*2481 1. At the beginning of the taxable years on appeal there stood on the petitioner's books of account installment accounts receivable representing sales made prior to January 1, 1918, when the petitioner was following the straight accrual method of accounting. Held, the petitioner may not include in the invested capital of the years on appeal the uncollected profits contained in said installment accounts receivable outstanding at the beginning of each year.
2. On January 1, 1918, the petitioner changed from the straight accrual method of accounting to the installment method. At the beginning of each of the taxable years on appeal there stood on the petitioner's books of account installment accounts receivable representing sales made on the installment plan subsequent to December 31, 1917. Held, the petitioner may not include in its invested capital of the years on appeal the uncollected profits contained in said installment accounts receivable outstanding at the beginning of each year.
*59 These proceedings*2482 are for the redetermination of deficiencies in income and profits taxes as follows:
| Docket No. | Year | Deficiency |
| 17049 | 1919 | $29,779.56 |
| 1920 | 64,832.71 | |
| 15660 | 1921 | 12,760.61 |
*60 The deficiency shown in Docket No. 17049 has been assessed.
At the hearing amended petitions were filed for the purpose of eliminating all other issues raised in the original petitions and to raise an additional issue not raised by the original petitions. With respect to the years 1919, 1920, and 1921, the amended petitions contain the following assignments of error:
(1) Commissioner has erred in denying to petitioner the so-called installment basis for computing its net income.
(2) Commissioner has erred in computing invested capital in that he has failed to include in the amount of capital stock and surplus the amount of $321,223.97, representing the excess of the actual cash vaule of certain properties paid into the Isabelle Realty Company, a corporation of the consolidated group, at the time of its organization in exchange for capital stock, over the amount at which such properties were entered on the books and carried thereon during the taxable year.
The amended*2483 petition in Docket No. 17049 also contains the following assignment of error:
Commissioner has erred in excluding the invested capital and the income of Hammann-Levin Co. Inc. from the invested capital and taxable income for the calendar year 1919 of the affiliated corporations of which Jacob Bros. Co. is the parent.
At the hearing counsel for the petitioner waived the issue raised by this assignment. At the hearing counsel for the respondent conceded that the Board should find for the petitioner with respect to No. (2) the amount to be $321,225.81 as shown in a stipulation instead of $321,223.97, as shown in the amended petitions. In regard to No. (1) the respondent also conceded that the petitioner is entitled to compute and report its income on the installment basis. The only matter remaining in controversy between the parties is whether the petitioner's invested capital for the respective years should include the amount of uncollected or unrealized profits reflected in uncollected accounts receivable resulting from installment sales made prior to such years, particularly the portion representing the uncollected profits on sales made prior to January 1, 1918, and reported*2484 in full in income during 1913 through 1917 on the accrual basis.
The proceedings were submitted on a stipulation from which we have made the following findings of fact.
FINDINGS OF FACT.
(1) The petitioner, Jacob Brothers Co., is a corporation which was organized, on July 24, 1902, under the laws of the State of New York. The corporation so organized was a continuation of the business founded by the brothers, Charles Jacob and C. Albert Jacob, in 1886 and conducted by them as a partnership until the formation *61 of the corporation in 1902. During the years involved in these proceedings the petitioner corporation was affiliated with the following corporations:
| Company | State of | Date | Portion of years |
| incorporation | incorporated | under review | |
| during which | |||
| affiliated | |||
| Mathushek Piano Manufacturing Co | New York | June 1, 1912 | All. |
| James & Holmstrom Piano Co | do | Aug. 5, 1908 | All. |
| Jacob Bros. Co | Pennsylvania | Mar. 5, 1912 | All. |
| Mathushek & Son Piano Co | New York | Apr. 2, 1890 | All. |
| Wellington Piano Case Co | |||
| Isabelle Realty Co | New York | Jan. 6, 1910 | All. |
| Sourene Manufacturing Co | do | 1891 | Jan. 1, 1917, to |
| Feb. 20, 1919. | |||
| Ansell, Bishop & Turner (Inc.) | Jan. 1, 1920, to | ||
| Dec. 31, 1921. |
*2485 (2) Each of the subsidiary corporations were business units which at various times in the past had been purchased by the two brothers and merged into the affiliated group. The separate corporations were continued, however, and separate accounting records were kept in the New York office for each of the companies, the branches keeping only such records as were necessary for their own purposes. In an operating sense the separate corporations was considered as branches of the principal business, all policies being determined by the two brothers and all finances being under their control.
