## Facts

- An automobile manufacturer (M) implemented a rebate program for “qualifying retail customers” who purchase or lease certain specified new automobiles within a set time period.
- A qualifying retail customer is one who independently negotiates an arm’s-length purchase or lease price with an authorized dealer.
- M pays a $40x rebate to qualifying customers who purchase or lease a new automobile.
- M pays an additional $5x rebate to qualifying customers who purchase a new automobile and trade in a specified type of vehicle.
- Rebates are paid after delivery of the automobile.
- The questions presented were whether these rebates are includible in customers’ gross income under I.R.C. § 61 and whether M may deduct the rebate payments under I.R.C. § 162.

## Issues

1. Whether manufacturer rebates paid after delivery to qualifying retail purchasers or lessees are includible in gross income under I.R.C. § 61.
2. Whether the manufacturer may deduct the rebate payments as ordinary and necessary business expenses under I.R.C. § 162.

## Decision

- The rebates are not includible in the customers’ gross income under I.R.C. § 61.
- For purchases, the rebates are treated as reductions in the purchase price, requiring a downward adjustment to the customer’s basis under I.R.C. §§ 1012 and 1016.
- For leases, the rebates are treated as reductions in the rental fee rather than income to the lessee.
- The manufacturer may deduct the rebate payments as ordinary and necessary business expenses under I.R.C. § 162 and Treas. Reg. § 1.162-1(a).

## Legal Principles

- Amounts paid by a seller/manufacturer to a buyer in connection with an arm’s-length purchase may be characterized as a purchase price adjustment rather than gross income under I.R.C. § 61.
- When a rebate is a purchase price reduction, the buyer’s basis equals cost under I.R.C. § 1012 and must be adjusted downward under I.R.C. § 1016 to reflect the rebate.
- A rebate paid to a lessee in connection with a lease may be treated as a reduction of the rental charge rather than includible income.
- Rebate programs used to stimulate sales can constitute ordinary and necessary business expenses deductible by the payor under I.R.C. § 162(a) and Treas. Reg. § 1.162-1(a).

## Conclusion

The IRS concluded that post-delivery manufacturer rebates to qualifying retail purchasers or lessees are treated as reductions in purchase price or rent (reducing basis for purchases) and are not gross income to customers, while the manufacturer may deduct the rebate payments as ordinary and necessary business expenses under I.R.C. § 162.


Rev. Rul. 76-96, 1976-1 C.B. 23 (1976)