Johnson v. Commissioner of Internal Revenue
| Decision Date | 18 May 1956 |
| Docket Number | No. 7166.,7166. |
| Parties | Blaine JOHNSON and his wife, Evelyn K. Johnson, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Albert Simons, Jr., and Huger Sinkler, Charleston, S. C. (Sinkler, Gibbs & Simons, Charleston, S. C., on brief), for petitioners.
Carolyn R. Just, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and Robert N Anderson, Attys., Dept. of Justice, Washington, D. C., on brief), for respondent.
Before PARKER, Chief Judge, SOPER, Circuit Judge, and THOMSEN, District Judge.
The principal question on this petition to review a decision of the Tax Court is whether amounts withheld by finance companies purchasing notes from taxpayer, an accrual basis trailer dealer, and set up and credited to his "dealer's reserve" account on the companies' books as reserves against possible losses, pursuant to agreements between the companies and taxpayer, should be considered taxable income to him (a) in the years in which they are so credited, or (b) in the years in which they become payable to him under the terms of the agreements.
The essential facts are not disputed. Blaine Johnson, whom we will call taxpayer, and his wife filed joint returns for the calendar years 1949 and 1950. From 1946 through 1948, taxpayer and J. B. Coffey, as partners, had bought and sold new and used trailers. As of January 1, 1949, taxpayer purchased Coffey's interest in the partnership, and thereafter operated the business as a sole proprietorship, with his principal place of business at Charleston, South Carolina. He sold almost all of his trailers on the instalment basis; the purchaser would execute a note for the unpaid purchase price, plus insurance, interest, and, in some cases, other charges, and give a chattel mortgage on the trailer as security for payment of the note. These notes and security instruments were executed on forms furnished by the several banks and finance companies with whom taxpayer had arrangements to discount such paper. Taxpayer generally endorsed the notes to the finance company either with recourse or with his guaranty of the unpaid balance of the note. Taxpayer was liable for all amounts that were unpaid on the notes.
The partnership of taxpayer and Coffey had made oral agreements with Lower Main Street Bank and Pioneer Finance Company, and in October, 1948, entered into a written agreement with Minnehoma Finance Company for the sale of such notes. Taxpayer continued these agreements after January 1, 1949, and entered into new oral agreements with Michigan National Bank and Union Bank of Michigan. Taxpayer was not required to do business with any of these companies, although Minnehoma had been organized to assist dealers in financing retail contracts obtained through the sale of a certain brand of house trailers.
As each note was transferred to a finance company, it would remit to taxpayer the balance due him on the selling price of the trailer, less whatever amount was credited on its books to taxpayer's reserve account. In financing these trailer notes, the several finance companies did not give consideration to the fair market value of the individual notes, but purchased all of them at the rate and on the terms fixed by their respective agreements. The amount withheld and credited to the reserve account was usually 5 percent of the unpaid balance on each note, although the percentage varied with the company, the kind of trailer, and the length of the finance period.
The original agreement with Minnehoma, executed on October 4, 1948, did not provide for withholding a portion of the note as a reserve, but it was amended on February 16, 1949, to set up a reserve account to which 5 percent of the unpaid note plus one-sixth of the finance charge would be credited. The establishment of this account was required by the financial institution which financed Minnehoma. New agreements dated May 24, 1950, and November 1, 1950, respectively, provided that the discounted portion of the note was still to be credited to the reserve account, but Minnehoma also agreed to place part of the finance charge in the reserve account.
Each of the agreements provided that if a retail purchaser's contract became due and unpaid, the finance company could charge taxpayer's reserve with the unpaid balance; that if taxpayer had a matured financial obligation of any nature to the company, the amount of the obligation could be charged to the reserve; and that repossession losses could be charged to the reserve. All the agreements provided that the ultimate balance in the reserve account would be paid to taxpayer whenever all indebtedness for which it was security had been discharged.
Pioneer and Union also agreed that they would pay taxpayer from time to time any portion of the reserve which exceeded 10 percent of the total balance outstanding on the notes. The corresponding percentage for Minnehoma was originally 20 percent and was later changed to 15 percent. Michigan agreed to return all sums in the reserve in excess of 10 percent of the gross unpaid balance of all contracts outstanding on March 31 of each year if, in the bank's opinion, taxpayer was in good standing.
A typical transaction may be illustrated as follows:
Sales price of trailer .......... $4,500.00
Down payment or trade-in allowance
................................ 1,500.00
Balance due taxpayer ............. $3,000.00
Insurance for one year ........... 90.00
_________
$3,090.00
Interest on note for 48 months
($3,090.00 at 6% for 4
years) ......................... 741.60
_________
$3,831.60
Insurance on remainder of
loan ........................... 270.00
_________
Total amount of note ............. $4,101.60
=========
Balance due taxpayer ............. $3,000.00
Credited to taxpayer's reserve
................................ 150.00
_________
Cash paid taxpayer by finance
company ........................ $2,850.00
=========
During the tax years involved taxpayer recorded such a transaction on his books as follows:
Cash ................... $1,500.00
Contracts receivable
— Finance Co. ........ 3,000.00
Trailer sales ..................... $4,500.00
When the finance company remitted its check, the following entry was made:
Cash ................ $2,850.00
Finance reserve .... 150.00
Contracts receivable — Finance
Co. .......................... $3,000.00
On taxpayer's books of account and tax returns his sales were recorded on an accrual basis.