(3) Two of the companies, Jacob Brothers Co. (of New York) and Mathushek Piano Manufacturing Co., operated factories for the manufacture and assembly of pianos. In these factories were manufactured pianos of the trade names of designations of "James & Holmstrom," "Mathushek," "Mathushek & Son," "Jacob Brothers," "Opera," "Wessell," and "Nilson," all of which were owned by the petitioners. Pianos so manufactured were supplied to the retail stores owned by the affiliated group and were also sold to the trade at wholesale. The wholesale business was not restricted to pianos of their own make, however, *2486 as the companies engaged in a general wholesale business of buying and selling other makes of pianos.
(4) James & Holmstrom Piano Co. and Jacob Brothers Co. of Pennsylvania were also engaged in the general wholesale business with the trade.
(5) The Wellington Piano Case Co. owned a factory at Leominster, Mass., at which were manufactured piano cases. The product of this company was sold to the trade generally and also supplied to the factories of Jacob Brothers Co. of New York and Mathushek Piano Manufacturing Co.
*62 (6) The Scourene Manufacturing Co. was dissolved on February 20, 1919.
(7) The Isabelle Realty Co. was a corporation organized on January 6, 1910, by the Jacob brothers primarily for the purpose of holding the real estate belonging to the affiliated group. In addition, there were paid into this company at the date of its incorporation and afterwards, various pieces of property purchased by the brothers for investment purposes.
(8) In addition to the manufacturing and wholesale business of the various companies, as above stated, the affiliated group operated twelve retail stores, as follows:
| Location of store | Period operated | Owned by |
| New York, N.Y | Jan. 1, 1913, to Dec. 31, 1921 | James & Holmstrom. |
| Brooklyn, N.Y | do | Jacob Bros. Co. |
| (New York). | ||
| Scranton, Pa | Jan. 1, 1916, to Dec. 31, 1918 | Jacob Bros. Co. |
| (New York). | ||
| Scranton, Pa | Jan. 1, 1919, to Dec. 31, 1921 | Jacob Bros. Co. |
| (Pennsylvania). | ||
| New Haven, Conn | Jan. 1, 1913, to Dec. 31, 1921 | Mathushek Piano |
| Manufacturing Co. | ||
| Meriden, Conn | do | Do. |
| Factory retail store | Jan. 1, 1918, to Dec. 31, 1921 | Do. |
| Jersey City, N.J | Jan. 1, 1913, to Dec. 31, 1921 | Mathushek & Son |
| Piano Co. | ||
| New York, N.Y | do | Do. |
| Plainfield, N.J | do | Do. |
| New Brunswick, N.J | do | Do. |
| Washington, D.C | Jan. 1, 1920, to Dec. 31, 1921 | Ansell, Bishop & |
| Turner (Inc.). |
*2487 (9) Each of the twelve retail stores shown above, during the years under review and for some years prior thereto, sold pianos, and, in some cases, phonographs, on the installment plan. Such pianos and phonographs were sold under various forms of conditional sales contracts which varied according to the requirements of the laws of the State in which was located the particular retail store. In the State of New York the sales were made under chattel mortgages. Outside of the State of New York a conditional sale contract was used, except in the State of Pennsylvania, where a form of lease was used.
(10) The pianos and phonogrphs sold under such agreements were sold for such initial cash payment as could be obtained from the customer and which was satisfactory to the corporations. In most instances such initial cash payment approximated 10 per cent of the sales price of the article sold. The subsequent installment payments were to be paid in small weekly or monthly payments as agreed upon with the customer and specified in the contract.
