1. Sales of personal property; no limitation on the amount paid down or in the first year is provided, but the persons or corporations falling under this head must be in the business of selling goods on the instalment plan.

2. Casual sales of personal property for more than $1,000. The cash (and property, if any, other than evidences of indebtedness) paid in during the taxable period must not exceed 25% of the sales price if the instalment basis is to be followed.

3. Sales of real property, subject to the same 25% as in (2). Although title may pass to the buyer in any of the above cases, the right of repossession in the case of default is usually retained by the seller.

COMPUTATION OF INSTALMENT INCOME

Instalment income is obtained by computing "that proportion of the instalment payments actually received which the total profit realized and to be realized bears to the total contract price" (Sec. 212 (d)). Thus, an automobile dealer sells a car for $2,000, the buyer paying $600 cash, trading in an old car for $900, and giving notes for the balance of $500. If the car cost the dealer $1,500, the gross profit of $500 would be spread over the contract price which is the down-payment plus the notes, or $1,100. On each $100 paid by the customer there would be, therefore, a profit of 5/11, or $45.45.

Where the profit from the sale is greater than the contract price, the excess attaches to the evidences of indebtedness or assets traded in which make up the balance of sales price and becomes taxable immediately or at the date the evidences of indebtedness become effective. If the car in the above illustration had cost the dealer $600, $1,100 of the total profit of $1,400 would be assigned to the down-payment and the notes, while the balance of $300 would be realized immediately, unless it could be shown that the used car taken in exchange had a market value of less than $300.

It is to be presumed (1) that, in accordance with existing methods of accounting, the gross profit ratio which the law suggests may be separately computed for each sale or may be averaged for each year's sales and (2) that whether or not the books of a dealer or other person making instalment sales have been kept on the instalment basis, the new rules may be applied, provided the books are now adjusted.

THE 25% LIMITATION

The curiously illogical limitation of 25% in cases 2 and 3 has the effect of making some instalment sales (in the early part of the taxable period) equivalent to ordinary cash or credit sales. The limitation should be changed to read that the 25% applies to a 12 months' period following the date of the sale; or, better, the 25% limitation should be removed altogether. Dealers in personal property are not subject to the 25% limitation; why should dealers in real property be discriminated against?1 It may be urged that the underlying security of real estate dealers may be firmer; but the reason for the postponement of taxation lies not in the security for the unpaid debt but (1) in the lack of cash or its equivalent to pay the tax and (2) in the possibility of the non-payment of the balance of the debt. The 25% limitation first appeared in T. D. 2707, which was the original authority for the reporting of profit on the instalment basis. No reason for the particular percentage chosen seems to exist other than the "impression" that evidences of indebtedness accompanied by a more than 25% payment give a more readily realizable value to the unpaid portion of the transaction.

1 In reporting Sec. 212(d) to the Senate, the Committee on Finance stated (page 19): "The application of the instalment basis as provided in the committee amendment should eliminate necessity for appraisals of the obligations of the purchaser in deferred-payment sales, as required under the Board of Tax Appeals decisions, save in those cases where, because of a large initial payment, i.e., one in excess of 25 per cent of the price, the property sold and serving as security for the unpaid balance has a value adequate to give the obligations a market value."

Since the promulgation of T. D. 2707, sales on the instalment plan have increased enormously, and no better market exists for real estate paper than for paper taken in instalment sales of personal property.

To have limited personal property instalment sales to those in which the initial payments were less than 25% would have had the effect of excluding, of course, the great bulk of automobile sales, where trade-ins are an essential part of the sale.

REPORTING PROFITS TWICE

Another source of criticism lies in the double taxation of instalment receipts where a change is made to the instalment plan of reporting income. Article 42 states: "no payments received in the taxable year shall be excluded in computing the amount of income to be returned on the ground that they were received under a sale the total profit from which was returned as income during a taxable year or years prior to the change to the instalment basis of returning income." The underlying thought in Art. 42 is, however, sound. A change to the instalment basis is equivalent to a change from the accrual basis to a cash basis of reporting income. In the period or periods of transition the net income or profit from the business will be smaller than it would be if either of the two bases were followed. But it is not believed that the law authorized calling the same item income in two different years, however equitable, especially in prospect of a declining rate of tax, an averaging of income would appear to be. For example, in Appeal of B. B. Todd, Incorporated, 1 B. T. A. 762, net income of $57,410.87 for 1918, on the accrual basis, became a net loss of $10,401.93 on the instalment basis, the corporation having been established July I, 1918.

EVIDENCES OF INDEBTEDNESS

In the last two classes of instalment sales, "evidences of indebtedness" are not to be included as a part of the 25%

paid in; and it is impliedly apparent that such indebtedness is not to be regarded as the equivalent of cash. This additional implication is of importance, because the Board of Tax Appeals has held that certain sales of real estate involving the receipt of first and second mortgages in part payment were not instalment sales (1 B. T. A. 168, 548).

The Department has taken the position, however, that a mortgage shall not be regarded as a part of the initial payments or as a part of the total contract price, but that it shall be regarded as a part of the "purchase" price. These terms can be best defined through an illustration: A sells a lot to B on July 1, 1926, whereby B will pay A $25 cash down and $25 a month for 23 months, plus interest, and in addition will take title and assume a mortgage of $400 at the end of that time. The lot cost A $500, and his books are on a calendar year basis. Hence,

By the time the notes of $600 have been paid, A will have reported the entire $500 profit as income. If A had a fiscal year ending June 30, it should be noted that the above transaction would not be an instalment sale as defined by the act, inasmuch as $300, or $50 more than 25% of the "purchase price," would have been received in cash.

Expenses of instalment sales, including commissions, are not to be considered in the transaction; they are deductions in the year they are incurred or paid (Art. 42, 44; I. T. 2305).

Individuals making casual sales of real property are permitted to deduct "future expense liabilities" (Sec. 214 (a) II) along with the cost of the property. The same privilege has always been accorded by the Department to deal

ers in real estate, and will be doubtless be continued (O. D. 226, 567).

OTHER DEFERRED-PAYMENT SALES

Where a first payment of more than 25% is made, the notes or other evidences of indebtedness received for the balance are to be reported at their fair realizable value; but if they have no fair market value, the cash as received is to be applied in reduction of original cost until the latter is absorbed; thereafter cash received is income in its entirety (Art. 46).

This rule applies alike to deferred-payment sales of real and personal property, and of personal property which is the object of a "casual sale" as above defined.

REPOSSESSION

Upon default and repossession of the property, the instalments already received in cash, less the profit thereon already returned as income, and less any damages or depreciation while the property was in the possession of the buyer, must be shown as income in the year in which the repossession takes place (Art. 42, 45, 46).

CONTRACTS

Long-term contracts are like instalment sales in that cash receipts thereon may be spread over a period of several years. If the contract involves construction work there may be contingencies attaching to it, making an intermediate computation of profits impracticable. The Department has been liberal in prescribing rules for contractors to follow. The regulations outline two methods which are suggestive and not mandatory.

(a) Income may be reported on the basis of percentage of completion. Copies of engineers' or archi