Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-5

1973-1 C.B. 212

Sec. 453

IRS Headnote

A manufacturer selling its products through franchised dealers operating on a consignment basis qualifies as a dealer in personal property and is eligible to report income from time sales on the installment method.

Full Text

Rev. Rul. 73-5

Advice has been requested whether a manufacturer, M, which makes time sales of its products through franchised dealers operating on a consignment basis, may use the installment method of accounting pursuant to section 453(a) of the Internal Revenue Code of 1954 in reporting its income from these sales.

M sells its products to ultimate consumers through franchised dealers. The franchised dealers' contract provides that merchandise is to be held for sale on consignment, title to remain in M until the merchandise is sold, and the entire proceeds of sale, subject to certain exceptions in the case of time sales, belong to M. Upon demand, M may repossess any consigned merchandise, and such merchandise may be returned to M by the franchised dealers at any time. The contract of sale used by the franchised dealers is required to be on a form furnished or approved by M, and names M as the seller and the consumer as the buyer. On cash sales, the full amount due M must be paid in cash. On time sales, the franchised dealers are required to deliver to M the contracts taken from consumers for deferred purchase money. The consumer makes a down payment (cash, trade in, or combination of both) equal in value to at least ten percent of the purchase price. The franchise dealer retains any down payment not to exceed the total amount to which he is entitled under the agreement. All payments other than the downpayments are made by the consumers directly to M. When M has received the full amount due it, all remaining payments are credited to the franchised dealer as received.

Under the above facts, the sales by M are made to the ultimate consumers, with the franchised dealers acting as M's selling agents and receiving a commission therefor.

Section 453(a) of the Code permits dealers in personal property, that is, persons who regularly sell or otherwise dispose of personal property on the installment plan, to elect to return the income therefrom using the installment method. Section 1.453-2(b) of the Income Tax Regulations defines "sale on the installment plan" as a sale of personal property under a plan which contemplates that each sale will be paid for in two or more payments. Since M's selling plan contemplates that, in the case of a time sale, M will be paid in two or more payments, the plan is an installment plan within the meaning of section 1.453-2(b) of the regulations.

Accordingly, in the instant case, M qualifies as a dealer in personal property and is eligible to report its income from time sales on the installment method. (Thus, if M's installment sales (including the down payments) for 1970 totaled 800x dollars, down payments were 80x dollars, and "add on" finance charges at the time of sale were 200x dollars, the total of the contract prices for the purpose of determining gross profit on the installment sales would be 1,000x dollars (800x dollars plus 200x dollars). If the cost of sales was 400x dollars, the gross profit is 600x dollars or 60 percent of the total of the contract prices. Thus, 60 percent of each payment (including the down payment) is includible in M's gross income. Commissions, including any down payments retained by the dealers, are deductible by M when paid or accrued under the agreement.

A taxpayer who desires to compute income by the installment method must maintain accounting records in such a manner as to enable an accurate computation to be made by such method in accordance with section 446 of the Code and sections 1.446-1 and 1.453-2 of the regulations. See Rev. Rul. 54-111, 1954-1 C.B. 76, and section 1.453-1(f) of the regulations.