PAYMENT SCHEDULE OF CORPORATION SELLING PERSONAL PROPERTY WILL NOT QUALIFY FOR TREATMENT AS SALES ON THE INSTALLMENT PLAN.

Rev. Rul. 87-48

ISSUE

Under what circumstances does a dealer's plan, by its terms and conditions, contemplate that each sale under the plan will be paid for in two or more payments within the meaning of section 1.453-2(b)(1) of the Income Tax Regulations?

FACTS

X, a corporation, is a calendar year taxpayer engaged in the business of selling personal property. X's sales terms require payment of 90 percent of the invoice amount within 30 days of the invoice date and payment of the remaining 10 percent within 40 days of the invoice date. Of X's sales made during its tax year under these terms, approximately 50 percent were paid for in one payment. The remaining sales were paid for in two payments.

LAW AND ANALYSIS

Section 543A(a)(1) of the Code provides that, under regulations prescribed by the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may report income from installment sales on the installment method.

Section 1.453-2(b) of the Income Tax Regulations defines "sale on the installment plan" for dealers in personal property as:

(1) A sale of personal property by the taxpayer under any plan for the sale or other disposition of personal property which plan, by its terms and conditions, contemplates that each sale under the plan will be paid for in two or more payments.

(2) A sale of personal property by the taxpayer under any plan for the sale or other disposition of personal property --

(i) Which plan, by its terms and conditions, contemplates that such sale will be paid for in two or more payments, and

(ii) Which sale is in fact for in two or more payments.

In W.T. Grant Co. v. Commissioner, 483 F.2d 1115, 1118 (2d Cir. 1973), cert. denied, 416 U.S. 937 (1974), the court explained the distinction drawn in the regulations as follows:

To qualify for the benefits of installment reporting the taxpayer has the obligation of showing that he is one of the intended beneficiaries of section 453, that in fact gain realized on his sales will be received in installments.

The primary distinction between section 1.453-2(b)(1) and section 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 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. (Citation omitted)

Thus, for purposes of section 1.453-2(b)(1) of the regulations, if a plan, by its terms and conditions, contemplates that each sale under the plan will be paid for in two or more payments, the Commissioner will accept the provisions for periodic payments as establishing the fact of such payments. If, however, it cannot reasonably be expected that, in general, customers will make two or more payments, the Commissioner will not accept the plan provisions as establishing the fact of multiple payments. In such a case, the plan, by its terms and conditions, does not contemplate that each sale will be paid for in two or more payments.

In this case, the scheduled payment dates are separated only by a short period of time. Therefore, it is reasonable to expect that customers would find it more convenient to make a single payment of the total invoice amount. The period between scheduled payments is so short and the amount of the second payment so small that the convenience of making a single payment outweighs the relatively insignificant financial advantage of delaying payment of the remaining 10 percent of the invoice amount. Under these circumstances, X could not reasonably expect that, in general, customers would make two or more payments. In fact, approximately 50 percent of all sales made under the plan during the tax year were paid for in a single lump sum. Accordingly, the plan does not, by its terms and conditions, contemplate that each sale under the plan will be paid for in two or more payments. The plan does contemplate that some, but not all, sales will be paid for in two or more payments. Therefore, those sales that are in fact paid for in two or more payments. Therefore, those sales that are in fact paid for in two or more payments (regardless of whether such payments are made on the dates specified under the plan) qualify as sales on the installment plan as defined in section 1.453- 2(b)(2) of the regulations.

HOLDING

Not all sales by a dealer under a plan qualify for treatment as sales on the installment plan unless the plan, by its terms and conditions, contemplates that each sale will be paid for in two or more payments. The determination of whether the terms and conditions of a plan contemplate that each sale will be paid for in two or more payments is made based upon all the facts and circumstances. If a dealer cannot reasonably expect that, in general, customers will pay for sales in two or more payments, the plan does not, by its terms and conditions, contemplate that each sale will be paid for in two or more payments. In such a case, the dealer will be permitted to report as sales on the installment plan only those sales that are in fact paid for in two or more payments.

Any change in a taxpayer's method of accounting to conform to the holding of this is a change in method of accounting to which the provisions of sections 446 and 481 apply. Taxpayers complying with the conditions of Rev. Proc. 87-29, page 42, this Bulletin, will be deemed to have obtained the consent of the Commissioner of Internal revenue to change their method of accounting to conform to the holding of this ruling. This ruling is identified as a designated ruling pursuant to section 5.12(2) of Rev. Proc. 84-74, 1984-2 C.B. 736.

PROSPECTIVE APPLICATION

Under the authority contained in section 7805(b) of the Code, this revenue ruling does not apply to tax years beginning before June 22, 1987, the date of publication of this revenue ruling.