*3582 The petitioner purchased at less than their par value, a series of 12 notes payable one each month. Held, that only so much of the discount as was earned within the year 1920 is income to the petitioner for that year.
*150 This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by the respondent for the year 1920 in the amount of $3,251.26. The question involved is what amount of "brokerage," or discount, derived by the petitioner from certain promissory notes purchased by it in 1920 should be included in its income for that year.
FINDINGS OF FACT.
The petitioner is an unincorporated association located in Chicago, Ill.
The petitioner's business is that of financing the sale of automobile trucks for the Chicago Motor Truck Co., as follows. The Truck Company takes from the purchaser a series of notes, secured by a chattel mortgage upon the truck sold, to cover the unpaid balance of the purchase price. The notes include one year's premium for insurance on the truck*3583 and the commission charges of the petitioner, as well as the unpaid purchase price. The petitioner then pays to the Truck Company the total amount of the unpaid purchase price, and also pays the insurance charges, and the Truck Company endorses the notes and delivers them, together with the chattel mortgage, to *151 the petitioner. The notes are twelve in number, one maturing each month for a year. Occasionally the purchaser does not pay the notes, or some of them, promptly, and time extensions are granted or else a new series of notes is taken. Occasionally notes are paid before maturity and a discount is then allowed to the maker.
The petitioner began its business operations on May 1, 1920. During that year it purchased notes in the amount of $168,167.06. The total amount of brokerage included therein was $10,494.94. Entries made in the petitioner's books to cover transactions were as follows. Bills receivable were debited with the face amount of the notes acquired; the brokerage and insurance account was credited with the amount of insurance and discount included in the notes, and the Truck Company was credited with the amount paid it, the balance of the purchase*3584 price of the truck. When a note became due the bills receivable account was credited with the amount of the note, and the account of the maker of the note was charged with the amount of the note plus the interest due thereon, and when the note was paid his account was credited with the payment. When the petitioner paid insurance upon a truck the brokerage and insurance account was debited with the amount paid. A separate interest account was kept which was credited when the interest was paid. The total amount of discount, or brokerage, as the petitioner called it, which was included in the notes falling due in 1920 was $3,414.20, and the total amount of such discount actually collected in that year was $2,938.50. The amount of discount which the petitioner reported in its income and profits-tax return for 1920 was $3,321.86. The petitioner's expenses were entered on its books as they were paid.
The respondent, upon audit of the petitioner's return for the year 1920, added to income the amount of $7,173.08, that being the difference between the amount of discount, or brokerage, reported by the petitioner and the total amount of discount, or brokerage, included in the notes*3585 purchased in that year. The respondent also increased the petitioner's income by the amount of $7,040 representing a reserve for stock mortgages, which had been deducted by the petitioner, and determined a deficiency in tax in the amount of $3,251.26.
OPINION.
MARQUETTE: The income which the petitioner derived from its finance operations consisted of "brokerage," or financing charges paid by purchasers of motor trucks, usually in 12 monthly installments. This brokerage was not paid as a separate item but was merged with the unpaid balance of the purchase price of the truck in a series of promissory notes. The petitioner's profit, its taxable income, was not received as a lump sum but in aliquot parts spread over many months. Occasionally notes were paid before the due *152 date, the payer thus obtaining a discount which reduced the petitioner's brokerage in like amount. Sometimes, too, notes were not paid when due.
The petitioner's bookkeeping method was to credit its brokerage account as each note became due with the amount of brokerage included in that particular note. If the note was not paid at maturity the brokerage thereon was transferred to the profit and*3586 loss account at the end of the year. Expenses were entered on the books as they were paid.
We think that the petitioner was essentially upon an accrual basis, as the respondent contends. But we do not agree that the entire amount of brokerage, $10,494.94, on the notes purchased during 1920 accrued in that year. Nearly two-thirds of the notes purchased did not become due until after the taxable year. Manifestly no discount or profit accrued upon such notes until the discount thereon was earned. The principle involved is essentially no different than that of bank discount, wherein we have several times held that discount neither received nor accrued within a taxable year is not income subject to tax in that year. ; ; .
In our opinion only the amount of brokerage actually earned by the petitioner in the year 1920 should be included in its income for that year. The respondent, in his answer, filed herein, concedes that he erred in restoring to the petitioner's income the amount of $7,040 which it had deducted*3587 as a reserve for stock mortgages, and adjustment should be made accordingly.
Reviewed by the Board.
Judgment will be entered under Rule 50.