*41 Decision of no deficiency will be entered.
The petitioner purchased from automobile dealers conditional sales contracts executed by buyers of automobiles under which title to the car remains in the dealer until the purchase price is fully paid, together with a note executed by the buyer in connection with the contract made payable to the seller in monthly installments, by whom it was endorsed over to the petitioner "without recourse." The difference between the face value of the notes and the price which the petitioner pays for such conditional sales contracts and notes is reported by the petitioner as "carrying charges" or gross profit. Held, that such gross profit is not "interest" within the definition of personal holding company income.
*196 Petitioner asks for the redetermination of deficiencies in personal holding company surtax for the years 1938, 1939, and 1940 in the amounts of $ 2,293.20, $ 2,645.46, and $ 7,912.06, respectively, together with delinquency penalties*42 for the same years of $ 573.30, $ 661.37, and $ 1,978.02, respectively. The questions in issue are (1) whether the petitioner was a personal holding company for the years 1938, 1939, and 1940, and, (2) if so, whether the petitioner is liable for delinquency penalties for failure to file returns as a personal holding company for the years in question.
FINDINGS OF FACT.
The petitioner is a corporation organized under article II of the Stock Corporation Law of the State of New York. It filed with the collector of internal revenue at Buffalo corporation income and excess profits tax returns, Form 1120A, for the years 1938 and 1939; a corporation income, declared value excess profits, and defense tax return, Form 1120, and a corporation excess profits tax return, Form 1121, for the year 1940. The petitioner did not file personal holding company surtax returns, Form 1120H, for said years.
The petitioner was not a licensed personal finance company. It was not a banking corporation and had no authority to carry on a banking business. It had authority to invest its funds in shares of stock, bonds, notes, and conditional sales contracts, but did not have the "right to buy, and sell bills*43 of exchange."
The petitioner solicited automobile dealers to sell to it the conditional sales contracts and notes which such dealers received on the sale of a car or automobile. It supplied the dealer with its own conditional sales contract and note forms and also supplied the dealer with a form *197 of credit statement and a rate chart or price list showing the amount which it would pay the dealer for such conditional sales contracts and notes. Thus, where the conditional sales contract and note provided for the payment of $ 280.62 in installments covering a period of 12 months, 16 months, or 18 months in equal monthly installments, the petitioner would pay the dealer $ 200 for the conditional sales contract and note. The conditional sales contract form provided in part as follows:
In Consideration of the price of $ /(Total Time Price) to be paid $ /(Down Payment) on the date hereof and the further sum of $ /(Amount of Rate) to be paid as hereinafter specified, the undersigned Seller hereby sells, and the undersigned Purchaser or Purchasers jointly and severally hereby purchase(s), subject to the terms and conditions hereinafter set forth, the following*44 property, together with all parts, equipment thereon, to wit:
The contract was to be executed both by the seller and the purchaser. The petitioner was not a party to the contract. It provided that title to the automobile was to remain with the seller until the contract price was fully paid by the purchaser.
Attached to the form was a form for assignment of the contract to the petitioner by the seller.
There was also attached to the contract form a "Conditional Sale Contract Note" which provided in material part as follows:
$ New York, 193 For value received the undersigned jointly and severally, promise to pay to the order of /(Seller) Dollars ($ ) at office of Elk Discount Corporation, in installments as follows, viz: installments of $ and installments of $ , the first installment to be paid on the day of , 193 , and one installment on day of each succeeding month thereafter until the entire sum is paid, together with interest thereon at the rate of six per cent per annum from date; but all installments paid on or before maturity may be paid without interest.
The reverse side *45 of the note provided, in part:
Pay to the Order of
Elk Discount Corporation
Without recourse on us
By /Name of Dealer
By /Signature of Owner, Partner or Officer
When a customer came to a dealer for the purchase of a new or second-hand car and the customer desired to purchase the car, paying *198 in part therefor on the installment basis, the dealer named a price as the down payment and advised the customer of the total amount of the unpaid purchase price. He was informed that if his credit was acceptable to an automobile discount corporation he could obtain the car upon making the down payment and executing the required conditional sales contract and note. The dealer would then obtain information with regard to the prospective customer's credit standing, obtain required references, and phone a credit statement about his customer to the petitioner. The petitioner would then check the man's credit statement and would also check the appraisal value of the automobile in an appraisal book published monthly. After taking into consideration the type of car that was being sold, the amount of money it was being sold for, and the customer's equity in the car, if the petitioner*46 thought it was a safe risk and the prospective customer's credit standing was satisfactory, it would then advise the dealer that it would purchase the contract and note. Within a short period the dealer would either mail or bring the contract and note to the petitioner and the petitioner would then pay the dealer for the conditional sales contract and note the amount shown to be the value thereof by the petitioner's rate chart. Thereafter the petitioner would mail to the car buyer a notice that it had purchased the contract and note from the dealer and that he (the customer) was to make payments due on the note to the petitioner.
