UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
decided: August 22, 1973.
W. T. GRANT COMPANY, APPELLEE
COMMISSIONER OF INTERNAL REVENUE, APPELLANT
Smith, Mulligan and Timbers, Circuit Judges.
SMITH, Circuit Judge:
The Commissioner of Internal Revenue appeals from a decision of the Tax Court, Charles R. Simpson, Judge, reviewed by the court, reported at 58 T.C. 290 (1972), holding that taxpayer's sales under its Coupon Book Installment Plan qualify for installment method treatment under § 453 of the Internal Revenue Code of 1954. We find that the sales do not qualify under the Code*fn1 and the regulations*fn2 and reverse.
The facts are found in the Tax Court opinion and may be summarized as follows.
Grant's provides its customers with three basic credit plans: (a) Special Purchase Installment Plan, a traditional single item installment plan; (b) 30-day Option Plan, a typical revolving credit plan; and (c) the Coupon Book Installment Plan, the plan at issue. Under the Special Purchase Installment Plan the customer enters into a retail credit agreement for individual purchases, and agrees to pay equal monthly installments over a fixed period of time. A service charge is included as part of the selling price. For the term of the contract, Grant's retains a security interest in the item purchased.
The 30-Day Option Plan allows a customer, through use of a credit card, to charge to his account sales during the billing month which he may pay fully within thirty days without a service charge, or may elect to pay at least 10 per cent of the balance in the account each month. With this election the customer incurs a service charge calculated each month on the outstanding balance in the account. No security interest is retained in the merchandise.
Under the Coupon Book Installment Plan customers deemed good credit risks are given the opportunity to purchase coupon books whose coupons may be redeemed for merchandise in any Grant's store. The books vary in value from $10 to $100 and contain coupons of various denominations.*fn3 The books may be paid for in full or over a period of time pursuant to a retail credit agreement in which the customer agrees to pay a certain time price differential in addition to prescribed monthly payments. In the tax years in question the period was a minimum of four months, a maximum of eighteen months. During this period the coupons may be redeemed at any time and in any amount. Return of the coupons or merchandise, or payment in full of the outstanding balance of the obligation results in a reduction in the amount due, as well as a proportionate reduction in the time price differential.*fn4
Grant's accounts for the special purchase plan sales and coupon books redemption in an identical manner. Sales under the coupon plan are deemed to occur when the coupons are redeemed, not when the coupon books are initially sold. The retail credit agreement, however, does indicate that the book is the item sold on which credit is extended. Grant's does not keep records of coupon redemption for each customer account. Thus there is no means of correlating the sales of merchandise items to the installment payments.
The Tax Court found that the coupon book was an installment sale, a "sales arrangement whereby the selling price is collected in periodical installments" and "the selling of consumer goods on credit under conditional sales contracts that provided for regular periodic payments after an initial down payment." The court resorted to the "common understanding of installment sale" as was done in Consolidated Dry Goods Co. v. United States, 180 F. Supp. 878 (D. Mass. 1960). In Consolidated Dry Goods, however, this was resorted to solely for lack of either a statutory or regulatory definition of installment sale. Regulatory definitions were quickly drawn up in response to Consolidated Dry Goods. Congress in 1964 first adopted, but soon repealed a statutory definition, preferring to rely on the regulation. See 1964 U.S. Code Cong. & Admin. News p. 3320, S. Rep. No. 1242, 88th Cong., 2d Sess. Any determination, therefore, of Grant's qualifying for § 453 treatment must be made in the context of the regulations. § 1.453-2(b) (1), (2).
Traditional installments sales, as characterized in § 453(1) (a) are covered by Treas. Reg. § 1.453-2(b) (1). Normally under these plans a separate contract is executed for each sale of personal property, and a security interest is retained in the property. Typical of such sales is the conditional sales contract. Sales falling within the second definition, § 1.453-2(b) (2) include -- contingent on certain proof*fn5 -- revolving credit plans, cycle budget accounts, flexible budget accounts, and other similar plans or arrangements for the sale of personal property under which the customer agrees to pay each billing month a part of the outstanding balance of his account.