(11) Each day each of the retail stores reported its operations to the main office in New York. Sales and other charges against the customers*2488 were reported on a uniform form provided by the main office which was called a "Journal Debit Sheet." Collections *63 on all accounts were deposited in bank accounts in the name of the parent company in the various cities and were reported to the main office on a uniform form designated "Journal Cash Sheet." Returns of goods, repossessions and other miscellaneous credits to customers' accounts were reported each day on a form designated "Journal Credit Sheet."
(12) The retail stores each maintained what was known as a "Lease Ledger." These ledgers contained the individual accounts of installment customers to which were debited and credited the individual charges or credits as shown on the journal sheets above referred to. Such lease ledgers were made up of uniform account sheets supplied by the main office. No other records were kept by the retail stores.
(13) The main office in New York kept the general books for each of the companies and each of the retail stores. These general books comprised complete double entry systems for each company. Entries were made on such general books from the journal sheets rendered to the main office each day by the retail stores above*2489 referred to and also from the cash expenditures and other transactions which were handled entirely by the New York office. In addition, the main office kept complete lease ledgers containing all installment accounts of each of the retail stores. Such subsidiary lease ledgers were identical with those kept by each of the retail stores.
(14) Each of the installment contracts entered into by any of the retail stores was assigned a number, which number was also assigned to the account receivable in the lease ledger. During the years under review, in making the daily reports on journal sheets above referred to, all charges and credits were segregated by account or lease number to the year in which the sale was made. The columns contained on such sheets and headed "Section" were utilized for this purpose, each column being used for the charges or credits applicable to particular years as identified by the account number.
(15) Prior to 1918 the books of account of the affiliated group were kept upon the so-called accrual basis and its income-tax returns for the years 1913 to 1917, inclusive, were filed on that basis. All sales, whether wholesale, retail, or installment, were accounted*2490 for in full in the year when the sale was made. Returns, repossessions, and other credits to the individual customers were likewise accounted for in the year in which the return, repossession, or other credit occurred. However, in 1918 the company entered upon its books a reserve for unrealized profits and credited thereto from profit and loss an amount representing the proportion of gross profit contained in uncollected installment accounts for sales made in that year. Such unrealized profits account was then charged to the credit of profit and *64 loss by an amount representing the proportion of gross profit realized on collections within that year. The installment basis of reporting income, as thus computed, was used in the original return of the company for the taxable years 1918, 1919, and 1920, it being agreed that such original returns were on the so-called installment basis, although not correct mathematically.
(16) At the close of 1921 a firm of accountants representing the petitioner advised that the previous computations for 1918, 1919, and 1920 were not correctly computed to reflect the gross profit from installment sales in accordance with the regulations*2491 of the Treasury Department. Accordingly, the installment sales and collections for each of the years 1918, 1919, and 1920 were recomputed by such accountants and amended returns were filed for the years 1918, 1919, and 1920 simultaneously with the original return for the year 1921, all of which returns reflected such accountants' recomputations on the installment basis. The installment computations included in such amended returns were accepted by the revenue agent who examined the books of the company, and the overassessments indicated thereby were made the subject of letters from the Commissioner of Internal Revenue for each of the years 1918, 1919, and 1920. The overassessments shown by such letters were never scheduled nor refunded.
(17) Upon receiving such letters, the accountants employed by the petitioner corporation advised the corporation that the rulings contained therein finally disposed of its tax matters for those years. Accordingly, the net overassessments shown thereby were set up upon the books of the companies as accounts receivable in the year 1924. Thereafter, the main offices of the affiliated group were moved from 539 West 39th Street to 306 East 133rd*2492 Street, New York City. At this time the officials of the company, believing their tax matters settled for such previous years, did not consider it necessary to retain all of the voluminous records of all of the companies. The many books containing the journal sheets above referred to were accordingly destroyed, and there were moved to the new offices only the general books of each of the companies and the subsidiary lease ledgers. The general books so moved did not contain the segregation of sales and collections to the year of sale which was contained on the so-called journal sheets, but only the posting from such sheets in total amount for each month. However, the lease ledgers which were retained showed the complete account with each installment customer for all installment sales made subsequent to January 1, 1917.
