*2240 INSTALLMENT SALES - METHOD OF REPORTING INCOME - Where a taxpayer corporation had, at the end of the year, accounts receivable which included installment sales made in a previous year at a rate of profit different from the current year, a determination for income-tax purposes of income on the installment sales basis can not satisfactorily be made in the absence of a segregation of the installment accounts receivable which will reasonably show the profits from collections in the taxable year.
*1145 This is a proceeding for a redetermination of deficiencies in income taxes determined by the respondent in the following amounts: for 1924, $42,116.35; for 1925, $20,948.81; for 1926, $28,627.70.
With respect to all of the taxable years the petitioner alleges error in the failure of the respondent to permit the computation of portions of its income on the installment sales basis.
FINDINGS OF FACT.
The petitioner operates a department store in Brooklyn, N.Y., maintaining its accounts and filing its returns on an accounting period ending January*2241 31 of each year. In March, 1923, the petitioner inaugurated a system of selling certain merchandise on the installment plan. This was in addition to its practice of selling for cash or for credit on ordinary charge accounts. The installment sales during the taxable years were made upon terms calling for initial payments followed by periodical payments of the balance of the selling price during periods of 8, 10, or 12 months. The length of the period of deferment depended upon the merchandise sold; a majority of the articles were upon the basis of eight months deferment. The installment plan was extensively advertised and the installment sales grew very rapidly in volume. No distinction in price was made in the sales whether for cash or on the installment plan. The installment sales contracts provided for retention of title in petitioner until payment in full, and for repossession of the merchandise in event of failure of the debtor to make any payment as promised. It was further provided that in event of repossession of the merchandise the payments which had been made were forfeited to the petitioner. Collections during the taxable years were very good, *1146 and over*2242 90 per cent of the deferred payments were paid within the time agreed upon. There were very few repossessions. The petitioner followed up the collections closely; a notice was mailed to the customer within 15 days of any failure to make a payment; five days later a follow-up letter was mailed and within 30 days of failure to make payment the account was turned over to an attorney for such action as he might decide upon.
The petitioner maintained records showing separately, with reference to each department, the amount of net sales, the cost of sales, and the resulting gross profit. The term "net sales" meant the aggregate of the sales of all kinds whether for cash or credit or on the installment plan, reduced by the selling prices credited to customers for merchandise returned or exchanged and also reduced by the amounts of such credits as were made to the customers' accounts for the value, appraised by the petitioner's employees, for repossessed merchandise. Any income derived by the petitioner from forfeited payments went into the general profits and was not reflected in the gross income of the departments. The merchandise sold upon the installment plan, the amount of net*2243 sales and the gross profits thereon according to the accounting records of the petitioner, were as follows:
| Department | Class of | Net | Per cent |
| merchandise | installment | of | |
| sales | profit | ||
| 43 | Furniture | $118,232.83 | 37.6 |
| 44 | Bedding | 15,907.02 | 43.7 |
| 49 | Carpets | 1,538.19 | 27.4 |
| 50 | Rugs | 8,411.95 | 32.0 |
| 67 | Radios | 16,785.66 | 25.5 |
| 71 | Oilcloths and linoleum | ||
| 74 | Talking machines | 45,030.49 | 32.6 |
| 84 | Oriental rugs | 1,323.75 | 40.7 |
| 96 | Lamps | 847.80 | 39.6 |
| 98 | China | ||
| 102 | Sewing machines | 6,324.48 | 40.8 |
| 105 | Refrigerators, stoves, cabinets, etc | 40,621.33 | 22.9 |
| 107 | Hoover sweepers | 81,244.55 | 18.8 |
| 108 | Washing machines | ||
| 109 | Mechanical refrigerators | ||
| 110 | Eureka vacuum sweepers | ||
| 336,268.05 | 30.2 |
*1148 The accounts receivable were brought together and accounted for in a collection register. This register recorded the amounts due and the collections received from each debtor, but the unpaid balances were not segregated as to the departments in which the sales originated. The unpaid installment accounts receivable upon the books amounted as follows: On January 31, 1924, $181,387.40; on January 31, 1925, $423,455.32; *2244 on January 31, 1926, $536,431.13.
At the end of each of the taxable years the books were closed and the net profits were determined on the basis of the total sales of all classes, no distinction being made with reference to the deferred payments on the installment sales. The returns filed by the petitioner were made upon the same basis. In determining the deficiencies, the respondent has not allowed any deductions by way of deferment of the pro rata gross profit attributable to the unpaid installment accounts. In determining the deficiencies the adjusted net incomes determined by the respondent amounted as follows: For 1924, $966,336.14; for 1925, $1,278,820.25; for 1926, $1,316,482.28.
OPINION.
TRAMMELL: The sole issue in this case is the claim of the petitioner, under sections 212(d) and 1208 of the Revenue Act of 1926, for a recomputation of its income from installment sales. The evidence clearly shows and it is not in dispute that the petitioner regularly sells merchandise on the installment plan. The accounting period of the petitioner is a fiscal year, ending January 31, and it is on the accrual basis. The original returns filed by the petitioner for the taxable*2245 years reported the entire profits from all sources, including the installment sales, without deferment of income attributable to installment accounts receivable.
Article 42 of Regulations 69 permits the acceptance of amended returns, provided the books of account contain adequate information so that income may be accurately computed on the installment basis. The objections of the respondent are directed to the accounts of the petitioner and to the method now proposed by the petitioner for the reporting of its income from the installment sales.
Setting aside, for the moment, details in controversy between the parties with respect to the computation of income from the installment sales, we find that the ultimate proposal of the petitioner is to ascertain for each year the summary average rate per cent of gross profit applicable to the aggregate installment sales for the year and to consider as unrealized income the same rate per cent of the aggregate of the installment accounts receivable outstanding *1149 at the end of the year. It is important to note, however, that the average rates of gross profit as computed by the petitioner vary from year to year. No attempt is*2246 made to show, with respect to the accounts receivable, the year in which the unpaid sales were made. While the evidence shows that the installment sales were made with agreed periods of deferment of relatively short terms, not less than eight months nor more than twelve months, this is not sufficient to show that the unpaid installment accounts at the end of any year represent only sales made during that same year. It may be contended that any amounts of unpaid installments after a period of a year would be small and inconsequential in view of the method of collection pursued, but we can not assume that such amounts would not materially affect income. It may be that large sales were made in December of any year on which purchasers were allowed 12 months in which to pay. If any of these payments were in default even under the petitioner's collection system they might have been delayed until the next year. We are left without evidence as to the amounts which might have been delayed in collection. We are of opinion that the rate of gross profit properly applicable to the installment sales of any one year should be consistently applied to such sales so long as they remain unpaid, *2247 in reporting on the installment basis. It is not sufficient to argue that the method proposed will result in the ultimate reporting of the entire profits. The tax is imposed upon the basis of the net incomes of annual accounting periods, and the very heart of this issue is the determination of the net incomes of the respective taxable years. We are appreciative of the human impossibility of meticulous exactness in the computation of net incomes, but we think the method proposed stretches beyond the limits of the reasonable accurateness contemplated by the statute.
The petitioner relies upon , in support of the method it proposes. Our approval of the method used in that case can not serve as a basis for the materially different method proposed in the instant case.
We, therefore, conclude that the petitioner has not shown by a preponderence of the evidence that the respondent's method of computing the taxable income is incorrect.
Reviewed by the Board.
Judgment will be entered for the respondent.