*1158 1. The gain on installment sales of pianos and electric refrigerators held taxable in the years when the installment sales contracts were turned over to finance companies for cash or credit for the face amount of the contracts, less finance charges or "hold-backs", or both.
2. In 1938 the petitioner purchased a Buick automobile at a price of $1,401.28 and was allowed a credit of $575.28 on a Chrysler car turned in by the petitioner in part payment therefor. The depreciated cost of the Chrysler at the time was $782.17. The petitioner claims the difference between the credit allowance and the depreciated cost as additional depreciation for 1938 on the Chrysler car. The respondent contends that the difference ($206.89) may not be deducted as a loss or as additional depreciation, but that the difference must be added to the cost of the Buick car to be depreciated over its useful life. In the absence of evidence that depreciation on the Chrysler car was not sustained at a greater rate than in prior years held that the petitioner is not entitled to a greater allowance for depreciation in 1938 than has been allowed by the respondent.
*218 This proceeding involves income and excess profits tax deficiencies for the years 1936, 1937, and 1938 as follows:
| Year | Income tax | Excess profits tax |
| 1936 | $456.48 | |
| 1937 | 1,740.70 | $457.14 |
| 1938 | 155.65 | 68.12 |
The principal question in issue is whether the petitioner is taxable under section 44(d) of the Revenue Acts of 1936 and 1938 on the profit from certain installment sales contracts which it turned over to finance companies during each of the taxable years. A subsidiary question relates to the amount of the depreciation allowance on automobiles to which the petitioner is entitled for 1938.
FINDINGS OF FACT.
The petitioner is a corporation engaged in the business of selling musical instruments and electric refrigerators at Houston, Texas. It filed its tax return with the collector at Austin. The business was *219 first organized in 1866 and has been in continuous operation since that time. It was incorporated under the laws of Texas in 1914.
Most of petitioner's sales are made on the installment basis, the*1160 purchaser making a down payment and executing a contract with the petitioner for the payment of the balance of the purchase price in monthly installments over a period not in excess of 30 months.
Petitioner finances its business through arrangements with the W. W. Kimball Co., the Bankers Commercial Corporation of Chicago, the Commercial Investment Trust, and the General Motors Acceptance Corporation, whereby it turns over to those companies some but not all of its sales contracts and receives in cash, or as a credit, a percentage of the total sale price. The contracts for the sale of pianos are turned over either to the W. W. Kimball Co., from whom the petitioner purchases pianos, or the Bankers Commercial Corporation of Chicago (B.C.C.), while the electric refrigerator contracts are placed with either the Commercial Investment Trust (C.I.T.), or General Motors Acceptance Corporation (G.M.A.C.). These companies will hereinafter be referred to sometimes as the finance companies.
On the contracts turned over to the W. W. Kimball Co. the petitioner receives credit for a percentage of the sale price, equivalent to 21 monthly payments on a 30-month contract, and when the contract*1161 is fully paid up receives a further credit for the balance of the sale price. Petitioner makes the collections on such contracts and forwards the amount collected to the W. W. Kimball Co. every week. In lieu of a finance charge the W. W. Kimball Co. charges the petitioner 6 percent interest, computed monthly on the balance of its open account.
Petitioner has a similar arrangement with B.C.C., except that on the contracts turned over to that company it receives cash up to 90 percent of the contract sale price, with a further deduction of a finance charge of one-half of 1 percent per month on the total amount for the period of the contract. Thus, on a $100 contract for a period of 20 months petitioner would receive $80 immediately and $10 upon completion of the contract, the remaining $10 being the amount of the finance charge. The 10 percent of the sale price which is retained by the finance company as a reserve or "hold-back" is paid to the petitioner upon completion of the contract. Petitioner makes the collections on these contracts itself and forwards the amounts collected to the finance company every week, as with the W. W. Kimball Co.
