Western Acceptance Corp. v. Commissioner

WESTERN ACCEPTANCE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Western Acceptance Corp. v. Commissioner Docket No. 105282. United States Board of Tax Appeals 46 B.T.A. 828; 1942 BTA LEXIS 809; April 1, 1942, Promulgated *809 A taxpayer purchased conditional sale contracts of automobile dealers with customers, assigned them to another for a greater amount, and made collections on them which it transmitted to the assignee. The income so derived, held, not interest and the taxpayer not a personal holding company. George F. Kachlein, Jr., Esq., for the petitioner. John H. Pigg, Esq., for the respondent. STERNHAGEN *828 The Commissioner determined a deficiency of $337.26 in personal holding company surtax for 1936 and a delinquency penalty of $84.32. Petitioner assails the determination that it is a personal holding company. FINDINGS OF FACT. Petitioner is a Washington corporation with principal office at Seattle, where it filed its income tax return for 1936. Petitioner was incorporated as the Modoc Investment Co. on November 6, 1931, to *829 acquire, encumber, lease, and sell real and personal property; to loan and invest money; to hold, collect and enforce notes, contracts, and choses in action; and to buy and sell securities. On April 2, 1935, its name was changed to Western Acceptance Corporation, and it began a business connected with the*810 financing of automobile purchases. During the last half of 1936 its outstanding stock, which had a total par value of $500, was owned by not more than five individuals. Petitioner is engaged primarily in the purchase from dealers of contracts for the conditional sale of used cars and in the collection of amounts due under these contracts from the customers. The customer having made a down payment to the dealer, promised installment payments of the balance under a printed form of contract which was supplied by petitioner to the dealer and which read in part as follows: The undersigned vendor does sell to the undersigned vendee that certain complete automobile hereinafter described: * * * The vendee has paid to the vendor Dollars and the vendee agrees to pay to the vendor or order installments of $ each, on the day of each succeeding month, beginning on the day of , 19 , at the office of WESTERN ACCEPTANCE CORPORATION, with interest thereon after maturity at the highest rate permitted by law, together with a reasonable collection fee in case the payments herein provided for are not paid promptly when due, * * * Title to the car was to pass to the customer after the*811 required payments had been made. The number and amount of these were computed by the dealer in accordance with a rate scale furnished by petitioner. After the contract had been executed in quadruplicate by the customer and the dealer, the dealer signed the following endorsement printed on the contract: For value received, we hereby sell; assign and transfer to WESTERN ACCEPTANCE CORPORATION the within conditional sale contract and the property therein described and warrant that we are the sole owner thereof and that said property is free from all liens and encumbrances, and hereby consent that the time of payment of any or all of said installments may be extended by the holder of this contract and hereby guarantee the payment and fulfillment of the within contract at the time and in the manner therein stated, or as extended, and agree to indemnify the holder from all loss and costs hereunder and we hereby waive all notice and demand. In event of breach of any term hereof by vendee we agree on demand to pay the whole amount thereof to holder, together with all costs incurred by holder. In case holder hereof forfeits contract from vendee and takes repossession of property, he*812 may either retain property as full performance on our part, or at his election may sell the same and apply proceeds to his costs and expenses and unpaid portion of this contract and we agree on demand to pay to him all unpaid balances. The dealer sent petitioner two copies of the contract, accompanied by a "Detail Sheet", on which he gave personal data about the customer. Petitioner's employees completed the detail sheet by supplying figures *830 for the balance due the dealer, insurance premiums, and various fees, and the total so obtained equaled the total of the installment payments, as the dealer had computed them by the scale. Petitioner investigated the customer's credit, and if acceptable, it promptly paid the dealer the balance due him as it appeared on the detail sheet, and entered the transaction on its books; as agent of an insurance company, it wrote policies against theft and damage of the car in favor of the customer and itself as their interests might appear; had the contract recorded by the county auditor as public notice of the conditional sale of the car, and then delivered the contract to the National Discount Corporation with the following endorsement: *813 For value received, all right, title and interest in and to this instrument, all monies due thereunder and the merchandise sold thereunder is hereby assigned and transferred to National Discount Corporation, Seattle. Within a day of receipt, the National Discount Corporation paid petitioner an amount equal to the total payable under the contract less a discount of 6 percent. All these steps required ten days or less. Thereafter petitioner made all collections on the contract and performed all necessary services in its enforcement. Amounts collected were transmitted to the National Discount Corporation within ten days or less. In case of default by a customer, petitioner