Which party bore the credit risk on the customer notes?
[29] By transferring the customer notes to Company, Taxpayer eliminated almost all of its exposure to credit risk on the customer notes. Aside from cancelling the agreement or allowing an event of default to occur, in the event of a customer’s default, Taxpayer had no obligation to repurchase either the customer note or the financed vehicle, or to return the advance payment. Further, Taxpayer fixed its economic loss in the customer notes. After transferring a customer note, the only loss Taxpayer could realize was a diminution in value of its right to receive distribution payments. Company, on the other hand, was at risk for the advance payments it made to Taxpayer. [30] It may be argued that Company’s risk of loss was insubstantial because (1) it advanced Taxpayer an average of about 60 percent of the face amount of each customer note, and (2) the distribution payments were based on the entire pool of customer notes, which meant that Taxpayer’s right to payments was subordinated to Co
