Elmer v. Commissioner

LUCIUS H. ELMER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Elmer v. Commissioner Docket No. 26074. United States Board of Tax Appeals 22 B.T.A. 224; 1931 BTA LEXIS 2147; February 19, 1931, Promulgated *2147 Upon the facts, held that the petitioner is not entitled to report income for 1922 and 1923 upon the installment sales basis. Packard Cleveland Motor Co.,14 B.T.A. 118, followed. Hugh Satterlee, Esq., for the petitioner. John E. Marshall, Esq., for the respondent. SMITH *224 This proceeding is for the redetermination of deficiencies for 1922 and 1923 in the amounts of $6,995.75 and $238.59, respectively. The only issue is whether the petitioner is entitled to report his income in those years upon the installment sales basis. FINDINGS OF FACT. The petitioner is a resident of Hartford, Conn. During 1922 and 1923, and in prior years, he was engaged in the business of selling Ford automobiles under the trade name of Elmer Automobile Company. He operated a number of salesrooms at and near Hartford. The most of the petitioner's sales were made on the deferred payment plan, the purchaser making a cash payment usually of $50 and executing a conditional sale agreement and one or more promissory notes for the balance of the purchase price, payable monthly over a year or more. Title to the automobile was reserved in*2148 the petitioner until the notes were fully paid up. Prior to 1922, the petitioner handled all of the purchase notes himself and looked after collections. This proved unsatisfactory, however, for the reason that the buyers would frequently make counterclaims for repairs and other matters, causing considerable inconvenience. In 1922, the petitioner engaged a financing company, the Commercial Credit Company of Baltimore, to handle the purchase notes. He would assign the notes, together with the sale agreements, *225 over to the finance company for collection, receiving cash in the amount of the face value of the notes. Prior to November 28, 1922, the petitioner caused to be organized the Hartford Automobile Finance Company, hereinafter referred to as the Finance Company, to take over the work being done by the Commercial Credit Company. The Finance Company was incorporated under the laws of the State of Connecticut. All of its capital stock, of a par value of $150,000, was subscribed for by, and issued to, the petitioner or his nominees. Upon its organization, the petitioner entered into a working agreement with the Finance Company which is evidenced in part by the following*2149 letter from the petitioner to the Finance Company, dated November 28, 1922: In confirming conversation with your Mr. Bailey regarding the handling of our New Time Payment Plan on Ford cars will state: First: We agree to secure an order for a Ford car on the regular "Retail Buyer's Order" with a $50.00 deposit, making out at that time a Buyer's Statement which you might call reference blank in which all cases we or you will secure endorsers, if possible, but in any event we will secure two references, and you must do likewise. Second: You are to check up these references and if, in your judgment, these references and the purchaser are reliable parties, we will abide by your judgment. Third: It must be agreed, on your part, to forward us a Delinquent List each week on any delinquent owners that you might have, in which case we will guarantee to return to you immediately the amount due on any cars that you might repossess where you have loaned us money on same. Fourth: As this means an endorsement on all the notes, we will make out in our name the Conditional Bill of Sale on all cars sold and expect you to be thorough in checking up the reliability of all purchasers. *2150 We are enclosing you a copy of letter of instructions sent to all of our branches and we will expect you to work along this line. In handling this plan there will probably be special cases which you will have to take up with us from time to time, which we will be glad to instruct you on. We are giving you this agreement as we do not believe you have carried out our understanding as to endorser and references. Kindly acknowledge and oblige. The letter of instructions to the branch offices referred to in the above letter dealt mostly with routine matters not material here. It referred to the agreement as a plan for the Finance Company "to handle our notes for collection." The course generally followed by the petitioner in handling a sale after organization of the Finance Company was as follows: The character and financial responsibility of a prospective buyer would be investigated and if satisfactory the purchaser would make a down payment of $50 on an automobile and would sign a conditional sale agreement and a note for the balance of the purchase *226 price, plus interest and insurance, payable usually in monthly or weekly installments over a period of a year*2151 or more. The note and the sale agreement were immediately endorsed over to the Finance Company, which would pay to the petitioner, then or within a week or so, the balance of the purchase price. Thereafter, all collections on the notes were made by the Finance Company. Upon failure of the buyer to meet any of the installment payments the Finance Company would notify the petitioner, who would repossess the automobile and repay the Finance Company the unpaid balance of the account. The purchase notes were endorsed over to the Finance Company in blank by the petitioner or his agent. In transferring the sale agreements to the Finance Company the petitioner would execute the following printed form appearing on the reverse side of the agreements: For value received, the undersigned, being the within named dealer, hereby sells, assigns, and transfers unto The Hartford Automobile Finance Company, of Hartford, Conn., all right, title, and interest in and to the within conditional sale and the debt and automobile therein described; and the undersigned hereby makes, constitutes, and appoints said Hartford Automobile Finance Company, Attorney with full power and authority, in its name*2152 or otherwise and for its own use and benefit to take all legal measures which may be proper and necessary for the complete recovery and enjoyment of the assigned premises. IN WITNESS WHEREOF, the undersigned has set had and seal this day of A.D. 192 . The Finance Company did not usually discount or otherwise dispose of the notes transferred to it by the petitioner, although on one occasion it used them as collateral for a loan at the bank. The petitioner at times extended his personal credit to the Finance Company to enable it to obtain the necessary funds to make payments to the petitioner on the purchase notes. All of the books and records of the Finance Company were at all times available to the petitioner. The petitioner filed income tax returns for the years 1922 and 1923 in which he computed his taxable income upon the installment sales basis. The returns showed net income of $16,022.27 for 1922 and $12,989.30 for 1923. In his audit of the returns the respondent has held that the petitioner is not entitled to report his income in those years upon the installment sales basis and has added $27,071.71 to the reported income for 1922, and $2,735.47 to the reported income*2153 for 1923. The petitioner's net profits on the portion of the purchase notes uncollected at December 31, 