*3012 1. Where a company sold trucks on a basis of 25 per cent cash and accepted for the balance a note secured by a chattel mortgage providing for ten or twelve monthly payments, and immediately assigned and transferred the note and sold, assigned and transferred the chattel mortgage to a financing company, receiving from it the full remaining unpaid amount of the purchase price, it should report as income the entire amount of cash so received in the taxable year.
2. In such a situation though the sale may have been on the installment basis, upon the receipt from the financing company of the full purchase price of the truck or car, the sale became a closed transaction and income arose.
3. The fact that taxpayer is an endorser with recourse and guaranteed payment of the notes does not relieve it of reporting as income the full amount received.
*119 This proceeding is brought to redetermine the income and profits taxes of the Packard Cleveland Motor Co. for the period from June 1, 1918, to December 31, 1918, and for the calendar year 1919, in*3013 the amounts of $19,173.03 and $9,647.55, respectively. The former sum is represented by a claim in abatement for a slightly larger amount and reduced by an overassessment certificate of the respondent. The petitioner asserts (1) that the collection of the taxes due for the period from June 1 to December 31, 1918, is barred by the statute of limitations; (2) that the commissioner erred in treating the petitioner's income on the closed-transaction basis instead of installment sales or deferred-income basis; and (3) that notes received in partial payment of automobiles and trucks were not worth their face value when so received and hence the petitioner's income should have been reduced accordingly.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of Ohio and having its principal office in Cleveland. It was engaged in the business of selling Packard automobiles and trucks and had the agency therefor in nineteen counties of Ohio, including the cities of Cleveland, Akron, Canton, Youngstown, Sandusky and Mansfield.
On June 14, 1919, the petitioner filed its return for the period from June 1, 1918, to December 31, 1918. An additional tax*3014 of $19,952.63 was assessed in March, 1924. A claim in abatement for that amount was filed by the petitioner on April 17, 1924. On March 3, 1925, the petitioner executed an income and profits-tax waiver relating to the making of any assessment of income, excess-profits or war-profits taxes due under any return for the year 1918, and effective until December 31, 1925. On October 15, 1925, the respondent made his final determination and issued his 60-day deficiency letter disallowing the said claim for abatement, subject, however, to an allowance of $779.60 as an overassessment.
During the years under consideration the petitioner sold a large number of Packard trucks and a small number of Packard automobiles on the following plan: The purchaser paid at least 25 per cent, occasionally 40 per cent, and in at least one instance 50 per cent, of the purchase price in cash and received title to the truck. He then executed a chattel mortgage and a note to the petitioner assigning to it the said truck to secure the payment of the unpaid portion of the purchase price, increased by certain financing, insurance, and other charges.
*120 The chattel mortgage was immediately "sold, *3015 assigned and transferred" to the American Commercial Co. of Cleveland, Ohio, hereinafter called the Commercial Company, by the following form of assignment:
FOR VALUE RECEIVED, the within mortgage and all the right, title and interest of the undersigned, mortgagee therein and thereunder, and to the property therein described are hereby sold, assigned and transferred to THE AMERICAN COMMERCIAL COMPANY, Cleveland, Ohio, and to its successors and assigns.
As an inducement to said assignee to purchase said mortgage and note the undersigned hereby certifies and represents them to be valid and subsisting obligations; that nothing has been done limiting, modifying, or in any way affecting their validity; that they were executed in connection with the sale of the automobile described therein, which said automobile was actually delivered to and accepted by said mortgagor; that at the time of the execution of said mortgage and note the undersigned did not hold said automobile on consignment, but had good title, free and clear of all claims whatsoever, there then existing no conditions to prevent the undersigned from selling the same; and that there is due and unpaid thereon only the sum*3016 mentioned in said mortgage.
The undersigned further guarantees the prompt payment of all moneys due, or to become due, under said mortgage, and, should it become necessary to make collection through an attorney, to pay all costs of such collection, including a reasonable attorney fee; and also the full performance by said mortgagor of all the conditions and convenants of said mortgage by said mortgagor to be performed.
Dated
(Dealer sign here before filing)
By
(Authorized officer of Firm member if Corporation or partnership)
Witness:
The note executed by the petitioner provided for either ten or twelve monthly payments, payable at the American Commerical Co., and was assigned and transferred to the Commerical Company by the following endorsement:
For value received we hereby assign and transfer the within note to
THE AMERICAN COMMERCIAL COMPANY.
GUARDIAN BLDG.
CLEVELAND, OHIO.
guarantee payment of the same at maturity and waive demand, protest and presentation for payment and notice of non-payment and protest.
THE PACKARD CLEVELAND MOTOR CO.
By
At the time the petitioner assigned and transferred to the Commerical Company the purchaser's note, together*3017 with the chattel mortgage securing it, it received from that company the full amount of the purchase price of the truck remaining unpaid by the purchaser. *121 The portion of the note representing interest and financing charges was retained by the Commercial Company. Since such assignment was made with recourse, the petitioner on various occasions was compelled to pay to the Commercial Company due and unpaid portions of the purchase money notes in respect to which the purchaser was in default. In such a situation the truck was repossessed. Often the truck so repossessed was refinanced in the same manner as described above and resold either to the original purchaser or to a stranger. No investigation of the financial responsibility of the purchaser was made by the Commercial Company, while the petitioner secured as its customers those who appeared to be honest and industrious and had a sufficient margin of cash to render the risk reasonably good. It often secured hauling contracts for its purchasers in advance of the sale.
