*2498 1. Petitioner is entitled to return its income from installment sales under the provisions of subdivision (d) of section 212 of the Revenue Act of 1926. Appeal of Blum's, Inc.,7 B.T.A. 737.
2. A taxpayer who changes from the straight accrual method to the installment sales method of returning income must return as income of the year in which the change is made, and all subsequent years, a proper proportion of all installment payments, actually received in those years, relating to sales effected in years prior to the change in method, notwithstanding that the entire profits from the sales to which such payments relate, were, under the method of returning income then employed, returned and taxed as income of the years in which such sales were effected.
*815 This proceeding results from the determination of deficiencies in income and profits taxes in the following amounts: for 1918, $46,890.51; for 1919, $46,391.21; and for 1920, $54,569.79; for 1921, $29,337.85.
The errors*2499 advanced by petitioner are that respondent erred in refusing to permit it to return its income derived from installment *816 sales on the basis prescribed by section 212(d) of the Revenue Act of 1926, and further, that on such basis it is not taxable in the current year on income included in installment payments received in such year but which installments were received in payment for sales made prior to such year and the income therefrom had been returned for the year in which the sales were made.
FINDINGS OF FACT.
Petitioner is a corporation organized in February, 1910, under the laws of Congress applicable to the District of Columbia, with its principal offices at 421 Seventh Street, N. W., Washington, D.C. From the date of its incorporation to the end of the year 1921, the said petitioner was engaged in the retail furniture business, selling for cash, credit and on the so-called installment plan; the cash and credit sales being made at a reduction from the marked selling price, and the installment customers receiving a reduction for the prepayment of their account. The greater portion of the furniture sold by the petitioner was sold on the installment plan under conditional*2500 bills of sale.
Petitioner's general accounts and general ledger during the years 1910 to 1921, inclusive, were kept on the accrual basis. In the general ledger, the petitioner maintained what is commonly called a general merchandise account to which was debited the inventory at the beginning of the year and the amount of all purchases made during the year. The returned sales were also debited to this account. On the credit side of the account was entered the sales price of all sales, returned purchases and the inventory at the close of the year. At the end of each year, the balance of this account, representing the gross profit on all sales, was transferred to the profit and loss account. Business expenses were likewise kept on the accrual basis.
The cash book was maintained on the general principle of debits and credits to various general ledger accounts, no columns being maintained for particular accounts, the cash payments received on installment sales and accounts being entered in gross from the daily cashier's sheets showing the name of the payer, amount paid and account number, the entry in the cash book not being made so as to record this detail. From these cashier's*2501 sheets, which were posted in summary to the cash book, the petitioner also posted in detail to a loose-leaf or subsidiary installment accounts receivable ledger, the payments made by the individuals on their respective accounts. The pages of this ledger were a combination of the conditional bill of sale and an account with each installment customer. The customer signed the contract comprising the left half of the page and it was *817 then bound in the accounting books and the remaining half used as the account itself. The total contract price of goods covered by the bill of sale was entered on the lines designated thereon for that purpose. Each payment under the contract was entered on the lines provided, together with the date of payment. If a customer made an additional purchase while a portion of the amount due on the former contract remained unpaid, the petitioner consistently followed the policy of applying the initial payment at the time of the second contract against the old contract. In this manner the oldest contract was extinguished before any payments were considered as applying on a later contract. The amount of sale of the second or succeeding contracts was*2502 entered on the above account page on the line beneath the first. Periodic payments were then recorded in same manner until the total amount of all outstanding contracts was paid. The installment accounts receivable ledger therefore showed the date and amount of each sale on the installment plan and the date and amount of each payment on said contracts.
Curing the years 1913 to 1917, inclusive, the petitioner filed its income-tax returns upon the same basis as that upon which its books were kept; that is, the accrual basis, reporting in each year the entire amount of sales made during that year, regardless of whether such sales were made for cash, on credit, or on the installment plan. As to sales under the latter plan, the full amount of each contract was reported in the year in which the contract was signed and the unpaid balances were treated as accounts receivable and the equivalent of cash.
