Commissioner of Internal Revenue v. Hansen Commissioner of Internal Revenue v. Glover Baird v. Commissioner of Internal Revenue

• Decision Date: 22 June 1959
• Docket Number: 381,512,Nos. 380,s. 380
• Citation: 360 U.S. 446,3 L.Ed.2d 1360,79 S.Ct. 1270
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. John R. HANSEN and Shirley G. Hansen. COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Burl P. GLOVER. Clifton E. BAIRD and Violet L. Baird, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE
• Court: U.S. Supreme Court

360 U.S. 446

79 S.Ct. 1270

3 L.Ed.2d 1360

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

v.

John R. HANSEN and Shirley G. Hansen. COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Burl P. GLOVER. Clifton E. BAIRD and Violet L. Baird, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE.

Supreme Court of the United States

Nos. 380, 381, 512.

Argued April 29, 30, 1959.

Decided June 22, 1959.

79 S.Ct. 1271

360 U.S. 447

Mr. Meyer Rothwacks, Washington, D.C., for Commissioner of Internal revenue. Mr. Emmett E. McInnis, Jr., Seattle, Wash., for respondents Hansen. Mr. W. S. Miller, Jr., Little Rock, Ark., for respondent Glover. Mr. Lester M. Ponder, Indianapolis, Ind., for petitioners Baird.

Mr. Justice WHITTAKER delivered the opinion of the Court.

These federal income tax cases present questions concerning the proper and timely accrual of gross income deriving from sales of commercial installment paper by retail dealers to finance companies. The taxpayers involved i these cases are two retail automobile dealers and a house trailer dealer. All keep their books on the accrual

[360 U.S. 448]

basis. Most of their

[79 S.Ct. 1272]

sales are ‘credit sales.’ It appears that they generally negotiate, consummate, and finance such sales in accordance with a common pattern. The dealer and his customer agree upon a ‘Cash Delivered Price’ for a particular vehicle owned by the dealer. In part payment of that price the customer makes a down payment to the dealer in dash or ‘trade in,’ or both. To the remaining balance of that cash price there is added the cost of insurance on the vehicle and a ‘finance charge.’ The aggregate is sometimes called the ‘Deferred Balance.’ It is evidenced and secured by an assignable or negotiable instrument retaining defeasible title to or a lien on the vehicle-generally on a form supplied by the finance company with which the dealer may then be doing business-and the instrument is signed by the customer, delivered to the dealer, and made payable to him in monthly installments over an agreed period-one to three years on automobiles and three to five years on house trailers. Thereupon, the dealer delivers the vehicle to his customer, with such memoranda or bill of sale as will enable him to register, license and use it.

Soon after completion of these procedures, these dealers sell (discount) those instruments (hereafter called ‘installment paper’) to finance companies for an agreed or formula fixed price, and the dealers guarantee payment, in whole or in part, of the installment paper.

Under contracts between the respective dealers and finance companies here concerned, the latter, upon receipt and acceptance of installment paper, are obligated to pay immediately to the dealers a major percentage of the purchase price, but they are thereby also authorized to retain the remaining percentage of the price and to credit it on their books to a ‘dealers Reserve Account’ in the name of the particular dealer, for the purpose of securing performance by him of his guarantor, endorser, and other liabilities to the finance company.

360 U.S. 449]

The dealers involved in these cases recorded on their books in the years the installment paper was sold, and included in their income tax returns for those years, the cash received from the finance companies, but they did not accrue on their books or include in their returns he percentage of the price that was retained by the finance companies and credited to their reserve accounts.

The Commissioner contends that in the year of their sales of installment paper to the finance companies, the taxpayers acquired a fixed right to receive-even though not until a later year-the percentage of the purchase money that was retained by the finance companies and credited on their books to the dealers' reserve accounts in that year, and, hence, those amounts constituted accrued income to the taxpayers in that year, and should have been accrued on their books and included in their returns for that year. The taxpayers, on the other hand, contend that the amounts so retained and credited were never under or subject to their control, and were always subject to such contingent liabilities of the taxpayers to the finance companies that it could not have been known, in the year of the sales, how much, if any, of the reserves would actually be received by them in cash, and hence they did not acquire, in the year of any of the sales, a fixed right to receive-in a later year or at any time-the amounts credited to them in the reserves, and, therefore, the reserves did not constitute accrued income to them. This presents, in essence, the issue for decision in these cases.

