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Chapter 11 - Table of Contents
How does it work?
Issue Identification
Initial Document request
Supporting Law
A "Related Finance Company" or RFC, is a financing
company owned by an automobile dealership. It provides financing
for customers that cannot obtain financing through normal channels.
The customer is required to make payments usually at the
dealership's location. This type of arrangement is usually
advertised by the dealership as a "buy here pay here" plan. The
"buy here pay here" plan is common with stand alone
used car dealerships, but many
new car dealerships utilize this type of plan for their
used car sales.
How does it work?
Dealerships involved in
this practice establish a financing entity (herein referred to as a
"Related Finance Company" or RFC), typically an S Corporation,
which acts as the lender in the dealership's financing arrangement.
The same shareholders that own the dealership usually own the S
Corporation.
When the vehicle is sold, and it is determined that
the customer needs special credit assistance, the dealership writes
the note at term (high interest rate) with recourse to the RFC. The
note is sold at a significant discount to the RFC substantiating
the discount by citing high risk. The dealership books a current
and deducted loss for the difference between the full contract and
the discounted contract. The RFC accrues income as it becomes
earned, subject to IRC section 162 deductions.
Legitimate Uses of a Related Finance
Company
There are several valid business purposes for
establishing an RFC. An effective RFC removes the collection burden
from the dealership; allowing dealership personnel to operate the
dealership.
Sourced from the IRS Web Site read the entire article here.
http://www.irs.gov/businesses/article/0,,id=137739,00.html | 
