Rev. Rul. 64-126

Advice has been requested whether a dealer, who regularly sells personal property on the installment plan and reports income therefrom on the installment method of accounting, in computing gross profit, must include, as a part of the `total contract price' of each article sold, the `carrying charge' which is determined at the time of the sale and added to the established cash selling price of the article.

The taxpayer is a dealer who regularly sells personal property at retail on an installment payment plan and has elected to report income therefrom on the installment method of accounting. Chattel mortgages on the merchandise sold are received from the purchasers. At the time an article is sold on the installment payment plan, for each individual sale there is determined a `carrying charge.' The `carrying charge' is based upon the unpaid balance of the established cash selling price after deduction of the down payment and upon the length of time provided for payment of that balance. The purchaser makes his installment payments on the combined total of the unpaid balance and the `carrying charge.' In the case of accelerated payment of an installment obligation, a proportionate adjustment is made in the `carrying charge.'

Section 453(a) of the Internal Revenue Code of 1954 provides that a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit, realized or to be realized when payment is completed, bears to the total contract price. Section 1.453-1(b) of the Income Tax Regulations provides that, for this purpose, gross profit means sales less cost of goods sold.

Section 1.453-2(b) of the regulations provides that the income from installment sales of a dealer, that is, a person regularly engaged in the sale of personal property on the installment plan, may be ascertained by treating as income that proportion of the total payments received in the taxable year from installment sales (such payments being allocated to the year against the sales of which they apply) which the gross profit realized or to be realized on the total installment sales made during each year bears to the total contract price of all such sales made during that respective year.

In Weyand Furniture Company v. Commissioner , Tax Court Memorandum Opinion, entered August 30, 1951, the court held, as far as here pertinent, that the carrying charges there considered (determined in a similar manner to the instant case) were part of the selling price (`total contract price'). The court stated, in part, as follows:

* * * The carrying charge here in question is * * * an amount in addition to the cash selling price charged essentially to defray the expense of handling the installment sales, Anderson & Co. , 6 B.T.A. 713, constituting part of the selling price, and as such should have been accrued at the time the sale was made. Anderson & Co., supra . * * * This is true even though a rebate would result from a prepayment of the contract price. Helvering v. Nibley-Mimmaugh Lumber Co. , 70 F.2d 843.

While the Weyand case does not involve the installment method of accounting, it does involve a principle which is equally applicable in the instant case, that is, that the `carrying charge' is a part of the `total contract price' of each installment sale.

Accordingly, it is held that, in computing the gross profit on installment sales, the taxpayer must include the `carrying charge' determined at the time of each installment sale and added to the established cash selling price as part of the `total contract price' of the articles sold. Further, any change in the amount of the `carrying charge' in a year subsequent to the sale will not affect the computation of the gross profit for the year of the sale but will be taken into account at the time the `carrying charge' is adjusted.

In the case of disposition of such installment obligations, see section 1.453-9 of the regulations.