Conditional sales contracts and notes were purchased by the petitioner without recourse to the dealer, but occasionally the petitioner would require the dealer to execute a repurchase agreement by which the dealer would be required to repossess the car without loss to the petitioner in case of default on the note by the buyer.
During the years 1938, 1939, and 1940 there were several companies in Buffalo buying conditional sales contracts and notes. All of these companies carried on business in much the same way as the petitioner and most dealers did business*47 with more than one of them. Nearly all of these companies furnished their own forms and rate charts. The rates varied and there was considerable competition to get the business, the automobile dealer doing business with the company which offered the highest price for the conditional sales contract and note. Although petitioner furnished its own rate chart which showed the charge that it was making for deferred payments, it sometimes bought notes on other rate charts in order to obtain business and sometimes purchased conditional sales contracts and notes which were not made on its own forms.
The dealer fixed the price of the automobile and worked out the terms of payment with its customer, the purchaser of the automobile. Petitioner did not take any part in these negotiations and did not have *199 any dealings with the buyer of the automobile until after it had purchased the conditional sales contract and note.
On some occasions the dealer would obtain a greater amount by the deferred payments than the ordinary amounts called for by the rate chart and in such a case the overpayment would be given to the dealer when collected.
The petitioner also paid to the dealer for each*48 deal turned over to it a certain amount of money out of the profit which it was to make on the purchase of conditional sales contracts and notes. This was commonly known as a reserve or kick-back. All of the finance companies gave such kick-backs and arrangements for the payment thereof were made at the time that connections were made with the automobile dealer to acquire all or a part of his conditional sales contracts and notes. Payments of kick-backs were usually made at or shortly after the conditional sales contract and note were purchased by the petitioner.
The petitioner also furnished to the purchaser of the automobile, at its own cost, fire, theft and, on higher priced cars, collision insurance which insured both the petitioner and the purchaser of the automobile.
The petitioner also did some trust receipt business, that is to say, financed the purchase of automobiles for dealers. This was a very minor part of the petitioner's operations. The petitioner was the owner of these cars. They were left in the possession of the dealer. On these transactions the petitioner received interest.
These items of interest and also any receipt of interest collected from the makers*49 of conditional sales contract notes, where the installments on the notes were not made when due, were recorded separately from profits which resulted in the case of conditional sales contracts and notes.
The difference between the amount which the petitioner paid for a conditional sales contract and note, according to its rate chart, and the amount eventually to be received by it was its gross profit, and this item was reported on petitioner's tax returns under the heading of "carrying charges."
For the year 1938 petitioner reported gross income of $ 25,821.15; for the year 1939, $ 35,459.99; and for the year 1940, $ 50,288.62. The petitioner's gross income for said years was reflected in its books as follows:
| 1938 | 1939 | 1940 | |
| Carrying charges | $ 24,569.66 | $ 33,741.21 | $ 48,462.11 |
| Interest on floor plan loans | 838.04 | 1,446.32 | 1,096.08 |
| Extension fees | 413.45 | 272.46 | 341.41 |
| Profit on sale of repossessed cars | 389.02 | ||
| Total | 25,821.15 | 35,459.99 | 50,288.62 |
*200 Out of the foregoing income petitioner paid to dealers as commissions or kick-backs during the years 1938, 1939, and 1940 the amounts of $ 2,490.68, $ 5,580.59, and $ 6,138.83, respectively.
The *50 petitioner kept its books of account for the taxable years upon the accrual basis. It maintained a reserve for bad debts. The additions to its reserve for bad debts for the years 1938, 1939, and 1940, as shown by its tax returns, were in the amounts of $ 3,300.44, $ 7,458.59, and $ 8,671.72, respectively.
All of the income of the petitioner during the years 1938, 1939, and 1940, other than income resulting from profit on purchase of conditional sales contracts and notes (so-called "carrying charges"), was less than 70 percent of the gross income of the petitioner during those years.