1922, amounted to $20,934.83. Of this amount, $12,318.84 was on notes turned over to the Commercial *227 Credit Company in 1922 and $8,615.99 on notes turned over to the Finance Company in that year. The petitioner's net profits on the portion of notes turned over to the Finance Company and uncollected at December 31, 1923, was $8,871.82. OPINION. SMITH: The only issue raised in this proceeding is whether the petitioner is entitled to report his income in 1922 and 1923 upon the installment sales basis as provided in section 212(d) of the Revenue Act of 1926. This section of the statute applies retroactively to the years under consideration and reads as follows: (d) Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total*2154 contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. [For retroactive application of this provision see section 1208.] Counsel for the petitioner, while admitting the apparent adverse effect of our decision in , makes the argument in his brief, first, that the facts in the instant case are distinguishable from those in , and, second, that the Board reached a wrong conclusion in its decision in that case. Briefly, the facts in the Packard Cleveland*2155 Motor Co. case were that the taxpayer sold automobile trucks, in the first instance on the installment plan, receiving on each sale a down payment of 25 per cent and a promissory note secured by a chattel mortgage for the balance of the purchase price, which was payable in ten or twelve monthly installments. Upon completion of a sale it immediately "sold, assigned, and transferred" the note and mortgage over to a finance company, receiving the full unpaid amount of the purchase price and guaranteeing payment of the amount of the note by the buyer. Whenever a purchaser defaulted in his payments on the note the seller repossessed the automobile truck and repaid the *228 finance company the balance due of the note. We said in that case that: * * * Under this set of facts we are convinced that upon the receipt of the full remaining purchase price of the truck or car petitioner received income in that amount. . Though the transaction may have been an installment sale originally, when the Commercial Company paid the petitioner the full balance of the account and assumed the obligation of collecting from the purchaser, so far*2156 as petitioner was concerned, the sale became a closed transaction. The Commercial Company did not act as the petitioner's agent in collecting. It had bought all of petitioner's rights under the note and mortgage and thereafter acted in its own sole behalf. In support of its position petitioner points to the fact that it guaranteed payment of the notes and might be, and in a considerable number of instances was, obliged to respond to the Commercial Company as an endorser on the paper. We do not deem this fact to be of controlling weight. Though the possibility of default was in contemplation it was not established as a surety when the notes were sold and, in fact, every reasonable precaution was taken by petitioner before making a sale to forfend against such a contingency. The treatment of the sale on petitioner's books argues strongly against petitioner's contention. The principal point upon which the petitioner seeks to distinguish the cases is that while in the Packard Cleveland Motor Co. case we found that there was an outright sale of the purchase notes to the finance company, in the intant case, it is contended, the petitioner merely assigned the notes over to*2157 the Finance Company as collateral for loans. We think, however, that the evidence does not establish this point. The so-called working agreement between the petitioner and the Finance Company said to be contained in the above letter of November 28, 1922, is far from complete. It makes no provision whatever for the actual exchange of the purchase notes and cash between the petitioner and the Finance Company, which is really the crux of the matter under consideration. Paragraph three of the letter reads: Third: It must be agreed, on your part, to forward us a Delinquent List each week on any delinquent owners that you might have, in which case we will guarantee to return to you immediately the amount due on any cars that you might repossess where you have loaned us money on same. (Italics supplied.) It does not follow, however, that the transactions which actually took place were "loans" because referred to as such in the informal agreement. The acts of the parties indicate a different result. The petitioner upon securing a sale contract executed with the buyer a conditional sale agreement receiving a down payment of $50 and a promissory note for the balance, payable in*2158 weekly or monthly *229 installments over a period of a year or longer. The sale agreement specified that title to the automobile would remain in the seller until the purchase price was fully paid up. The petitioner would then immediately deliver over the note, endorsed in blank, and the sale contract to the Finance Company, receiving from it then or within a few days the full amount of the face value of the note. If the buyer defaulted in his payments on the note, then the petitioner repossessed the automobile and repaid to the Finance Company the unpaid balance of the note. The sale agreements were transferred to the Finance Company in the following words: For value received, the undersigned, being the within named dealer, hereby sells, assigns, and transfers unto The Hartford Automobile Finance Company, of Hartford, Conn., all right, title, and interest in and to the within conditional sale and the debt and automobile therein described * * * (Italics supplied.) This course of procedure was regularly and consistently followed. We think that the acts of the parties negative any intent on the part of the parties merely to provide for a loan from the Finance Company*2159 to the petitioner, with the sale agreements and notes posted as collateral. In view of these facts, we think that the petitioner has failed to distinguish the case at bar from the Packard Cleveland Motor Co. case. In both cases the result was the same for all practical purposes. The dealer in each instance received during the taxable year of the sale the full amount of the sale price and parted with all interest in the sale except as an endorser on the buyer's note. In this preceeding, the evidence, less favorably to petitioner's cause, does not show that the buyers defaulted on a substantial percentage of their payments as was true in the Packard Cleveland Motor Co. case. It might be pointed out, too, that the evidence fails to show for what part of 1922 the Commercial Credit Company handled the purchase notes for the petitioner, or the details of the transactions between the petitioner and that company. After careful consideration of the petitioner's argument herein, we are unconvinced that our conclusion in the Packard Cleveland Motor Co. case fails properly to apply the applicable provisions of the taxing statute. It is our opinion that the method of computation*2160 used by the respondent correctly reflects the petitioner's taxable income for the years under review. The evidence shows errors in the respondent's computation with respect to the allocation of unreported profits for each of the years, which should be adjusted in accordance with the above found facts. Judgment will be entered under Rule 50.