(18) On February 13, 1926, following the decision of this Board in the case of , the Commissioner of Internal Revenue mailed to the petitioner a letter in which the *65 prior decision of the Department was reversed and in which it was held that the companies were not entitled to report their income on the installment*2493 basis. This letter indicated an additional assessment of $29,779.56 for the year 1919. This letter was followed by a notice of deficiency dated April 12, 1926, indicating a proposed deficiency in the amount of $29,779.56 for the year 1919, from which notice appeal was taken. On March 11, 1926, a further notice of deficiency was addressed to Jacob Bros. Co. covering the years 1920 and 1921 and indicating deficiencies for such years of $64,832.71 and $12,760.61, respectively. Such notice of deficiency was based upon a similar ruling by the Commissioner that the companies were not entitled to report their income from installment sales on the installment basis. Petition was filed with this Board against the deficiencies shown by this deficiency letter.
(19) Having destroyed the original journal sheets which showed the segregation of sales, collection, repossessions, and other data according to the year of sale, it was necessary, in order to determine the data necessary to prosecute its appeal, to analyze all of the individual installment accounts contained in the lease ledgers and also the relevant accounts on the general books. A staff of accountants and bookkeepers was employed*2494 for several months in making these analyzations.
(20) As above stated, a separate double entry bookkeeping system was maintained for each corporation. In each case where a corporation was engaged in the wholesale business and also conducted one or more retail stores, separate trading accounts were kept for the wholesale business and for the retail installment business of each store. The books, therefore, reflected the sales, cost of goods sold, and gross profit on sales separately for each store and separately for the wholesale and retail business of such company.
(21) The percentages of gross profits on the installment sales of each company for each of the years 1913 to 1921, inclusive, were as follows:
| Mathushek | James & | Ansell, | ||||
| Mathushek | Jacob | Jacob | Piano Man- | Holmstrom | Bishop | |
| Year | & Son | Bros. Co. | Bros. Co. | ufacturing | Piano Co. | & |
| Piano Co. | (Brooklyn | (Scranton | Co. (3 | (New York | Turner | |
| (4 stores) | store) | store) | stores) | store) | (Inc.) | |
| Average for 4 years: | ||||||
| 1913-1916 | 53.05 | 57.28 | 53.257 | 50.23 | 55.64 | |
| 1917 | 50.157 | 56.62 | 55.845 | 53.619 | 57.778 | |
| 1918 | 51.36 | 63.33 | 56.638 | 51.819 | 59.759 | |
| 1919 | 54.13 | 60.068 | 55.21 | 53.32 | 56.412 | |
| 1920 | 51.11 | 47.71 | 49.28 | 53.688 | 49.75 | 39.88 |
| 1921 | 50.05 | 47.916 | 40.02 | 58.40 | 52.078 | 39.507 |
*2495 (22) Each of the installment accounts contained in the lease ledgers above referred to were separately analyzed to determine *66 the amount collected in each year on such sale made subsequent to January 1, 1917. Each of such accounts was entered on columnar schedules, showing the amount of sale, the amount collected thereon in each subsequent year and other credits for repossessions, etc., in such year. A further analyzation was made of the installment accounts receivable control accounts, the cash accounts, and other accounts on the general books to determine the amount collected in each of the years under review on sales made prior to January 1, 1917. The collections in each of the years 1917 to 1921, inclusive, on sales of each period were then multiplied by the ratio of gross profit to sales for each period, as set forth above, to determine the proportion of gross profit applicable to such collections in each year.
(23) When goods were repossessed by the corporations, the accounts were adjusted on the books as follows: The stock inventory was debited with the cost value of the instrument repossessed and the installment account receivable was credited with the same*2496 amount. The balance of the accounts receivable was charged off to "Cost of goods sold."