Monthly statements were submitted by the Commercial Company to the petitioner showing the status of payments made by purchasers. The petitioner was*3018 not concerned with the collection of unpaid installments until and unless the purchasers became delinquent from two to four months. In some instances additional time was allowed by the Commerical Company with the consent of the petitioner. Upon the sale of the truck and the assignment of the unpaid purchase obligations to the Commercial Company the account was closed on petitioner's books, the name of the purchaser disappeared from the petitioner's books, and reappeared only in the event of refinancing or repossession.
Following the Armistice and chiefly in 1920 and 1921 the petitioner was compelled to repossess many trucks and ultimately suffered a considerable loss thereby. The Packard Company had reduced the price of trucks by approximately $1,000 in 1919 or 1920 and in 1920 ceased altogether their manufacture. In Cleveland the market for trucks in 1920 was exceedingly poor on account of the cessation of war activities during the preceding year.
The following is a summary of purchasers' notes unpaid on January 1, 1919, and January 1, 1920:
| Representing unpaid balance on sale | Notes unpaid Jan. 1, 1919 | Notes unpaid Jan. 1, 1920 |
| 1917 | $5,034.95 | |
| 1918 | 183,062.91 | $1,113.00 |
| 1919 | 233,253.09 | |
| Total of unpaid notes | 188,097.86 | 234,366.09 |
*3019 The respondent based the computation of the petitioner's profit for the years in question on the amount of the cash payments received from the purchaser plus the amount of cash actually received within *122 the taxable year from the Commerical Company from the sale and assignment of the purchasers' deferred obligations. Respondent excluded from his computation that portion of the notes representing financing charges and interest, all of which were retained by the Commercial Company. Subsequent to 1920 the books of the petitioner were adjusted to show its income on a deferred basis rather than on an accrual basis.
OPINION.
VAN FOSSAN: The petitioner contends that the collection of the deficiency in tax due for the period from June 1 to December 31, 1918, is barred by the statute of limitations because no waiver was ever executed extending the statutory period for collection, the waiver of March 3, 1925, relating solely to the assessment of tax. Petitioner's return for 1918 was filed June 14, 1919. The assessment was made in March, 1924, or within five years after the filing of the return, and was timely, irrespective of the waiver. *3020 Petitioner, however, contends that, assuming the assessment was timely made, the collection of the tax is barred. The period for the assessment and collection of the tax not having expired before the enactment of the Revenue Act of 1924, enacted June 2, 1924, section 278(d) of that Act became operative and extends the time for collection for six years from the date of the assessment. ; ; . In this situation the filing of the waiver was immaterial.
The second and major issue relates to the computation of income, it being contended by petitioner that its method of selling and financing the sale of trucks and cars was founded essentially on the installment or deferred-income basis, while respondent has treated the same as a closed transaction when petitioner received from the Commercial Company the full unpaid price of its trucks and cars.
In our findings of fact we have set out step by step petitioner's sale and payment procedure. As between petitioner and its purchasers the sales originally may have been on an installment*3021 basis. This, however, would not be an end of the matter. Pursuant to previous arrangements, petitioner immediately assigned and transferred the notes and sold, assigned and transferred the mortgages to the Commercial Company, receiving in cash the full unpaid purchase price of the car or truck. Thereupon petitioner closed the purchaser's account on its books. Only in the event of a repossession or refinancing was the account again opened and then the precise procedure *123 originally followed was usually reenacted. Under this set of facts we are convinced that upon the receipt of the full remaining purchase price of the truck or car petitioner received income in that amount. . Though the transaction may have been an installment sale originally, when the Commercial Company paid the petitioner the full balance of the account and assumed the obligation of collecting from the purchaser, so far as petitioner was concerned, the sale became a closed transaction. The Commercial Company did not act as the petitioner's agent in collecting. It had bought all of petitioner's rights under the note and mortgage and thereafter acted in*3022 its own sole behalf.
In support of its position petitioner points to the fact that it guaranteed payment of the notes and might be, and in a considerable number of instances was, obliged to respond to the Commercial Company as an endorser on the paper. We do not deem this fact to be of controlling weight. Though the possibility of default was in contemplation it was not established as a surety when the notes were sold and, in fact, every reasonable precaution was taken by petitioner before making a sale to forfend against such a contingency. The treatment of the sale on petitioner's books argues strongly against petitioner's contention.
As an alternative contention petitioner urges that it was error for the respondent to tax them on the full amount of cash received for the reasons that petitioner was contingently liable as an endorser and the notes were not worth their full face value when received. It urges further that only the endorsement with recourse by petitioner gave them such value. The evidence does not convince us that under the facts and circumstances surrounding the sale the notes were not worth their face. The working arrangement between petitioner and the*3023 Commercial Company was very intimate. The notes were sold immediately on receipt for full face value. It is not reasonable to assume that petitioner would have made the sale in the first place or have guaranteed payment of the notes to the Commercial Company had it not believed them good for their face value. Petitioner's practice was to find a man who appeared to be honest and industrious and possessed of enough cash to make the initial payment. It often secured for him hauling contracts before the sale was made. The unpaid balances of the notes were secured by chattel mortgages. The record and all reasonable inference therefrom do not support the petitioner's contention.
Judgment will be entered for the respondent.