Installment reporting was enacted as a relief provision to allow a merchant first to actually realize profits arising from deferred payment transactions before requiring that a tax be paid on the gain. Prendergast v. Commissioner, 22 BTA 1259, 1262 (1931). To qualify for the benefits of installment reporting the taxpayer has the obligation of showing that he is one of the intended beneficiaries of § 453, that in fact gain realized on his sales will be received in installments.
The primary distinction between § 1.453-2(b) (1) and § 1.453-2(b) (2) sales on installment plans focuses on this obligation of the taxpayer. Where there is a separate contract for each sale in which the parties contract for installment payments for the purchase of a particular item, the Commissioner will accept the provision for periodic payments as establishing such payments. Where, however, the parties' contract covers a number of sales no specific intent is demonstrated as to any particular purchase; it is not unlikely then that while installment payments may be made on a great number of the sales, some will be paid in single payments. As intent cannot be demonstrated specifically proof of actual multiple payments is required. See S. Rep. No. 1242, supra, at 3320-22; Emory, The Installment Method of Reporting Income: Its Election, Use and Effect, 53 Cornell L. Rev. 181, 262-63 (1968).
The Congress, in the Revenue Act of 1964, as noted above, initially adopted the position suggested by the Tax Court here, and provided a statutory definition of installment sale so as to extend § 453 "to income received under any plan which provides for the payment by the purchaser for personal property sold to him in a series of periodic installments of an agreed part or installment of the debt due the seller." Exception was made for sales essentially made as an ordinary charge account. See 1964 U.S. Code Cong. & Admin. News at pp. 1771-72. Within the same year, however, the statutory definition was repealed, the Congress concluding "that it would have been better to have left the Treasury Department with the opportunity to determine by regulation the extent to which sales under revolving credit type plans are to be treated as sales under installment plans." S. Rep. No. 1242, supra, at 3322.
In the context of the regulation's definitions the similarities between the Special Purchase Installment Plan and the Coupon Book Installment Plan relied on by the Tax Court and appellee are of little significance. While the company uses the same accounting procedures for both plans, the basic distinction still exists -- contract and accounts under the special purchase plan apply to a single sale item and thus reflect an intent as to the specific purchase and clearly correlate payments to individual sales while there is no correlation of payment and purchase under the coupon book plan.*fn6
Underlying the court's decision in the case at bar was the assumption that when a customer purchases a coupon book he is doing so in order to acquire an aggregate purchase of merchandise and to pay for it in installments. It discounted the possibility of small individual purchases that would be covered by the monthly payments, or delayed redemptions, finding it unreasonable to believe that customers would incur an added finance charge without taking advantage of the extension of credit. Yet while it is true that overall the records of the company indicate that a great number of the coupons are redeemed quickly and frequently in a period of one month, there is evidence that a significant number are not immediately redeemed.*fn7
The evidence suggests the possibility that redemptions could be covered by single or prior payments. The proof procedures provided in § 1.453-2(d) were designed to cover this situation -- sales where a large number are expected to be paid and are paid in installments,*fn8 but may also be and are in some cases paid in full.*fn9 The intent of Congress is clear; § 453 is to be extended to revolving credit plans, such as Grant's subject however to the regulation and proof requirements deemed warranted by the Commissioner. At least some and possibly a substantial number of the purchases in the last month of the tax year are covered by a single month's payment and were not intended to be the basis for tax deferral.
Grant's chose the merchandising coupons method to avoid the expense and inefficiency of a separate credit contract for each small purchase; in doing so it lost the protection of the traditional installment sales presumption of periodic payment.*fn10
"A dealer who desires to compute income by the installment method shall maintain accounting records in such a manner as to enable an accurate computation to be made by such a method in accordance with the provisions of this section. . . ." Treas. Reg. § 1.453-2(c) (1). Grant's might either have used separate contracts or kept customer accounts of redemptions. It did neither and therefore cannot prove that it is eligible for § 453 relief. Tax deferral should not have been granted.
Reversed and remanded.
Reversed and remanded.