During the taxable years petitioner's shares of stock were owned by not more than five individuals.
OPINION.
The petitioner concedes that it qualifies as a personal holding company for the calendar years 1938, 1939, and 1940 so far as stock ownership is concerned. The respondent submits that "the only question for determination, therefore, is whether its [petitioner's] income is personal holding company income within the meaning of the law. If the petitioner's gross income, designated 'carrying charges,' is interest within the meaning of the law, it is a personal holding company."
The so-called "carrying*51 charges" do not have reference to any accounting practice of the petitioner. They represent merely the estimated gross profit which the petitioner will make on the transactions -- the difference between what the petitioner will initially pay the dealer for the contracts and notes and the gross amounts of installment payments to be made by the buyer of the automobile.
Section 403 of the Revenue Act of 1938 and section 502 of the Internal Revenue Code define "personal holding company income" as meaning:
* * * the portion of the gross income which consists of:
(a) Dividends, interest (other than interest constituting rent as defined in subsection (g)), royalties (other than mineral, oil, or gas royalties), annuities.
The respondent contends that the "carrying charges" represent "interest." He cites article 403-1 (2) of Regulations 101, which provides in part: "The term 'interest' means any amounts, includible in gross income, received for the use of money loaned except that it does not include interest constituting rent."
The respondent submits that the facts in this case show that the individual buyer of an automobile was paying the so-called "carrying charges" for the use of the money*52 which the petitioner advanced; *201 that "The evidence shows that the petitioner was engaged primarily in the business of lending money upon notes signed by individual automobile purchasers secured by liens upon the automobiles in the form of conditional contracts of sale."
We do not think that this contention of the respondent can be sustained. The petitioner was not in the business of lending money. Its business was confined solely to the purchase of conditional sales contracts and notes executed by buyers of automobiles from automobile dealers and the collection of the notes from the makers thereof. The installment payments on the notes were made without the payment of interest, except when they were not made on the due dates. The only interest which the petitioner received was that which accrued and was paid by the makers of the notes where the installment payments were not made on time, and on "floor plan financing," where interest was received from automobile dealers on trust receipts. The interest thus received was negligible in amount and was reported as interest in the petitioner's tax returns.
The position of the respondent appears to be that the petitioner loaned*53 money to prospective buyers of automobiles which is in effect paid by them to the dealers to make up the difference between the down payment and the cash purchase price of the car, and that any amount received by the petitioner from the buyer in excess of such balance constitutes the receipt of interest by the petitioner. We do not think that this position is factually defensible.
In the first place, the buyer is not interested in borrowing money from the petitioner. He is interested only in buying an automobile and paying therefor partly in cash and the balance in installments. There is nothing in the evidence to show that the buyer knows what the cash purchase price of the automobile is.
The petitioner is not a party to the conditional sales contract. It does not come into the picture until after the buyer has entered into a conditional sales contract with the dealer and signs the required note and the petitioner has purchased them from the dealer. Furthermore, when the buyer makes the required installment payments on time no part of the amounts paid constitutes the payment of interest. The buyer is merely paying the purchase price of his car. In I. T. 3254, C. B. 1939-1, *54 p. 98, it is said:
Whether any part of the finance charges paid in connection with the purchase of an automobile should be treated as interest and, therefore, deductible to the extent allowed by section 23 (b) of the Revenue Act of 1938, or should be treated as a part of the cost of the automobile and, therefore, a capital expenditure, is to be determined by the provisions of the contract of sale. ( Henrietta Mills, Inc., v. Commissioner, 52 Fed. (2d) 931; and Daniel Bros. Co. v. Commissioner, 28 Fed. (2d) 761.) However, amounts, even though specifically denominated as interest, are not deductible under the provisions of section 23 (b), supra, in situations where it is clear from an examination of the entire contract that such *202 amounts were intended as a part of the purchase price and were not actually paid as interest. ( Pratt-Mallory Co., Inc., v. United States, 12 Fed. Supp., 1020; Appeal of Anderson & Co., 6 B. T. A. 713; and Appeal of Marsh & Marsh, Inc., 5 B. T. A. 902.)
Clearly, if the dealer had not *55 sold the conditional sales contracts and notes to the petitioner, but had collected the installment payments himself, he would not have received interest. The petitioner simply steps into the shoes of the dealer when it purchases the conditional sales contracts and notes from the dealer.
