excluded is included?
I see this as the dealers' income, not that of the consumers. The dealers are the parties taking in the used vehicles and getting paid the credit to destroy them. Paying a rebate (by passing on the credit) reduces basis (IRC 263A regulations/case law). It's still in the dealers' [federally non-taxable] gross receipts before returns/allowances.
"The 'cash for clunkers' law specifically states that the cost savings aren't considered income for the buyer and are not subject to federal income taxes."
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I'm uncertain as to the correctness of the CA FTB's ruling on this:
"California income tax purposes as a sale or exchange of the used car that the person delivers, in exchange for consideration of the $3,500 or $4,500 voucher, as the case may be. Persons trading in used cars may offset the applicable amount realized by the basis of the used cars relinquished, which is generally cost, in determining whether they realized gain on the transaction."
I can't find any document on the FTB's web site that leads to that conclusion. I tried searching for "Car Allowance Rebate System", "CARS", "cash for clunkers", and "July 30, 2009" (the alleged date of the announcement per CCH). All searches I tried on Google lead back to the CCH article as the source.
So, what is the California Franchise Tax Board's non-conforming position based on? Did the consumer "sell" his car to the dealer or to the U.S. Government (who paid)?
Even worst a case, though, wouldn't the only thing that could be remotely taxable is any difference between the voucher and trade-in value of the car? According to Edmunds, a 1991 Ford Bronco trade-in would be around $100.00. The only thing taxable MIGHT be the $4400 difference correct? How could anything else be considered income or taxable?
OK, but is it a sale, and to whom: The dealer or the U.S. Gov't?
In all likelihood, if the adjusted basis of a vehicle is that low, it was a business use vehicle, in which case 1031 can be used to render the gov't payment as non-recognized even under California law. If it were a personal use vehicle, then basis is still the original cost (plus capital improvements) because there was never any depreciation, so in general, the sale will be a loss (one not recognized as personal losses aren't deductible). Except for the rare case where the used vehicle's original purchase price was less than the credit, how would there ever be income here? I am unaware of any vehicles over the past 25 years that sold for less than the credit amount when new. It's NOT CoD income as that first requires a debt, and there's no debt on the new vehicle, and the credit is clearly tied to it, not the old vehicle. How else could a person pay INto the transaction and still have income?
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