You should review all the legal implications with an attorney who is familiar with the BHPH and RFC industry to ensure your paperwork and other related documents comply with all regulations and laws. An attorney will also need to help you draft an asset purchase and various management or shared expense agreements to document the legal transactions taking place. You should also complete the necessary minutes and corporate resolutions that document the sale of the notes and any other agreements you complete.
You and your staff will need to become familiar with the IRS regulations that govern these types of transactions to ensure compliance and enable you to correctly record all the transactions necessary to document the activity between the dealership and the RFC. The IRS is very familiar with RFCs and has established audit checklists with very specific questions and documents to review both the dealership and the RFC. Failure to comply could result in the disallowance of the discount deduction on the dealership and immediate recognition of all the gross-profit realized from the sale. This disallowance would also result in additional interest and penalties, along with the past due tax, being payable immediately.
A qualified third party finance company or consultant will need to review your loan portfolio to provide a quote or purchase offer to arrive at a fair market value that can be used to sell the notes to the RFC and remain in compliance with the IRS regulations. Adequate capital and cash must be available in the RFC to purchase and pay for the notes at time of purchase. The RFC must incur its own expenses and should be responsible for all collection efforts and costs after the purchase of the notes from the dealership. This includes repo fees and repo losses.
This article only touches the surface of the considerations needed to decide if an RFC is right for you and your current tax situations. You should consult your tax advisor, preferably someone who is familiar with the BHPH and RFC industry, along with your state and national associations to gain more insight before making a decision.
Vol 5, Issue 9