Insurance sales commissions were deductible.

The Tax Court recently held, in Berger Chevrolet, Inc., TC Memo 1997-499, that commissions paid by automobile dealerships to employees for selling credit insurance were currently deductible under Sec. 162(a). The Service had denied the deduction on the theory that the commissions were expenses of dealer-related insurance agencies.

In determining that the commissions were ordinary and necessary, the court considered that a vehicle dealership's business encompasses a wide range of activities beyond vehicle sales; the financing of sales on an installment plan was a familiar aspect of a dealership's business and the offer of credit insurance on such sales was related to the financing.

The commissions for credit insurance were an "ordinary" expense, as the parties stipulated that virtually all new motor vehicle dealerships offer credit insurance to customers who finance automobiles. The court noted that the offering of credit insurance on an installment agreement requires an explanation by an employee; a dealership would take such service into account in compensating an employee.

The commission expenses were also "necessary," since virtually all motor vehicle dealerships offer credit insurance. To keep up with their competitors, and to offer one-stop service for financing, the dealerships must have employees who can explain the function of credit insurance to customers and who can calculate the premiums.

The IRS also argued that the commissions should not be currently deductible because the dealerships were not in the insurance business. The court rejected this argument, noting that the Service failed to recognize dealerships' role in the sale of credit insurance; such insurance was a small, but integral, part of a dealership's business.