Court Opinion

ID: 4482022
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:15.525467+00
Date Added: 2024-06-11T14:54:01.093785
License: Public Domain

Atkins, /., dissenting: I respeotivefully dissent from the holding of the majority that all sales under petitioner’s coupon book installment plan quality for installment reporting treatment under section 453(a) of the Internal Revenue Code of 1954. As pointed out by the majority, section 453(a) contains no specific definition of the term “sale on the installment plan.” However, the regulations promulgated pursuant thereto do contain a detailed definition of what is meant by that term. Section 1.453-2 (b) of the Income Tax Regulations provides as f ollows: (b) Definition of sale on the installment plan. The term “sale on tbe installment plan” means— (1) A sale of personal property by the taxpayer under any plan for the sale or other disposition of personal property which plan, by its terms and conditions, contemplates that each sale under the plan will be paid for in two or more payments, or (2) A sale of personal property by the taxpayer under any plan for the sale or other disposition of personal property— (i) Which plan, by its terms and conditions contemplates that such sale will be paid for in two or more payments, and (ii) Which sale is in fact paid for in two or more payments. Normally, a sale under a traditional installment plan (as described in paragraph (a) (1) of section 1.403-1), meets the requirements -of subparagraph (1) of this paragraph. See paragraph (d) of this section for the application of the requirements of subparagraph (2) of this paragraph to sales under revolving credit plans. The majority relies upon the case of Consolidated Dry Goods Co. v. United States (D. Mass. 1960), 180 F. Supp. 878, for the proposition that since the statute contains no definition of the term “sale on the installment plan” such term should be construed in the light of the generally accepted meaning of such term. In that case the court held that a revolving credit plan came within the ordinary meaning and accepted trade meaning of the term “installment plan,” and that therefore sales under such plan qualified for installment reporting. However, as pointed out by the court, the statute and the then applicable regulations contained no express definition of the term “installment plan.” Thereafter, on October 15, 1963, the respondent promulgated new regulations containing the above-quoted provisions and provided for installment plan treatment of certain amounts received under revolving credit plans. See T.D. 6682, 1963-2 C.B. 197. However, the respondent in such regulations did not accept in its entirety the holding of the court in the Consolidated Dry Goods case. Devolving credit plans fall only within the second definition contained in the above regulations, and the regulations require that it be proved which sales are in fact paid for in two or more installments. A method was provided for determining what percentage of revolving credit accounts meets this requirement. The above regulations have been subjected to congressional scrutiny and the approach taken by the respondent has been approved by Congress.1  In view of the foregoing, it seems to me that the Consolidated Dry Goods case is of little help here. It also seems clear to me that, unless the above-quoted regulations are to be disregarded, resort to general definitions of the term “sale on the installment plan” is beside the point. Nor are the provisions of State law with regard to coupons and coupon sales helpful in deciding what is a “sale on the installment plan” for Federal income tax purposes. I, of course, recognize the relief purpose for enactment of the installment method of. reporting income as pointed out by the majority, but it is still incumbent upon petitioner to show it qualifies for the relief under the statute and regulations. It is clear that the plan here involved calls for the payment for coupons in installments. However, the petitioner does not contend, nor does the majority hold, that this is itself a sale of merchandise upon the installment plan within the meaning of section 453 (a). Translating this into sales of merchandise under an installment plan is another matter and I cannot agree with the majority. 1 agree that this plan generally is intended to facilitate the purchase of a number of relatively small items of merchandise with the customer paying therefor by the installments provided for the payment for the coupon book itself. And it is apparently the case that most customers redeem their coupons shortly after issuance so that the installments payable for the coupon book are in fact payable for the merchandise purchased. However, there is no showing that this is always so. Under the petitioner’s accounting system, and under the majority’s holding, a sale does not take place until the customer exchanges coupons for merchandise. It is these sales all of which are held to be “sales on the installment plan.” Such conclusion is not in accord with the applicable regulations. As pointed out above, section 1.453-2(b) sets forth two definitions of the term “sale on the installment plan.” The majority focuses only on the first definition