In the years 1918, 1919, 1920, and 1921, petitioner prepared its income-tax returns on what it intended to be the installment-plan method. The returns so filed, however, were inaccurate, inasmuch as no attempt was made to allocate cash collections from the installment sales to the*2503 various years when the sales were made and the Commissioner of Internal Revenue refused to accept the conclusions shown by such returns.
During the year 1923, petitioner employed approximately fourteen accountants, who worked for nearly four months analyzing the installment accounts receivable ledgers for the years 1918 to 1921, inclusive, and allocating collections as shown thereby to the installment contracts made in each year. Each of the thousands of accounts shown by the installment accounts receivable ledgers was separately analyzed and the unpaid balance of each account as of January 1, 1918, was entered separately on columnar sheets under the year in which the sale was made. The collections on each contract were then analyzed and allocated to the year of collection for each year of sale. At the conclusion of this work and the preparation of the summary schedules resulting therefrom, the petitioner filed with *818 the Commissioner amended schedules which it offered as amended returns for the years 1918 to 1921, inclusive, on the installment basis. The Commissioner refused to accept these amended schedules or returns principally because petitioner's books of account*2504 were kept on the accrual basis and not on the installment basis. The deficiencies involved in this appeal are, therefore, based upon income computed on the straight accrual basis.
Subsequent to the year 1923, petitioner had a further analyzation made of the installment accounts receivable ledgers for the purpose of supplementing the original analyzation and of allocating the cash collections to the sales made in the years from 1913 to 1918. Based on these analyzations of the installment accounts receivable ledgers, the cash collections made in the years 1918 to 1921, inclusive, allocated to the years in which the sales were made, are as follows:
| CASH COLLECTED DURING 1918 TO 1921, INCLUSIVE, ON SALES. | ||||
| Year in which collected | ||||
| 1918 | 1919 | 1920 | 1921 | |
| Cash collected on cash and credit sales | $80,506.61 | $131,312.62 | $152,037.46 | $172,894.83 |
| Cash collected on installment sales made during cash year on the sales of the same year | 190,794.38 | 273,659.46 | 327,241.41 | 352,769.98 |
| Cash collected on installment sales: | ||||
| March to December, 1913 | 1,039.71 | 628.53 | 319.95 | 172.05 |
| Year, 1914 | 1,576.17 | 1,398.81 | 619.46 | 239.77 |
| Year, 1915 | 5,067.29 | 3,275.05 | 1,002.12 | 500.95 |
| Year, 1916 | 12,368.73 | 4,807.68 | 1,867.25 | 384.15 |
| Year, 1917 | 99,608.10 | 20,071.08 | 3,368.85 | 475.25 |
| Year, 1918 | 173,126.25 | 25,983.90 | 3,966.74 | |
| Year, 1919 | 236,133.10 | 37,000.09 | ||
| Year, 1920 | 287,234.14 |
*2505 The percentage of gross profit on sales in each of the years from 1912 to 1921, inclusive, computed in accordance with the method shown below, was as follows:
| Year | Percentage of gross profit |
| 1913 | 48.225 |
| 1914 | 46.155 |
| 1915 | 44.231 |
| 1916 | 44.223 |
| 1917 | 42.83 |
| 1918 | 47.055 |
| 1919 | 51.233 |
| 1920 | 47.623 |
| 1921 | 42.455 |
| METHOD OF COMPUTING PERCENTAGE OF GROSS PROFIT | |
| Year 1918 | |
| Total cash, credit, and installment sales | $541,998.00 |
| Less returns 1 | 50,513.43 |
| Total sales (less returns) | 491,484.57 |
| Cost of sales: | |
| Inventory at beginning of year | 84,763.48 |
| Additions during year including returns 1 | 437,682.25 |
| 522,445.73 | |
| Less: | |
| Returns included in above 1 | $50,513.43 |
| Inventory at close of year | 211,712.62 |
| 262,226.05 | |
| Cost of sales | 260,219.68 |
| Gross profit | 231,264.89 |
| Ratio of gross profit to sales, per cent | 47.055 |
*819 The total deductions for each of the years 1918 to 1921, inclusive, on the straight accrual basis were as follows:
| Year | Deductions |
| 1918 | $159,631.70 |
| 1919 | 218,732.90 |
| 1920 | 277,295.00 |
| 1921 | 284.859.56 |
The capital stock and surplus*2506 (unadjusted for Federal income and profits taxes) for purposes of computing invested capital on the straight accrual basis for each of the years 1918 to 1921, inclusive, were as follows:
| Year | Capital stock | Surplus |
| Jan. 1, 1918 | $50,000.00 | $60,665.38 |
| Jan. 1, 1919 | 50,000.00 | 131,752.31 |
| Jan. 1, 1920 | 50,000.00 | 277,418.42 |
| Jan. 1, 1921 | 50,000.00 | 421,534.34 |
The discounts on purchases included in the merchandise account for each of the years 1918 to 1921, inclusive, were as follows:
| Year | Discount on purchased |
| 1918 | $10,910.25 |
| 1919 | 9,911.59 |
| 1920 | 14,768.37 |
| 1921 | 4,274.63 |
These amounts were not used to reduce the cost of purchases for the years in question.