In making the analyzations above referred to, the adjustments so made were segregated by the accountants. The debit of the goods repossessed to inventory stock was allowed to stand as correct. The schedules were then constructed to reflect income from repossessions as follows:
(a) In the case of goods repossessed within a year of sale there were eliminated from sales and cost of goods sold the amounts included therein for the sales repossessed. Such eliminations are reflected in the sales and cost of goods sold. The total amount collected between the date of sale and the date of repossession was then determined and included in its entirety in gross income.
(b) In the case of goods repossessed in years subsequent to the year of sale the goods were treated as regular installment sales in the year of sale. Collections in theyear of sale and in subsequent years prior to the year of repossession were treated as regular installment sales and included in the collections, but were not included in the computations of gross profit. In the year of repossession, however, the charge on the books*2497 to cost of goods sold of the balance of the accounts receivable (after crediting for the cost value of the goods returned) was eliminated, such elimination being reflected in the cost of goods sold, as above stated. The total amounts collected on such accounts in the year of repossession were included in their entirety in gross income. The excess of the cost value over the unrecovered cost is then included in income. Neither of such adjustments are included in the computation of gross profits on sales within the year.
*67 (24) The gross taxable income from installment sales for the years under review, adjusted in accordance with section 705 of the Revenue Act of 1928, by the elimination of collections on sales prior to 1918 when the change was amde to the installment basis, is as follows:
| Mathushek | Jacob Bros. | Jacob Bros. | Mathushek | James & | |
| & Son | Co. of | Co. of | Piano Manu- | Holmstrom | |
| Piano Co. | New York | Pennsylvania | facturing Co. | Piano Co. | |
| 1919 | $165,056.43 | $20,960.90 | $20,840.17 | $43,314.86 | $16,066.01 |
| 1920 | 231,277.79 | 28,656.87 | 26,275.59 | 58,197.22 | 21,851.86 |
| 1921 | 239,259.82 | 38,168.52 | 27,147.64 | 59,314.24 | 29,738.28 |
*2498 (25) The taxable net income from all sources of each of the affiliated companies having installment sales after proper deductions and adjustments is as follows:
| Mathushek | Jacob | Jacob | Mathushek | James & | Ansell | |
| & Son | Bros. Co. | Bros. Co. | Piano Manu- | Holmstrom | Bishop & | |
| Piano | of New York | of Penn- | facturing | Piano Co. | Turner | |
| sylvania | Co. | (Inc.) | ||||
| 1919 | $ 53,223.20 | $140,617.77 | $87,277.34 | $16,498.55 | $58,989.58 | |
| 1920 | 90.808.60 | 133,779.01 | 68,110.95 | 56,832.15 | 29,057.21 | -$7,307.33 |
| 1921 | 80,656.71 | 76,215.52 | 42,213.79 | -14,958.80 | 28,177.89 | 10,262.90 |
(26) The consolidated net income of the petitioner and affiliated companies for the years 1919 through 1921 is as follows:
| 1919 | $389,467.96 |
| 1920 | 428,780.04 |
| 1921 | 279,396.18 |
(27) The consolidated capital stock and surplus as determined by the Commissioner for each of the years involved (unadjusted for Federal income and profits taxes and including the full amount of uncollected accounts receivable on installment sales) is as follows:
| As of January 1 - 1919 | $ 4,361,451.70 |
| 1920 | 4,724,433.45 |
| 1921 | 5,229,046.09 |
(28) There is included*2499 in the total amount of capital stock and surplus as shown in the preceding paragraph 27 the total amount of accounts receivable for installment sales. The proportion of gross profits included in such uncollected accounts (determined by the application of the yearly percentage ratio of gross profits to sales contained in paragraph 21, above, to the balances of unpaid accounts at the beginning of each year for such prior year) amounts to the following totals at the beginning of each year:
*68