and does not take into consideration the second definition. The language of the two definitions is inartful at best and at first reading it may appear that the two definitions are both referring to the same thing. But obviously they contemplate two different situations which are to be distinguished from each other. The second definition refers to a sale under a plan which plan contemplates that such sale will be paid for in two or more payments and which sale is in fact paid for in two or more payments. As an example of this the regulations refer to sales under a revolving credit plan.2 It seems to me that this definition requires two things: First, an examination of a particular sale to see if that sale, under the terms of the plan under which it took place, may be paid for in two or more payments; and second, an after-the-fact determination as to whether or not that particular sale was in fact paid for in two or more payments. Distinguished from this is the first definition which states that a sale on the installment plan is a sale under a plan which plan contemplates that each sale under the plan will be paid for in two or more payments. As an example of this the regulations refer to a traditional installment sale. It will be noted that this definition does not at all look to what in fact happens. It looks solely to the plan itself. I think it is clear that this means that the plan must be such that by its terms and conditions there can be no sale thereunder which is to be paid for in less than two payments. If this is not so, the second definition, which looks to what in fact happens, would be meaningless. Viewed in this light, I do not think that petitioner’s coupon book installment plan is a plan under which there can be no sales paid for in less than two payments. As pointed out above, a sale under the plan does not take place until the customer redeems a coupon or coupons for merchandise. A customer might buy merchandise in an amount that has theretofore been completely paid for by the installments provided under the retail credit agreement; or a customer might buy merchandise in an amount for which there is only one remaining installment due; or a customer might buy merchandise each month only in an amount which is covered by the next installment due under the retail credit agreement. These illustrations establish that there can be sales under petitioner’s plan which can be paid for in less than two payments. The fact that the examples cited may rarely take place in fact is irrelevant. We are concerned initially only with whether under the literal terms of the plan there can ever be sales which will be paid for in less than two payments. Accordingly, the sales under petitioner’s plan fail to qualify under the first definition, namely, that contained in section 1.453-2 (b) (1). However, petitioner’s coupon book installment plan does contemplate that there will be sales which can be paid for in two or more payments. Accordingly, any sale which is in fact paid for in two or more payments will qualify for installment reporting pursuant to the provisions of section 1.453-2 (b) (2) of the regulations. The concern is only with those sales as to which a portion of the profit is being deferred from one taxable year to another. The amount of profit deferred is the profit reflected in the accounts receivable outstanding as of the end of the year. Under petitioner’s accounting system when coupon books are sold the amount due thereon is included in accounts receivable. However, as payments are made on such coupon books the accounts receivable are appropriately reduced. Hence, any sales made by the exchange of coupons which have already been paid for do not enter into the problem here presented since accounts receivable have been reduced by such payments and the profit on such sales is included in taxable income for the year. As of the end of the year the amount of unredeemed coupons is deducted from the amount of accounts receivable, so that the accounts receivable as of that time, as so reduced, reflect only consummated sales the profit on which petitioner has deferred. I think it is apparent that any sales made prior to the last month of petitioner’s taxable year for which petitioner has deferred any profit were paid for in two or more installments, since the installments on the coupon books sales are paid monthly. In such cases there would have been a payment in the last month of the taxable year and at least one payment in the subsequent year. Accordingly, I would hold that the petitioner properly deferred the reporting of profit on such sales. A different situation is presented with respect to sales made in the last month of each taxable year. It may be that all or substantially all such sales are paid for in two or more installments, but this the petitioner has not shown. Indeed, since petitioner does not identify and record the exchange of each coupon by reference to each coupon book account, it would not be possible to determine which of such sales were paid for in two or more installments. It is quite possible that some of such sales were not paid for in two or more installments. For example, during the last month of the year a customer may have purchased