Alworth-Washburn Co. v. Helvering, 5858.

• Decision Date: 06 November 1933
• Docket Number: No. 5858.,5858.
• Citation: Alworth-Washburn Co. v. Helvering, 67 F.2d 694, 62 App. D.C. 322 (D.C. Cir. 1933)
• Parties: ALWORTH-WASHBURN CO. v. HELVERING, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — District of Columbia Circuit

67 F.2d 694 (1933)

ALWORTH-WASHBURN CO. v. HELVERING, Commissioner of Internal Revenue.

No. 5858.

Court of Appeals of the District of Columbia.

Argued October 10, 1933.

Decided November 6, 1933.

Paul E. Shorb and M. P. Wormhoudt, both of Washington, D. C., for petitioner.

G. A. Youngquist, Sewall Key, John MacC. Hudson, C. M. Charest, E. Barrett Prettyman, and A. H. Fast, all of Washington, D. C., for respondent.

Before MARTIN, Chief Justice, and ROBB, VAN ORSDEL, HITZ, and GRONER, Associate Justices.

GRONER, Associate Justice.

Petitioner is a Minnesota corporation. It was in process of liquidation and in 1926 sold all of its remaining assets for a little less than $600,000. The cash received did not exceed one-fourth of the total purchase price. It therefore elected to report the income from the transaction on the installment basis, and this was accepted by the Commissioner.

The applicable statute is section 212 (d) of the Revenue Act of 1926 (44 Stat. 23, 26 USCA § 953 (d). Under the provisions of this section a taxpayer who sells real property, where the initial payment does not exceed one-fourth of the purchase price, may return proportionately the taxable profit in the succeeding years in which the installment payments are actually received.

In this case there is no dispute as to the total amount of profit derived from the sale, nor did the Commissioner question petitioner's right to spread this profit over the years of actual payment, but in the year following the sale petitioner indorsed in blank the notes for the remainder of the sale price and discounted or sold the same to a bank for cash, receiving the face amount thereof with interest.

The question which we have to decide is whether the profit reflected in the notes discounted or sold was income to petitioner in 1927 (the year in which the transaction with the bank was had) or in the subsequent years in which the notes were actually paid to the bank.

The Commissioner insists that when petitioner discounted the notes and received full payment therefor, the transaction was closed and the entire gain was then realized and was therefore taxable. Petitioner, on the other hand, insists that, because of its indorsement of the notes, it incurred a continuing liability to the bank which deferred its realization of gain until the liability was extinguished by the payment of the notes. It says that its relation to the bank was that of borrower; that the cash received was a loan; and that it did not and could not know the amount of profit it would realize on the notes until they were finally paid.

The main question, in circumstances nearly identical with those we have here, was passed on by the Court of Appeals of the Second Circuit (Elmer v. Commissioner, 65 F. (2d) 568, 569). In that case the taxpayer was the selling agent for Ford cars. The terms of sale contemplated a partial payment in cash and a series of weekly or monthly notes, which were in turn secured by a contract of conditional sale reserving title. The taxpayer sold and assigned the contracts to a finance corporation and indorsed the customer's notes and in that way received in cash the total purchase price of the car. The agreement between the finance company and himself contemplated that if there should be a default in any of the notes, he would stand between the finance company and loss. In these circumstances, Judge Learned Hand, speaking for the court, held that the entire profit accrued in the year in which the sale and assignment of the contracts occurred, and to the proposition whether the transfer of the notes was a loan or a sale, said: "If a merchant discounts his customer's note at a bank, endorsing it, but getting immediate credit for its discount value, it would be a most unnatural thing to consider it a loan from the bank. He remains liable if the customer defaults, but the collection is in the bank's hands, and the transaction is closed in the absence of a default."

It is undoubtedly a fact that the terms "loan," "discount," and "sale," as applied to a transaction such as is involved in this case, are frequently so used by courts as to result in a rather vague and inexact distinction between them. The question arises mostly in cases involving usury statutes, and it is often said that it is the one or the other according to the nature of the transaction and the facts attending it. In some cases it is held that a discount of an existing chose in action, when not used as a cover for usury, even though the rate of discount agreed upon is more than is permissible under the usury statutes, is not a loan within the meaning of those statutes but a...