made demand on the dealer for indemnification and received payment in full for the defaulter's contract. Although not written into the contract, it was also understood that if the car sold should be returned to the dealer within 90 days after a deliquency, the dealer would repurchase the contract. Petitioner is one of over a hundred shareholders of the National Discount Corporation. The latter sometimes endorsed a contact to a bank in the following form: For value received, we hereby sell, assign and*814 transfer to the within instrument and the property therein described and all monies payable thereunder and warrant that we are the sole owner thereof and that said property is free from all liens and encumbrances and hereby consent that the time of payment of any or all of said installments may be extended by the holder of this contract, and hereby guarantee the full performance thereof by the vendee, and agree to indemnify the holder from all losses and costs hereunder and we hereby waive all notice and demand. During 1936, some thirty or forty dealers throughout the State of Washington sold to petitioner several thousand such contracts, and petitioner assigned nearly all of them to the National Discount Corporation. The amount of discount earned in the purchase and handling of contracts in 1936 was $12,556.20. Petitioner also received commissions of $1,653.53 on the writing of insurance policies; interest of $3,661.45; and fees of $1,088.36 for services in public filing of the contracts. The several items constitute petitioner's gross income of $18,959.54. *831 Petitioner filed a corporation income and excess profits tax return for 1936, on which it correctly reported*815 gross income; the $12,556.20 was described as "Discount Earned." OPINION. STERNHAGEN: The petitioner contends that it is not a personal holding company, as defined by section 351(b), Revenue Act of 1936. 1 The respondent narrows the issue by a statement that the petitioner's gross income is, to the specified 80 percent, derived from interest, and that this is the ground upon which he has classified the petitioner as a personal holding company. As shown in greater detail in the findings, the petitioner's income consists principally of the gains derived from its purchase and disposition of the conditional sales contracts of automobile dealers with customers. The petitioner pays the dealer the cash price of the car and takes the dealer's contract*816 with the customer, who is to pay a greater amount in periodic payments. The petitioner is in a position substantially similar to that of the acceptance corporation in . The petitioner then assigns the contract to the National Discount Corporation at a discount, receiving an amount greater than that paid by it to the dealer. These transactions are all covered by express writings the forms of which are in evidence. Nothing in any of them suggests, either in express language or by implication, that any of the parties was thinking of a loan and its repayment or of interest. They were buying and selling conditional sales contracts and were not lending and borrowing money and using the contracts as collateral security for the loans. There is no more ground for construing interest in the arrangement in the field of taxation than in the field of usury. ;*817 (Oreg.); (Wash.). This has frequently been held as to the installment buyer's claim for an interest deduction in computing net income. , affirming ; ; cf. ; affd., ; ; . An automobile dealer has been held not entitled to treat the amount received from the finance company as a loan but required to treat it as sale price of the conditional *832 sale contract, a conception which prevented the dealer from using the installment method. , affirming ; ; cf. *818 . On the general subject of interest, see also ; . The income derived by the petitioner from the conditional sales contracts was not interest, and the Commissioner was in error in so regarding it as the ground for classifying the petitioner as a personal holding company under section 351(b). Cf. ; affd., . Although respondent does not urge that petitioner's income is gain from the sale of securities, petitioner argues, in the alternative, that "if the Board should find that the gain designated as 'discount earned' derived by the petitioner from the purchase and sale of conditional sales contracts is 'a gain from the sale of securities,' such gain is received by petitioner as a dealer in securities and therefore not personal holding company income." The Board does not find it necessary to hold whether the "discount earned" is a gain from the sale of securities, since the respondent has not determined that it is, and*819 in his brief he expressly concedes that the conditional sales contracts are not "securities" within the meaning of section 351. The question whether petitioner is a dealer in such contracts is therefore irrelevant. Since petitioner was not in the taxable year a personal holding company, it was under no duty to file a personal holding company return, and since there is no deficiency upon which to base a percentage penalty, no such penalty may be assessed. Decision will be entered for the petitioner. Footnotes 1. SEC. 351. SURTAX ON PERSONAL HOLDING COMPANIES. * * * (b) DEFINITIONS. - As used in this title - (1) The term "personal holding company" means any corporation * * * if - (A) at least 80 per centum of its gross income for the taxable year is derived from royalties, dividends, interest, annuities, and (except in the case of regular dealers in stock or securities) gains from the sale of stock or securities, and (B) * * * ↩