Consolidated Dry Goods Company v. United States, Civ. A. No. 57-238.
| Decision Date | 05 February 1960 |
| Docket Number | Civ. A. No. 57-238. |
| Citation | 180 F. Supp. 878 |
| Parties | CONSOLIDATED DRY GOODS COMPANY v. UNITED STATES of America. |
| Court | U.S. District Court — District of Massachusetts |
Ropes, Gray, Best, Coolidge & Rugg, Harry K. Mansfield, Boston, Mass., for plaintiff.
Andrew A. Caffrey, Asst. U. S. Atty., Boston, Mass, for defendant.
This is an action to recover alleged overpayments by plaintiff on its federal income taxes for its fiscal years ending January 31, 1948, through January 31, 1955, inclusive. The sole issue involved is whether plaintiff is entitled to report for income tax purposes profits from sales of merchandise made under its Cycle Budget Account Plan in accordance with the installment method provided in § 44(a) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 44(a) and § 453(a) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 453(a).
Plaintiff is a corporation operating retail department stores at various locations in Massachusetts and New York. It reports its income on the accrual method of accounting. Its sales of merchandise to customers are made under several different arrangements for payment, in addition to the Cycle Budget plan to be described later. It sells for cash. It sells under a conventional charge account agreement under which merchandise purchased during one billing period is to be paid for in full prior to the next billing date. It also sells merchandise under conditional sales agreements under which payment is to be made in regular fixed installments until completely liquidated, with Consolidated retaining title and the right of repossession until the purchase price is paid in full.
The Cycle Budget Account Plan is a typical example of what is known in the merchandising field as a revolving credit plan. Under this plan the store by agreement with the customer establishes a credit limit for the customer, generally fixed at six times the monthly payments which it is determined the customer is able to pay. The customer may then purchase merchandise on credit up to this limit. The customer agrees to make the fixed monthly payment each month (together with a service charge of one per cent of the unpaid balance) so long as there remains any unpaid balance on the account. When a customer has made purchases up to the credit limit, no further purchases can be made on the account until the unpaid balance is reduced. Whenever the unpaid balance is less than the credit limit, the customer may make further purchases on credit until the credit limit is reached. If in any month charges are made to the account in excess of the credit limit, the customer at his next monthly payment must pay this excess in addition to the regular monthly payment.
The revolving credit plan seems to have first been used about 1938 and the use of plans of this general type by retail stores has become widespread since World War II. Sales under such a plan resemble sales under what may be called the traditional installment plan in that the purchaser makes payment by a series of payments at regular intervals over a period of time. There are some differences however between these sales and those under the traditional installment plan. The latter ordinarily involves a separate contract for each item of property purchased, providing for a series of payments specifically applicable to the purchase price of that piece of property. Usually the seller also retains some type of security interest in the property, such as reservation of a security title under a conditional sales agreement, until the property is fully paid for. Under the revolving credit plan there is no retention of any security interest and no specific contract as to each item purchased. The buyer's regular payments are not specifically attributable to the purchase price of any single item but only go to reduce the unpaid balance on what may be the total purchase price of several items purchased at different times.
The issue is whether the term "installment plan" as used in the statute is to be interpreted as applying only to the traditional installment plan, or whether it has a meaning broad enough to include a development or variation thereof such as the plaintiff's cycle budget plan.
The governing statutory provision contains no definition of what is meant by installment plan. There is no express definition included in the applicable Treasury Regulations. The government seeks to find support for its view that only the traditional type of installment plan is included by implications which it seeks to draw from certain language in these regulations. Treasury Regulations 65, Article 42, promulgated under the Revenue Act of 1924, Treasury Regulations 111, Section 29.44-1, promulgated under the Internal Revenue Code of 1939, Treasury Regulations 118, Section 39.44-1, promulgated under the Internal Revenue Code of 1939, and Treasury Regulations on Income Tax (1954 Code) Section 1.453-2, all contain references to the use by sellers on the installment plan of various methods used by dealers to protect themselves in case of default, such as retention of title by the vendor under a conditional sales agreement, lien agreements, chattel mortgage agreements or conveyance to a trustee. But nowhere do these regulations say that use of one of these devices is a necessary part of an installment sale. Regulations 65, 111 and 118 say only that dealers selling on the installment plan "usually adopt one of four ways of protecting themselves." The latest regulations under the 1954 Code state "A person who regularly sells personal property on the installment plan may adopt (but is not required to do so), one of the following four ways of protecting his interest in case of default by the purchaser:" This certainly does not make the retention of some sort of security interest by the seller, as government contends, an essential feature of an installment sale. The language of the earlier regulations is merely a description of what was at the time they were issued a feature of most installment sales since most such sales were then of the traditional type. It is significant that the language was changed in the 1954 Regulations. The new language amounts to a recognition that there have been changes in the business of...
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