When goods were repossessed because of dissatisfaction or non-payment, two general plans were followed:
(a) If the goods had been out of the store for only a short period, that is, not to exceed one or two weeks, and were in the same condition as when sold, they were taken back into stock, the merchandise account being debited, and the customer was credited with the full amount of the sales price and his initial payment refunded, unless he purchased other goods, in which event*2507 a new contract was made and the payment applied against it.
(b) If the goods were kept by the customer for a longer period, they would be taken back by the petitioner, appraised, and sent to public auction rooms for sale. The net amounts received at such auction would then be credited to the account of the customer. If such credit exceeded the unpaid balance, the excess *820 would be refunded to the customer. If, on the other hand, it was insufficient to cover the unpaid balance, the account was usually charged off.
The installment sales, in the taxable years, were in the following aggregates:
| 1918 | 1919 | 1920 | 1921 | |
| Total sales | $450,581.24 | $615,930.38 | $895,638.13 | $949,214.49 |
| Less: Returns | 50,513.43 | 56,511.04 | 140,658.09 | 151,084.32 |
| Net sales | 400,067.81 | 559,419.34 | 754,980.04 | 798,130.17 |
All sales in the taxable years, were of the following aggregates:
| 1918 | 1919 | 1920 | 1921 | |
| Net installment sales | $400,067.81 | $559,419.34 | $754,980.04 | $798,130.17 |
| All other sales | 91,416.76 | 141,224.21 | 166,805.83 | 177,169.46 |
| Total sales | 491,484.57 | 700,643.55 | 921,785.87 | 975,299.63 |
The gross profits on all sales*2508 made in the taxable years were as follows:
| 1918 | $231,264.89 |
| 1919 | 358,954.97 |
| 1920 | 438.983.01 |
| 1921 | 414,059.55 |
OPINION.
MILLIKEN: Petitioner complains that respondent refused to permit it to return so much of its income as was derived from installment sales on the basis provided by section 212(d) of the Revenue Act of 1926. This section is made retroactive by section 1208 of the same Revenue Act. Section 212(d) provides in part:
(d) Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price.
Section 1208 reads:
The provisions of subdivision (d) of section 212 shall be retroactively applied in computing income under the provisions of the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, the Revenue Act of 1921, or the Revenue Act of 1924, or any of such Acts as amended. Any*2509 tax that has been paid under such Acts prior to the enactment of this Act, if in excess of the tax imposed by such Acts as retroactively modified by this section, shall, subject to the statutory period of limitations properly applicable thereto, be credited or refunded to the taxpayer as provided in section 284.
Respondent does not take the position that petitioner did not regularly sell or otherwise dispose of its personal property on the *821 installment plan but confines himself to the contention that the books and records of petitioner were not kept in such a manner as to disclose sufficient information upon which to base a return on such a basis.