On December 31 of each year, when taxpayer's books were closed for the purpose of determining profit or loss for the year, the "Finance Reserve" account was closed to "Profit and Loss". When taxpayer received any portion of the reserves held by the finance companies, he credited the "Finance Reserve" account. On his tax returns and financial statements, the debits to the "Finance Reserve" account for notes sold were deducted from gross sales and the credits in the "Finance Reserve" account were shown as other income.
When taxpayer purchased Coffey's interest in the partnership, he acquired the benefits and obligations of the Lower Main, Minnehoma, and Pioneer agreements. On that date the aggregate of the reserves with Lower Main and Pioneer, which were the only dealer reserves of the partnership, amounted to $11,220.27. This amount was received by taxpayer from Lower Main and Pioneer in three payments: $2,984.78 in 1949, $1,673.42 in 1950, and $6,562.07 in 1951. Prior to January 1, 1949, the reserves had been carried on the books of the partnership as accounts receivable. The amounts added to the reserves prior to that date were considered as income when credited, and therefore were not reported as taxable income by taxpayer when collected in 1949, 1950, and 1951. In addition to the above amounts, taxpayer received from reserves with Lower Main and Pioneer $2,000.08 in 1951 and $2,115.41 in 1952, which amounts were reported by taxpayer as taxable income in the returns filed by him and his wife for those years. Prior to filing the return for 1949, the first year during which taxpayer had operated the trailer business as a sole proprietorship, taxpayer's accountant concluded that the reserves withheld by the finance companies should be treated as deductions from sales, and set up taxpayer's books to reflect this accounting method. He testified that before making out the returns he ascertained that the trailer industry generally treated dealer finance discounts in that way.
In the balance sheets for 1949 through 1952, which were used for credit purposes, taxpayer showed the reserve accounts as assets of his trailer business. The 1949 balance sheet did not include as an asset reserves deducted by the finance companies during 1949. The balance sheets for 1950, 1951, and 1952 included the accumulated reserves as an asset, with a footnote that since January 1, 1949, the reserve deductions had been treated as a deduction from income on the profit and loss statements. The accumulated reserves were shown in this way on the 1950, 1951, and 1952 statements because the finance companies had requested that the accumulated reserves be shown on the statements in this manner.
During the calendar years 1949 and 1950 taxpayer was at no time delinquent in any payments due the finance companies, and most of the trailer purchasers were paying their notes when due. However, in 1949 and 1950 a number of delinquent notes were charged to...
To continue reading
Request your trial
-
Hansen v. Commissioner of Internal Revenue
...v. Comm'r, 5 Cir., 1958, 257 F.2d 810; Texas Trailercoach v. Comm'r, 5 Cir., 1958, 251 F.2d 395, reversing 27 T.C. 575; Johnson v. Comm'r, 4 Cir., 1956, 233 F.2d 952; Modern Olds v. United States, D.C.N.D. Tex.1957; Hines Pontiac v. United States, D.C.N.D.Tex.1957; Massey Motors v. United S......
-
Banks v. Commissioner, Docket No. 42724.
... ... 1937 to 1947, inclusive, petitioner filed Federal income tax returns with the collector of internal revenue for the district of Minnesota ... Petitioner did not file any Federal ... 2d 293, 295 (C. A. 9), certiorari denied 344 U. S. 820; Blaine Johnson Dec. 21,300, 25 T. C. 123, 130, affirmed 56-2 USTC ¶ 9608 233 F. 2d 952, 956 (C. A. 4); Treasury ... ...
-
Bolling v. CIR
...United States, 256 F.2d 456 (4 Cir. 1958). That decision, however, predated Hansen. Further, the court there followed Johnson v. Commissioner, 233 F.2d 952 (4 Cir. 1956), and Texas Trailercoach, Inc. v. Commissioner, 251 F.2d 395 (5 Cir. 1958), both of which were classified by the Supreme C......
-
Schaeffer v. Commissioner of Internal Rev.
...litigation. The petitioners' contention that the credits did not accrue as income in 1952 and 1953 finds support in Johnson v. Commissioner, 4 Cir., 233 F.2d 952; Texas Trailercoach, Inc., v. Commissioner, 5 Cir., 251 F.2d 395; and Glover v. Commissioner, 8 Cir., 253 F.2d 735. See also: Com......