goods by using a coupon with respect to which there is but one remaining installment due, namely, the installment due to be paid after the end of the year. Or during the last month of the year a customer might purchase goods by use of a coupon with respect to which there is more than one installment due to be paid after the end of the year, but the customer elects to prepay such installments in one payment so that in fact there is but one payment after the purchase of the merchandise. In such cases, it could not be considered that the purchase price was paid in two or more installments, as contemplated by setcion 1.453-2 (b) (2) of the regulations. Under the circumstances I would hold that the reporting of profit on sales made under this plan in the last month of each of the petitioner’s taxable years in question may not be deferred. Hott, J., agrees with this dissent.   By sec. 222 of the Revenue Act of 1964 (enacted Feb. 26, 1964), Congress amended sec. 453 of the Code by adding a subsection providing that the term “installment plan” includes a revolving credit plan. However, by Pub. L. 88-539 (enacted Aug. 31, 1964), Congress repealed such provision retroactively as of its initial effective date. With regard to such repeal, It was stated in S. Rept. No. 1242, 88th Cong., 2d Sess., 1964-2 C.B. 699: “Revolving credit-type plans. — Prior to October 15, 1963, sales under revolving credit type plans were not recognized by the Treasury Department as installment sales for tax purposes because of certain differences between revolving credit plans and traditional installment plans. “Traditional installment plans (described in regulations sec. 1.453-2(b) (1)) ordinarily involve a separate contract for each item of property purchased, providing for a series of payments specifically applicable to the purchase price of that property. Usually the seller also retains some type of security interest in the property until the property is paid for. Revolving credit type plans (described in regulations sec. 1.453-2(b) (2)) on the other hand usually do not Involve separate sales contracts. Under these plans, any item in the store may be charged to the same account and the seller does not retain any security interest in the property sold. The buyer frequently has the option to pay his account in fuU within 30 days with no finance charges or he may pay the account in Installments with periodic finance charges related to the unpaid balances of the account. In this latter case, the buyer’s regular payments are not specifically attributable to the purchase price of any single item but instead go to reduce the unpaid balance on what may be the total price of several items purchased at different times. “New regulations were issued by the Treasury Department on October 15, 1963 (T.D. 6682) specifically providing for installment sale treatment of certain amounts received under revolving credit plans. Broadly speaking, under these rules, a sample of revolving credit sales is taken from balances in customer accounts as of the billing dates for the last month of the seller’s taxable year and the percentage of sales in the sample accounts determined which: (1) are the type the revolving credit plan contemplates will be paid for in two or more installments and (2) actually are paid for in two or more installments. The percentage is then applied to the balance of the total revolving credit accounts (after adjusting for sales of nonpersonal property) and the resulting amount is treated as representing sales under the installment plan. “In the Revenue Act of 1964, Congress in effect replaced these regulations with a provision providing that the term installment plan was to include a revolving credit type plan, except that the term was not to Include any such plan with respect to a purchaser who uses it primarily as an ordinary charge account. “Tour committee has concluded that it would have been better to have left the Treasury Department with the opportunity to determine by regulation the extent to which sales under revolving credit type plans are to be treated as sales under installment plans. For that reason, it has repealed the provision added in this respect by the Revenue Act of 1964 (subsec. (e) of sec. 453 as added by sec. 222 of the Revenue Act of 1964). In taking this action, your committee intends that the term “sales on the installment plan” be interpreted by the regulations as covering “sales on a revolving credit type plan” to the full extent provided in the regulations issued by the Treasury Department on October 15, 1963 (T.D. 6682). However, it is anticipated that continuing efforts will be made to simplify the sampling procedures required by those regulations as experience makes this possible.”    Although the reason for the adoption of the definitions contained in sec. 1.453-2(b) and of the other sections of the regulations promulgated in T.D. 6682 may have been to deal specifically with the problem of sales under revolving-credit-type plans, there is nothing which would indicate that the second definition in sec. 1.453-2 (b) is limited to sales under such plans. Rather, I view the second definition as being applicable to sales under any plan not coming within the first definition.