The facts stipulated disclose that petitioner was engaged in the retail furniture business; that it sold for cash, for credit, and on the installment plan; and that it kept its books on the accrual basis. Petitioner employed accountants to ascertain from its books and records the facts detailed in the findings of fact. We are thus placed in possession of the amount of gross sales, of the amount of sales of cash and credit, and the amount of sales on the installment plan. We know the cost of all goods sold and the amount*2510 of gross profits attributable to such sales. We know the amount of cash received each year on installment sales. The element which is absent is the exact amount of gross profit attributed to the installment sales. This hiatus results from the fact that while we know the cost of all goods sold, whether for cash or credit or on the installment plan, we do not know the precise cost of all goods sold on the installment plan. This was the situation which presented itself in the . We there applied a composite percentage rate of gross profit on all sales and said with reference to such method:
* * * Where, as in the case of this petitioner, cash sales are made at a profit considerably less than that to be realized on the installment sales made within the year, it is true that the composite percentage rate of gross profit will be less than the actual percentage of gross profit on installment sales alone; and it might appear, at first hand, that by using this composite percentage rate of gross profit the petitioner would escape taxation on a portion of the profits from installment sales. *2511 However, while the petitioner would apply the lower composite percentage rate to the installment payments, at same time it would apply the same percentage rate to the receipts from cash sales, showing a much greater profit from cash sales than actually realized. The method works out so that the petitioner would return as income, in any taxable year, on account of sales made within that year, an amount in excess of the actual profit on cash sales plus the profits actually realized through collection of installment payments relating to installment sales made in the same year; and such excess will always be the difference between an amount obtained by applying the composite percentage rate to the gross contract price of all installment sales made within the year and that obtained by applying the actual percentage rate of gross profit on installment sales to the same base. The excess reported is taken care of in subsequent years, during which the remaining installment payments will be received, through the application of the same composite percentage rate to the collections made in those years on account of the sales made in the prior year. Under this method the petitioner will ultimately*2512 return all of its income - nothing more nor anything less. We believe the suggested method is a reasonable interpretation of the statute in the fulfillment of its underlying purpose, and will clearly reflect income to be returned by the use of the installment *822 sales method. As the Board said in the , "The entire plan of income taxation recognizes the fact that income is a matter, at best, of estimate, and can never be reduced to absolutely definite terms in the case of a large modern business institution."
We are of the opinion that petitioner's income from installment sales should be computed under the provisions of section 212(d) and that the rules and procedure laid down in , should be followed so far as applicable. Cf. ; ; , and *2513 .
Petitioner's last contention is that it should not be required to report in the year received, installment payments on goods sold in previous years where the income from such sales has been returned for taxation. The principal ground for this contention is that it results in double taxation. Double taxation is not to be presumed, but if the taxing statute is clear it is not invalid. Cf. . Here the express words of section 212(d) require that all installments received in the taxable year shall be returned. That the Congress contemplated that double taxation might result is shown by provision in section 1208 for credits and refunds, but, and this is quite important, makes such credits or refunds subject in each case to the period of limitation applicable. If the period of limitation has expired, no credit or refund can be made.
Petitioner next contends that in no event should installments received in payment for goods sold prior to the effective date of the Revenue Act of 1916, be returned, since section 1208 does not amend any Revenue*2514 Act of prior date. This contention overlooks the fact that in this case we are not called upon to compute any taxes under the Revenue Act of 1913 (38 Stat. 114) but that the taxes in this case are to be computed under the Revenue Acts of 1918 and 1921. Lastly, these contentions disregard the vital fact that petitioner was not compelled to make its returns under section 212(d) but did so of its own volition. When it changed its method of reporting from the accrual method to the installment method, it was called upon to report all of its income from installment sales under that method. It must treat all such items of income consistently. It can not return under both methods. To follow both methods would result in distortion of income. See ; These contentions are similar to the contentions which were considered at length under the , and we adhere to the views there expressed.
Judgment will be entered on 15 days' notice, under Rule 50.
Considered by PHILLIPS and MARQUETTE.
Footnotes
1. Related items embracing returned installment sales. ↩