W.T. Grant Co. v. Comm'r of Internal Revenue
| Decision Date | 15 May 1972 |
| Docket Number | Docket No. 1813-68. |
| Citation | 58 T.C. 290 |
| Parties | W. T. GRANT COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
A. Chauncey Newlin, David Sachs, and Michael H. Testa, for the petitioner.
Powell W. Holly, Jr., for the respondent.
The petitioner maintains a coupon book installment plan under which a book of coupons is paid for in installments, and the coupons may be exchanged for merchandise at any of the petitioner's stores. During 1964 and 1965, the petitioner also maintained plans under which certain employees were given the opportunity to purchase shares of the petitioner's stock and to pay for it over a 10-year period. Such stock was not to be issued until it was fully paid for. Before the stock was issued, the petitioner quarterly credited each participating employee's purchase account with certain net dividend credits. Held:
1. Sales under the coupon book installment plan qualify for installment reporting under sec. 453(a), I.R.C. 1954; and
2. The net dividend credits made by the petitioner under its employee stock purchase plans constituted compensation deductible under sec. 162(a)(1), I.R.C. 1954.
The respondent determined deficiencies in the petitioner's income tax for the taxable years ended January 31, 1964 and 1965, in the respective amounts of $4,594,199 and $5,376.267. Since the respondent has conceded one issue raised in the pleadings, the remaining issues for decision are: (1) Whether the petitioner's sales under its ‘Coupon Book Installment Plan’ qualify for installment method treatment under section 453 of the Internal Revenue Code of 1954,1 and (2) whether the petitioner is entitled to deduct certain amounts credited to the accounts of its employees under its employees stock purchase plans.
Most of the facts have been stipulated, and those facts are so found.
The petitioner, W. T. Grant Co., is a corporation, incorporated in 1937 under the laws of the State of Delaware, which had its principal office and place of business in New York, N.Y., at the time of filing its petition in this case. It duly filed its Federal income tax returns for its taxable years ended January 31, 1964, and January 31, 1965, with the district director of internal revenue, New York, N.Y. A taxable or fiscal year of the petitioner will be identified by the calendar year in which it ends.
The petitioner is engaged in the business of selling a wide variety of merchandise at retail through more than 1,000 stores located throughout the United States. For many years, the petitioner, in addition to cash sales, has made sales of merchandise under three credit plans. These credit plans are designated by the petitioner as ‘30-day Option Plan,‘ which is a revolving credit plan as defined in section 1.453-2(d) of the Income Tax Regulations; ‘Special Purchase Installment Plan,‘ which is a traditional installment plan as defined in section 1.453-2 of the regulations; and ‘Coupon Book Installment Plan.’ The Federal income tax treatment of the income derived under the first two of such plans is not in controversy, and it is agreed that the petitioner is a ‘dealer in personal property’ as such term is defined in the Income Tax Regulations, sec. 1.453-1(a)(1).
Although the tax treatment of the special purchase installment plan is not in controversy, an explanation of the plan is helpful. Under the special purchase installment plan, a customer purchases one or more articles of merchandise and agrees in a retail credit agreement to pay for the merchandise in equal monthly installments over a certain period of time. During 1964 and 1965, such period of time varied from a minimum of 9 months under some contracts to a maximum of 25 months under others. At the time of the sale, a service charge, which is called a time-price differential, is determined and included as part of the sales price in the agreement. The amount of the monthly payments is determined according to a terms table, and the payments may vary from $5 to $24 on sales from $35 to $500, respectively. Under this plan, the petitioner does not bill its customers. Rather, when he executes the credit agreement, the customer receives an installment payment card which he mails or presents monthly to the petitioner together with the appropriate monthly payment, and upon which the petitioner records the receipt of the monthly payment for the customer's records. Under this plan, the petitioner retains title to the merchandise until full payment is made.
Under the petitioner's coupon book installment plan, a customer who has established a satisfactory credit rating is issued a book of coupons, and these coupons are redeemable for merchandise. Such coupons are issued in books containing coupons in the total amounts of $10, $15, $20, $25, $35, $50, and $100. Each coupon book is numbered. At the time the coupon book is issued to the customer, the customer agrees in a retail credit agreement to make payments in equal monthly installments over a fixed period of time. The fixed periods vary between a minimum and a maximum number of months. Over the years, the limits have varied between a minimum of 4 months and a maximum of 25 months, commencing with the time of issuance of the coupon book. During 1964 and 1965, the minimum period was 4 months and the maximum period was 18 months. At the time of issuance of the coupon book to the customer and execution of the agreement, the time-price differential is determined as of such date and included as a part of the selling price in the agreement. In completing the agreement upon issuance of coupons under this plan, the words ‘coupon book,’ together with the serial number of the particular coupon book issued, are entered in the space provided for the description of the merchandise sold. The terms table used by the petitioner provides for monthly payments ranging between $5 and $10.
The petitioner does not bill its customers under the coupon book installment plan. Rather, the customer receives an installment payment card, identical to that used with respect to the special purchase installment plan, which he mails or presents monthly, together with the appropriate monthly payment to the petitioner, and upon which the petitioner records the receipt of the monthly payment for the customer's records. Coupons may be exchanged by the customer for merchandise at any of the petitioner's stores throughout the country, regardless of where such coupons are issued.
The retail credit agreements used under the coupon book installment plan are identical in most States to those utilized under the special purchase installment plan and provide that the petitioner retains title to the merchandise sold thereunder until full payment is made. In New York, California, Delaware, and Oregon, State law does not permit title retention where merchandise is sold in exchange for coupons, and the form of retail credit agreement used in such States omits such a provision. Under both plans, the customer may pay installments in advance if he so desires, but such anticipation of the payments does not reduce the amount to be paid on each monthly payment due after the due dates of the prepaid payments; the customer may prepay the full balance due under the retail credit agreement, in that event, he receives a proportional refund credit of part of the time-price differential as required by applicable State law; a customer may return merchandise or unused coupons, in that event, the amount due under the retail credit agreement and the time-price differential will be appropriately reduced; and a customer may enter into a new retail credit agreement before the final installment under a prior agreement is due, in that event, the new agreement will incorporate the prior balance due and will include a new time-price differential determined at the time of signing the new agreement with reference to the new principal amount thereunder.
The petitioner records its sales under both the special purchase installment plan and the coupon book installment plan on the same forms and does not distinguish between the two plans for bookkeeping and accounting purposes. It maintains a ledger history card for each credit customer and posts sales of merchandise or issuance of coupons to such customer on such card. The same chapter in the petitioner's credit manual describes the petitioner's office procedures in handling sales under both plans.
Since each coupon book is numbered, it is identifiable to a particular installment contract. However, due to the enormous volume of coupons exchanged for merchandise, the petitioner does not identify and record the exchange of each coupon by account. Each store prepares a report for each business day for monthly submission to the petitioner's central accounting department showing the aggregate dollar value information relative to coupons issued and finance charges, coupons exchanged for merchandise, and payments received on installment contracts. The petitioner's central accounting department then accounts for all such transactions as follows:
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