| As of Jan. 1, 1918 | As of Jan. 1, 1919 | As of Jan. 1, 1920 | As of Jan. 1, 1921 | |
| Mathushek & Son | $270,106.33 | $315,003.31 | $314,816.78 | $304,955.04 |
| Piano Co. | ||||
| Jacob Bros. Co. | 76,594.31 | 95,256.13 | 101,774.92 | 126,433.41 |
| (New York) | ||||
| Jacob Bros. Co. | 48,385.23 | 51,446.73 | 57,354.77 | |
| (Pennsylvania) | ||||
| Mathushek Piano | 46,598.01 | 82,202.67 | 108,769.99 | 112,470.24 |
| Manufacturing Co. | ||||
| James & Holmstrom | 43,910.47 | 51,638.35 | 65,170.93 | 67,753.63 |
| Piano Co. | ||||
| Ansell, Bishop & | 20,820.41 | 40,132.95 | ||
| Turner | ||||
| 437,209.12 | 592,485.69 | 662,799.76 | 709,100.04 |
(29) As stated, the totals set forth in the preceding paragraph 28 include the uncollected*2500 profits on sales made prior to January 1, 1918, the entire amount of which sales was included in gross income on the accrual basis in the years 1913 to 1917, inclusive, and so reflected in the income reported in the income and profits-tax returns filed by the corporations for those years. The total amounts of such uncollected profits on sales prior to January 1, 1918, included in the totals shown in said paragraph 28 are as follows:
| As of | As of | As of | |
| Jan. 1, 1919 | Jan. 1, 1920 | Jan. 1, 1921 | |
| Mathushek & Son Piano Co | $ 144,640.36 | $ 57,724.15 | $ 11,952.68 |
| Jacob Bros. Co. (New York) | 20,161.49 | 12,908.06 | 6,445.98 |
| Jacob Bros. Co. (Pennsylvania) | 20,637.36 | 12,729.54 | 8,677.06 |
| Mathushek Piano Manufacturing Co | 31,887.65 | 14,010.35 | 5,056.53 |
| James & Holmstrom Piano Co | 27,121.85 | 14,935.73 | 5,643.44 |
| 244,488.71 | 112,307.83 | 37,775.69 |
(30) For many years prior to 1910 the two brothers, Charles Jacob and C. Albert Jacob, purchased various pieces of real property, some for the use of the business and some for investment purposes. As hereinabove stated, the Isabelle Realty Co. was organized on January 6, 1910, and on January 12, 1920, many of such parcels*2501 of property were conveyed to that corporation in exchange for capital stock. At that time the brothers favored a conservative policy in reflecting values upon the books and, accordingly, such properties were entered on the books of the Isabelle Realty Co. at nominal values without regard to the actual value thereof at the time of acquisition by the corporation. Such nominal values remained on the books during the years under review. It is stipulated and agreed that the actual cash value of such properties at the time paid in to the Isabelle Realty Co. as aforesaid was equal to the actual cost of $731,773.97, being $321,225.81 in excess of the amount at which such properties were carried on the books and reflected in the total capital stock and surplus set forth above in paragraph 27. It is further stipulated and agreed that depreciation as allowed by the Bureau on said properties and as reflected in the notices of deficiencies is reasonable in the amounts allowed and no *69 adjustment of income, nor of the foregoing amount for invested capital purposes, is necessary.
(31) It is further stipulated and agreed by and between the parties hereto, that, in computing the invested*2502 capital of the petitioner, the consolidated capital stock and surplus as set forth in paragraph 27 should be increased in each year by $321,225.81, representing the excess of the cash value of certain properties over the amount at which such properties were carried on the books as referred to in paragraph 30, above.
(32) It is further stipulated and agreed by and between the parties hereto that the corporations were entitled to and did change their method of reporting income to the installment basis as of January 1, 1918; that original returns upon such basis were filed for the years 1918, 1919, 1920, and 1921; and that their income for the years under review should be computed on such basis in accordance with section 1208 of the Revenue Act of 1926 and section 705 of the Revenue Act of 1928, using for this purpose the data herein stipulated and agreed upon.
