General Motors Corp. & Subsidiaries v. Commissioner, 112 T. C. 270 (1999)
Consolidated return regulations are a method of reporting, not a method of accounting, and do not require matching of income and deductions from intercompany transactions involving third parties.
Summary
General Motors Corporation (GM) and its subsidiary GMAC, part of a consolidated group, disputed whether GM’s rate support payments to GMAC should be deferred on their consolidated tax return. The Tax Court held that the consolidated return regulations constituted a method of reporting, not accounting, so GM did not need the Secretary’s consent to change its reporting method. Additionally, the court found that GM’s rate support payments were not subject to deferral because the corresponding discount income earned by GMAC from retail and fleet customers was not directly from an intercompany transaction.
Facts
GM and its subsidiary GMAC filed consolidated Federal income tax returns. GM manufactured vehicles while GMAC provided financing. GM offered retail rate support programs to boost vehicle sales, under which GMAC financed vehicles at below-market rates. GM reimbursed GMAC the difference between the RISC’s face value and its fair market value, which GMAC used to pay dealers. Similar fleet rate support programs were also offered. GM deducted these payments in the year paid, while GMAC recognized income over the loan term. Before 1985, GM deferred these deductions on consolidated returns until GMAC recognized income. In 1985, GM stopped deferring these deductions, leading to a dispute with the Commissioner.
Procedural History
The Commissioner determined a deficiency of $339,076,705 in GM’s 1985 consolidated Federal income tax. GM petitioned the Tax Court, which bifurcated the case into rate support and special tools issues. The court addressed the rate support issues in this opinion, ultimately ruling in favor of GM.
Issue(s)
1. Whether GM and its consolidated affiliated subsidiaries changed their method of accounting in 1985 when they stopped deferring GM’s rate support payments on their consolidated return.
2. Whether GM’s rate support payments to GMAC were subject to deferral under section 1. 1502-13(b)(2) of the Income Tax Regulations.
Holding
1. No, because the consolidated return regulations constituted a method of reporting, not a method of accounting. GM was not required to obtain the Secretary’s consent to change how it reported the rate support deductions on its consolidated return.
2. No, because the corresponding item of income (discount income earned by GMAC) was not directly from an intercompany transaction, and thus not subject to the matching rule under section 1. 1502-13(b)(2).
Court’s Reasoning
The court distinguished between methods of accounting and reporting. It followed precedent from Henry C. Beck Builders, Inc. and Henry C. Beck Co. , holding that consolidated returns are a method of reporting, not accounting. The court noted that the 1966 regulations, in effect during the year in issue, did not alter this distinction. Each member of the group determines its method of accounting separately, and the consolidated return regulations merely make adjustments to these separate computations. The court also rejected the Commissioner’s argument that the discount income earned by GMAC was the corresponding item of income to GM’s rate support deductions. The discount income was not directly from an intercompany transaction but from transactions with third parties (dealers and customers). The court emphasized that the consolidated return regulations aim to clearly reflect the tax liability of the group and prevent tax avoidance, which was not an issue here as the rate support payments represented a real economic loss to the group.
Practical Implications
This decision clarified that consolidated return regulations are a method of reporting, not accounting, and thus do not require the Secretary’s consent for changes in how items are reported on consolidated returns. It also limited the application of the matching rule to direct intercompany transactions, excluding transactions involving third parties. Taxpayers in consolidated groups can now more confidently deduct intercompany payments in the year paid, even if the corresponding income is recognized by another member over time, as long as the transactions involve third parties. This ruling may influence how consolidated groups structure intercompany transactions and report them on their tax returns, potentially reducing the need for deferral adjustments. Later cases and regulations, such as the 1995 amendments, have sought to address this ruling by expanding the definition of corresponding items and intercompany transactions.