On the grounds stated, the Commissioner proposed assessment of income tax deficiencies for certain years against the respective taxpayers here involved. The taxpayer each petitioned the Tax Court for a redetermination. After hearings, the Tax Court sustained the Commissioner in each case. The taxpayers petitioned for review. In No. 380, the Hansen case, the Ninth Circuit

[79 S.Ct. 1273]

[360 U.S. 450]

reversed,258 F.2d 585; in No. 381, the Glover case, the Eighth Circuit reversed, 253 F.2d 735, and in No. 512, the Baird case, the Seventh Circuit affirmed, 256 F.2d 918. Because of an asserted conflict between those circuits in these cases, and between other circuits on the question involved,¹ and because of the importance of the question to the proper administration of the revenue laws, we granted certiorari in all three cases.

Inasmuch as these cases turn on the same issue, and the Hansen and Glover cases were consolidated for argument and argued together in this Court, and the Baird case was argued immediately following, it will be convenient to decide the three cases in one opinion. Although the relevant facts in the three cases are very similar and follow the pattern just explained, there are variations which we think should be set forth.

Respondents in No. 380, John R. Hansen and Shirley G. Hansen, are husband and wife and filed joint federal income tax returns for the taxable years 1951, 1952 and 1953 here involved. During those years, John R. Hansen (‘taxpayer’), was a motorcar dealer in Bellevue, Washington,

[360 U.S. 451]

and kept his books on the accrual basis. He frequently sold automobiles on ‘time payments.’ The taxpayer was not bound by any contract to sell his installment paper, but because of his needs for operating capital he consistently sold it to General Motors Acceptance Corporation (‘GMAC’).

Although before selling installment paper to GMAC the taxpayer did not have an express contract with that company concerning the terms and conditions of such sales and purchases, he had received its manual covering its policies on those subjects and apparently acted under them. That manual was not put in evidence, but it is intimated in the evidence and findings and stated in the briefs, without contradiction, that it contained provisions to the effect that upon receipt and acceptance of a duly assigned conditional sale contract guaranteed by the dealer, GMAC would pay to the dealer the major percentage (not specified in the evidence or findings) of the agreed price therefor, but would retain the remaining percentage of the price and credit the same on its books to a ‘Dealers Reserve Account’ in the name of the dealer, as security for performance of his obligations to GMAC under his guaranty of payment of the installment paper and for the payment of any other obligation which he might incur to GMAC. Once in each year GMAC would remit to the dealer so much of his accumulated reserve as exceeded 5% of the then aggregate unpaid balances on installment paper which GMAC had purchased from the dealer.

Upon negotiating a time sale of an automobile and receiving the down payment and any other sum immediately payable, the taxpayer prepared, on forms supplied by GMAC, a conditional sale contract setting forth a compilation of the figures, including insurance and a finance charge, involved in the time sale and concluding with a statement of the

[79 S.Ct. 1274]

‘Time (Deferred) Balance’ which was

[360 U.S. 452]

payable at the office of GMAC in fixed monthly installments. When the customer signed and delivered to the taxpayer the conditional sale contract, the automobile was delivered to the customer and, as recited in that contract, he acknowledged ‘delivery and acceptance of (it) in good order.’ ²

It was the taxpayer's consistent practice immediately thereafter to assign the conditional sale contract (and guarantee its payment) to GMAC by executing the form of assignment printed at the foot of the form and forwarding it to GMAC for purchase.³ Upon receipt and acceptance

[360 U.S. 453]

of the conditional sale contract and assignment, GMAC remitted to the taxpayer the major percentage of the price it was to pay therefor, but retained the remaining percentage and credited it on its books to a ‘Dealers Reserve Account’ in the name of the taxpayer, for the purpose of securing performance by him of his obligations to GMAC.

The taxpayer recorded on his books in the year such installment paper was sold, and included in his income tax return for that year, the cash received from GMAC, but he did not accrue on his books, or include in his return, the percentage of the price that was retained by GMAC and credited to his reserve account.

The Commissioner proposed the assessment of deficiencies in income taxes against the taxpayer and his wife for the years involved upon the grounds earlier stated. The taxpayer sought a redetermination in the Tax Court which, after hearing, sustained the Commissioner, but on taxpayer's petition for review the Ninth Circuit reversed, 258 F.2d 585, and we granted certiorari for the reasons already stated, 358 U.S. 879, 79 S.Ct. 121, 3 L.Ed.2d 109.

Respondent in No. 381, Burl P. Glover (‘taxpayer’), during the years...