On the electric refrigerator contracts, *1162 which the petitioner turns over to C.I.T. and G.M.A.C., it receives cash of 90 or 95 percent of the sale price, less a finance charge of one-half of 1 percent per *220 month for the period of the contract, and receives the remaining 5 or 10 percent upon completion of the contract, the same as with the piano contracts turned over to B.C.C. The finance charges are added to the sale price in the customer's contract. Collections on these contracts are made either by the finance companies or by the petitioner at the customer's option. The contracts are all made out on forms furnished by G.M.A.C., which state that the finance companies retain a lien on the merchandise sold until the sale price is fully paid.
The petitioner guarantees full payment for all of the contracts described above. If the purchaser defaults in his payments the contract is returned to the petitioner for whatever disposition it wishes to make of it and the petitioner reimburses the finance company to the full extent of its interest in the contract.
Petitioner services the article sold during the contract period and handles repossessions when necessary.
In its books the petitioner carries an open account*1163 for each sale contract showing the status of the contract from the time it is made until it is finally closed.
Petitioner reported its income on all installment sales in 1936, 1937, and 1938 on the installment basis. In determining the deficiencies herein the respondent increased petitioner's reported income by the amounts of $3,036.04 for 1936, $9,409.91 for 1937, and $1,016.92 for 1938, which amounts represent the difference between the "Profits included in balances of discounted installment contracts" at the beginning and at the close of each year.
The parties have stipulated that, due to an accounting error, $647.60 of the amount of the increased profits for 1937, as shown in the deficiency notice, should be allocated to the year 1938 and that prior adjustment should be made therefor in the final computation if the respondent is sustained on this issue. A motion for such increase in the deficiency for 1937 as will result from the adjustment has been made by the respondent.
In its 1938 income tax return the petitioner claimed a total depreciation allowance on automobiles and trucks of $1,071.60, of which amount the respondent allowed $1,023.72 and disallowed $47.88.
*1164 On May 31, 1936, the petitioner purchased a Chrysler automobile for $1,235. Depreciation allowances computed at 20 percent and amounting to $144.08 for seven months of 1936 and $247 for 1937 were taken by the petitioner in its returns and allowed by the respondent in his deficiency notice. Additional depreciation of $61.75 was allowed by the respondent for the period January to April, 1938.
In April 1938 the petitioner traded in the Chrysler automobile on a Buick automobile. The purchase price of the Buick was $1,401.28 *221 and petitioner was allowed $575.28 as the trade-in value of the Chrysler. In determining the cost basis of the Buick for depreciation purposes the respondent added to its sale price of $1,401.28 the difference between the depreciated cost and the trade-in allowance on the Chrysler, viz., $206.89, thereby arriving at a cost basis for the Buick of $1,608.17, on which he allowed depreciation computed at the rate of 20 percent of $241.22 for the nine-month period April to December, 1938.
In its income tax return for 1938 the petitioner claimed a loss deduction of $145.14 on the sale of the Chrysler, which the respondent disallowed on the ground that*1165 the trade-in of the Chrysler for the Buick was an exchange of property held for productive use for property of a like kind, also to be held for productive use, within the meaning of section 112(b)(1) of the Revenue Act of 1938, and that therefore no gain or loss may be recognized on the transaction.
In December 1938 the petitioner purchased a Chevrolet automobile for $1,046.50. The respondent allowed depreciation thereon for 1938 in the amount of $17.44 computed at the rate of 20 percent for one month. This automobile was included among other assets acquired during the year 1938 on which the petitioner in its return claimed six months' average depreciation, the total amount of depreciation claimed on automobiles being $1,071.60 and the amount allowed by the respondent being $1,023.72, as stated above.
OPINION.
SMITH: Section 44(d) of the Revenue Acts of 1936 and 1938 provides in part as follows:
SEC. 44. INSTALLMENT BASIS.
* * *
(d) GAIN OR LOSS UPON DISPOSITION OF INSTALLMENT OBLIGATIONS. - If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of*1166 the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange - the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange - the fair market value of the obligation at the time of such distribution, transmission, or disposition. Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full. * * *
Our question under this issue is, therefore, whether during the taxable years 1936, 1937, and 1938 the petitioner "distributed, transmitted, sold, or otherwise disposed of" the above described installment contracts on the sales of pianos and electric refrigerators. The petitioner's *222 contentions are that it merely "pledged" these contracts with the finance companies as security for loans.
