J. B. Bradford Piano Co. v. Commissioner , 15 B.T.A. 1045 ( 1929 )

J. B. BRADFORD PIANO CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

J. B. Bradford Piano Co. v. Commissioner

Docket No. 7093.

United States Board of Tax Appeals

15 B.T.A. 1045; 1929 BTA LEXIS 2749;

March 22, 1929, Promulgated

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1. INCOME - INSTALLMENT SALES. - In the year 1920 the petitioner collected $27,423.50 on installments of sales made in the year 1918. Of this amount $13,026.16 was gross income and must be included in petitioner's gross income for the year 1920.

2. DEDUCTIONS - INSTALLMENT SALES. - The excess of allowable deductions over gross income as reported on the installment basis for the year 1918 may not be treated as a deferred expense and deducted in the year 1920.

3. INVESTED CAPITAL - INSTALLMENT SALES. - The petitioner having chosen to take advantage of the benefits of reporting its income on the installment sales basis must, for invested capital purposes, submit to the disadvantages of having its surplus and invested capital adjusted in accordance with the installment sales method of accounting.

Richard H. Tyrrell, Esq., for the petitioner.

J. F. Greaney, Esq., for the respondent.

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TRUSSELL

The deficiency notice upon which this action is predicated asserted deficiencies in income and profits taxes for the year 1920 in the amount of $4,883.16 and for the year 1921 in the amount of $355.90. The petition as originally filed challenges the correctness of deficiencies for both years. At the trial, however, the error respecting the year 1921 was waived.

For the year 1920 petitioner alleges that the Commissioner erred (1) in adding $13,026.16 to income, and (2) in reducing invested capital by an alleged operating deficit in the amount of $10,604.89.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of Wisconsin and carrying on a business of selling pianos on the installment plan. At January 1, 1918, petitioner had a book surplus in the amount of $33,462.77. During that year it charged against this surplus income and profits taxes for the year 1917 in the amount of $2,712.41 and $20,700 of cash dividends, thus reducing its book surplus to $10,050.36. Its 1918 income-tax return made on the installment sales basis showed an excess of allowable deductions over gross income in the amount of $13,455.12. During the year 1920 petitioner collected $27,423.50, of which 47 1/2 per cent, or $13,026.16, represented gross profits.

During the year 1919 petitioner distributed cash dividends in the amount of $35,100.

In computing the deficiency here in question the respondent added to gross income $13,026.16 of 1920 collections of 1918 sales and charged the excess of allowable deductions over gross income for the year 1918 against the book surplus existing at the beginning of that year and reduced invested capital by the total amount of $35,100 cash dividend paid in the year 1919.

OPINION.

TRUSSELL: From an examination of this record it appears that if the petitioner had continued its former method of reporting income upon the accrual basis it would have had no excess of deductions over gross income in the year 1918 and would further have had a book surplus from which the entire dividend of 1919 could have been paid. The petitioner, however, has chosen to take advantage of the postponement of the payment of income taxes until the installment payments upon its sales have been actually collected. It thus procures the advantage of postponing taxes until cash collections have been made and, having secured such advantages, it should not complain if the accounting system results in some counter disadvantages.

Section 212(d) of the Revenue Act of 1926 provides:

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 contract price. * * *

It will be observed that the language of this section is permissive, i.e., a taxpayer may take advantage of this section or not as it may choose, but, having taken advantage of it, the provision respecting what shall be gross income becomes peremptory. Therefore, having collected installments on 1918 sales in 1920, the $13,026.16 is required by the statute to be reported as gross income for the year 1920.

This same statute authorizes the Commissioner, with the approval of the Secretary of the Treasury, to make proper regulations for carrying the provisions of the Act into effect, and in Regulations 69, article 42, appears the following provision:

* * * Deductible items are not to be allocated to the years in which the profits from the sales of a particular year are to be returned as income, but must be deducted for the taxable year in which the items are paid or incurred or paid or accrued, as provided by section 200(d).

There seems to us to be nothing unreasonable about this regulation, and, therefore, we are led to the conclusion that the excess of allowable deductions over gross income for the year 1918 may not be allowed as a deduction for the year 1920.

Both the taxing statutes and the department regulations respecting taxpayers reporting on the installment sales basis are silent on the subject of invested capital. In , the Board has established the rule that unrealized and untaxed gains represented by accounts receivable may not be included in surplus by a taxpayer reporting on the installment sales basis. A like course of reasoning brings us to the conclusion that adjustments of surplus for invested capital purposes may be properly made in accordance with the accounting methods made necessary by the taxpayer reporting upon an installment sales basis. Under this method the petitioner had an operating dificit for the year 1918 and such accounting deficit was properly charged by the respondent against petitioner's book surplus.

The deficiencies may be recomputed in accordance with the findings of fact and this opinion.

Judgment will be entered under Rule 50.