It is also to be noted that the so-called "carrying charge" was never intended to represent in its entirety an amount paid for the use of money advanced by the petitioner. It was intended to include substantial amounts which the petitioner had to pay for insurance to protect both itself and the buyer. The buyer was thus relieved from the payment of any insurance on his car until he had paid therefor in full and acquired title. Also, the "carrying charge" included substantial amounts which were in reality a part of the cost to the petitioner of the conditional sales contracts and notes. Such additional cost to the petitioner was represented by the commissions or kick-backs which the petitioner paid to the automobile dealer for his business.
Conditional sales contracts are in the same category as merchandise. The gross profit which a purchaser realizes on such transactions is not to be differentiated*56 from profit on the purchase and sale of other merchandise. A purchaser may not be able to collect the entire amount due under the contract. The petitioner was not able to collect the contracts in full. Its losses on the transactions are reflected in deductions from gross income in the form of additions to a reserve for bad debts.
In our opinion the facts in this case are not essentially different from those which obtained in Western Acceptance Corporation, 46 B. T. A. 828, wherein we held that where a taxpayer purchased conditional sales 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 was not interest within the meaning of the definition of personal holding company income. The only difference between the instant proceeding and that case upon its facts is that here the petitioner did not act as a go-between between another acceptance corporation and the automobile dealer.
In Gould v. Gould, 245 U.S. 151">245 U.S. 151, the Court stated:
In the interpretation of statutes levying taxes it is the *57 established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen. * * *
*203 In Elverson Corporation, 40 B. T. A. 615, we noted that "The usual import of the term [interest] is the amount which one has contracted to pay for the use of borrowed money," and that "If there were doubt as to the connotation of the term, and another meaning might be adopted, the fact of its use in a tax statute would incline the scale to the construction most favorable to the taxpayer."
We think, in the circumstances of the instant case, the term "interest" can not be enlarged to include the "carrying charges" here in question.
The respondent in support of his contention cites Noteman v. Welch (C. C. A., 1st Cir.), 108 Fed. (2d) 206. That case involved a Massachusetts corporation which loaned money to individuals under a statute which permitted it to charge "interest and expenses" not to exceed 3 percent*58 per month. The argument was made that a part of the amounts collected from borrowers of money was not interest, but was for examination and investigation fees, etc. The court held, however, that the entire amount was interest. The facts in that case are obviously materially different from those which obtain in the instant proceeding; for here the petitioner simply purchased from automobile dealers conditional sales contracts and notes executed by buyers and made such collections as it could from the buyers.
From a consideration of the entire evidence in this case, we are of the opinion that the respondent erred in determining that the "carrying charges" here in question constituted personal holding company income, and we therefore hold that the petitioner was not a personal holding company for the tax years in question.
Since the deficiency in tax before us is only a deficiency in personal holding company surtax and since we have held that the petitioner was not a personal holding company for the tax years in question, the delinquency penalty determined by the respondent is not due.
Decision of no deficiency will be entered.
Murdock, J., dissenting: I think a large*59 part, if not all, of the "carrying charges" was interest within the meaning of the statute. That part which was paid to the automobile dealer as a "kick-back" and the part which was used to obtain insurance can be disregarded, because the remainder, together with admitted interest, was more than 80 percent of the gross income of the petitioner.
The services of this petitioner were called into use only because a prospective purchaser of a car did not have enough cash of his own and had to have the temporary use of the funds of this petitioner in order *204 to buy the car. The plan was fully arranged in advance under which he actually obtained the use of the funds of this petitioner. Of course he had to pay for the use of those funds. The petitioner in effect discounted the purchaser's note, paying over to the automobile dealer on behalf of the purchaser the amount of the note, less discount, and holding the note until maturity, by which time he had obtained the full face amount of the note, including the discount or the amount received as compensation paid for use of the money loaned. This is within the definition of interest. Although the name is not controlling, the words*60 "carrying charges" used by the petitioner to describe this income would seem to have no meaning at all unless they meant charges made for the carrying of loans to the purchasers of automobiles.
The Western Acceptance Corporation case relied on in the majority opinion is distinguishable. Western did not hold the obligations to maturity. It obtained them from automobile dealers and immediately sold them to another company and thereafter acted merely as a collection agency for the latter. Thus, Western did not lend its money. Here the money outstanding during the period of the loan belonged to the petitioner and its profit was compensation for thus allowing its money to be used to purchase the car and to be repaid at a later date. If the purchaser had obtained the money in some other ways, the fact that he was paying for the use of it might be more apparent, but the fact would be the same in all cases.