We do not have before us the psecific provisions of petitioner's agreements*1167 with any of the finance companies. No written contracts were offered in evidence. Petitioner's vice president and treasurer testified that he did not remember whether there were any written contracts with the finance companies.
The evidence does show that in each taxable year the petitioner turned over certain of its installment sales contracts to finance companies and received either cash or a credit for the face amount of such contracts, less either a standard finance charge or a "hold-back" of a certain percentage of the contract price pending final settlement of the account, or both. In lieu of a finance charge the petitioner paid the W. W. Kimball Co. 6 percent interest on the balance of its open account in which credit for the contracts had been entered.
As to the electric refrigerator contracts, the procedure seems to have been that commonly followed by many retailers of automobiles and household appliances, under which the installment sales contracts are immediately turned over to finance companies or banks for cash.
Even prior to the enactment of section 44(d), supra (first enacted in the Revenue Act of 1928), it was held in a number of cases that where installment*1168 obligations are sold or discounted at a bank, or otherwise disposed of, the transaction giving rise to the installment obligation is closed and the gain or loss must be reported in that year. See Grace T. Mytinger,4 B.T.A. 896">4 B.T.A. 896; Packard Cleveland Motor Co.,14 B.T.A. 118">14 B.T.A. 118; Lucius H. Elmer,22 B.T.A. 224">22 B.T.A. 224; affd., 65 Fed.(2d) 568; Alworth-Washburn Co.,25 B.T.A. 140">25 B.T.A. 140; affd., 67 Fed.(2d) 694; Miller Saw-Trimmer Co.,32 B.T.A. 931">32 B.T.A. 931. Referring to section 44(d) of the 1928 Act, the court said in Duram Building Corporation v. Commissioner, 66 Fed.(2d) 253:
* * * That statute of course, is not controlling as to the petitioner's transactions in 1926; but we view it as merely an express recognition of what was equally true under the 1926 act by reason of the general provisions (sections 202-204 [26 USCA §§ 933-935]) with respect to the sale of property by a taxpayer. * * *
In Elmer v. Commissioner, 65 Fed.(2d) 568, the court found, sustaining the Board, that the transactions by which certain automobile installment sales*1169 contracts were placed with a finance company were sales, rather than loans with the contracts pledged as security. In Alworth-Washburn Co. v. Helvering, supra, the taxpayer, in the year following the sale of real estate, discounted the purchase money notes payable over a five-year period at the bank and received the face amount of the unpaid balance of the notes in cash. There, as in Elmer v. Commissioner, supra, the question turned upon the nature of the transaction between the taxpayer and the bank. The court said:
*223 It is undoubtedly a fact that the terms "loan," "discount," and "sale," as applied to a transaction such as is involved in this case, are frequently so used by courts as to result in a rather vague and inexact distinction between them. * * *
But in the view we take of this case, it is not necessary we should be at pains to find a subtle distinction between the words we have discussed. * * * Whether the transfer of the notes received by petitioner as part of the purchase price for its property be denominated a loan, a sale, a discount, or a sale by way of discount, is not determinative of the rights of this case. The question*1170 rather is whether the tax statutes, fairly construed, make the money received by petitioner in the year 1927 gain or profits within the purview of section 213 of the Revenue Act of 1926 (44 Stat. 23, 26 USCA § 954).
The petitioner here points out that it guaranteed all of the sales contracts which it turned over to the finance companies and in case of a purchaser's default it was obligated to reimburse the finance company for the balance advanced on the contract. So, however, were the taxpayers liable on the notes which they discounted at the banks or turned over to finance companies in the Alworth-Washburn case and in the Elmer case.
The petitioner further relies upon the fact that it handled all of the repossessions of merchandise and reimbursed the finance companies for the balance due on the contracts. In Elmer v. Commissioner, supra, the seller repossessed the automobiles upon default of the purchaser "probably as its [the finance company's] agent" the court stated, and repaid the amount so realized to the finance company. We do not think it material that here the petitioner acted in its own behalf in repossessing merchandise*1171 upon a default in payment by the purchaser. While the contracts were in good standing all collections made thereon belonged to the finance company holding the contract, and the petitioner merely acted as agent for the finance company in making the collections.