OPINION.
TRAMMELL: As the concluding paragraph of their stipulation, which has been incorporated in our findings of fact in substantially the same form and following the paragraph numbers as submitted, the parties have stipulated the issue in these proceedings to be as follows:
The parties are in disagreement as to whether*2503 the total amount of capital stock and surplus as shown by paragraph 27 should be reduced by the total amount of the so-called "reserve for uncollected profits," or "reserve for unrealized profits," as set forth in paragraph 28, above. The respondent contends that such capital stock and surplus should be reduced by the full amount of the "unrealized profits" shown in paragraph 28. On the other hand, the petitioner contends that no protion of such reserve should be eliminated from surplus, and, particularly, that there should not be eliminated that portion thereof representing the uncollected profits on sales made prior to January 1, 1918, and reported in income in full during the years 1913 to 1917, inclusive, on the accrual basis, the total amounts of which are shown in paragraph 29, above. The issue thus raised is therefore presented to this Board for decision.
The foregoing presents two questions for our determination. The first is whether the petitioner may include in its invested capital as of January 1, 1919, January 1, 1920, and January 1, 1921, the uncollected profits contained in its accounts receivable outstanding on these dates and arising from sales of merchandise*2504 on the installment plan made prior to such dates. The second question is, if the entire amount of such uncollected profits may not be included in invested capital whether the portions of such profits resulting from the installment *70 sales made prior to January 1, 1918, and which were reported in income on the accrual basis from 1913 through 1917 may be so included.
The second question above is identical with one considered by us in . There we said:
In computing invested capital in the deficiency notice, the Commissioner included, as a part of the earned surplus, the entire profits of installment sales effected in 1917. In the amended answer, the Commissioner eliminated from invested capital of 1918, 1919, and 1920, the profits included in the outstanding 1917 installment accounts receivable, at the beginning of each of those years, as unrealized and not properly includable in earned surplus. The petitioner opposes this action of the Commissioner on the ground that the entire profits on installment sales of 1917 were returned and taxed as income of that year. We think that the action of the Commissioner, as set forth in the*2505 amended answer, is correct. For the years in question, the installment sales method has been used in computing income. By the use of that method all of the profits actually reduced to possession in those years, are to be returned as income of those years. The fact that some of these profits have been returned in prior years is to be ignored, and they are, for the purposes of the tax, to be treated as a part of the earnings of the years in which they are reduced in possession. Obviously, the petitioner may not include in invested capital of any taxable year, as earned surplus, the earnings of that year and subsequent years.
What we said there as to profits returned in prior years being taxable in the years in which reduced to possession has since been changed and such profits relieved of tax by section 705 of the Revenue Act of 1928. . The fact that section 705 relieves these earnings from tax after they are collected does not change the fact that they are earnings of the year in which they are collected, nor does it make earned surplus of profits not yet reduced to possession and which but for this section would be*2506 returned and taxed as income for the year in which they are actually reduced to possession.
The question of the determination of invested capital of a taxpayer who had changed its method of rrporting income from the a ccrual basis to that of installment sales was again before us in , and in . In both cases we followed our decision in the Blum case. In Bradford Piano Co. we said:
* * * 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 advantage, it should not complain if the accounting system results in some counter disadvantages.
* * *
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 *2507 , the Board has established the rule that *71 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.
We perceive nothing in the petitioner's case to warrant us in applying to it a different rule to what we have heretofore applied in other cases. Accordingly, we do not think that the petitioner is entitled to include in its invested capital as of the beginning of any of the taxable years here involved any portion of the uncollected profits contained in its accounts receivable outstanding at the beginning of the respective years and arising from installment sales made prior to January 1, 1918. Nor do we think that the petitioner is entitled to include in its invested capital as of January 1, 1919, January 1, 1920, and January 1, 1921, the uncollected profits contained in its accounts receivable*2508 outstanding on the respective dates and arising from sales on the installment plan made prior to such dates but subsequent to December 31, 1917.
Judgment will be entered under Rule 50.