As to the transactions involving the assignment of the electric refrigerator contracts, particularly, the evidence fails to show that the procedure followed by the petitioner differed in any material respect from that followed by one or more of the taxpayers in the cases cited above. Some of the piano contracts, those turned over to the W. W. Kimball Co., were handled in a somewhat different manner in that the petitioner paid interest on the credit advanced to it in lieu of a finance charge, but we do not think that this difference seriously affects the result. In all instances the petitioner realized in cash or its equivalent all or a substantial portion of the sale price of the article sold at the time when the sale contract was turned over to the finance company. This is enough, we think, to require the inclusion in the gross income of each year of the profits represented in such cash receipts. We therefore sustain*1172 the respondent in his determination that the installment obligations were distributed, transmitted, sold, or otherwise disposed of, within the meaning of section 44(d) supra.
*224 The petitioner alleges as error in paragraph 4(c) of its petition the "Disallowance of sufficient depreciation on automobiles and trucks in 1938 to return capital invested which resulted in an additional tax of $33.13." Apparently this allegation of error was intended to put in issue the respondent's disallowance of the amount of $145.14 which the petitioner claimed in its return for 1938 as a loss on the sale of the Chrysler automobile which it traded in on the Buick. In disallowing the deduction the respondent held that there was no sale but an exchange within the meaning of section 112(b)(1) of the Revenue Act of 1938 on which no gain or loss is recognized.
Section 112(b)(1) of the Revenue Act of 1938 provides in part:
SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * *
(b) EXCHANGES SOLELY IN KIND. -
(1) PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT. - No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock*1173 in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.
The pertinent provisions of Regulations 94, which are the same as the corresponding provisions of Regulations 101, are:
Art. 112(b)(1)-1. Property held for productive use in trade or business or for investment. - * * *
No gain or loss is recognized if (1) a taxpayer exchanges property held for productive use in his trade or business, together with cash, for other property of like kind for the same use, such as a truck for a new truck or a passenger automobile for a new passenger automobile to be used for a like purpose, * * *
Respondent's determination relative to the depreciation allowance for 1938 is in accord with the decisions of the Board in W. H. Hartman Co.,20 B.T.A. 302">20 B.T.A. 302; *1174 George E. Hamilton,30 B.T.A. 160">30 B.T.A. 160; National Outdoor Advertising Bureau, Inc.,32 B.T.A. 1025">32 B.T.A. 1025; affd., on this point (C.C.A., 2d Cir.), 89 Fed.(2d) 878; Graves, Cox & Co.,27 B.T.A. 546">27 B.T.A. 546.
The cited cases hold that under the provisions of section 112(b)(1) of the Revenue Act of 1938, or corresponding provisions of prior acts, no recognizable gain or loss results from the exchange of automobiles or trucks held for productive use in trade or business for other automobiles or trucks intended for a like use.
Petitioner conceded at the hearing of this proceeding that the Chrysler automobile in question was traded in and not sold and that no deductible loss was sustained on the trade-in. It asserted, however, that the excess of undepreciated cost over the trade-in *225 allowance should be allowed as additional depreciation in the year 1938. This contention is without merit. The allowance for depreciation depends upon the actual usage of the property. There is no evidence before us that the depreciation actually sustained on the automobile in question either in 1936, 1937, or 1938 was in excess of that set up by the*1175 petitioner on its books and claimed and allowed in the audit of its income tax returns. Certainly, the amount of the trade-in value allowed on an automobile which has been used in a trade or business for a given period can not be said to determine the amount or the rate of the depreciation to be allowed on it in any year of its use.
The evidence before us affords no basis for the allowance of any greater amount of depreciation on any of the automobiles in question than was claimed by the petitioner in its return and allowed by the respondent in the determination of the deficiency. Upon this issue the respondent is sustained.
Reviewed by the Board.
Decision will be entered under Rule 50.