The opinion of the court was delivered by: DUSEN
The trial judge makes the following Findings of Fact and Conclusions of Law:
Paragraphs 2, 3, 4, 5 (including Exhibit C attached to the complaint), 6, 7 (including Exhibit D attached to the complaint), 8, 9, 10, 11, 12 (including Exhibit A attached to the stipulation), 13, 14, 15, 16 (including Exhibit A attached to the complaint), 17, 18 (including Exhibit B attached to the complaint), and 19 of the stipulation filed January 16, 1957, and paragraphs 1, 2, 3, and 4 of the supplemental stipulation filed June 19, 1957, are adopted as the Findings of this court.
Section 44(c) of the Internal Revenue Code of 1939 (hereinafter called 'Code'), 26 U.S.C.A. § 44(c), provides as follows:
'(c) Change from accrual to installment basis. If a taxpayer entitled to the benefits of subsection (a) elects for any taxable year to report his net income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded.'
Where a taxpayer had used the accrual method of accounting in the years prior to this change to the installment basis provided for in § 44(a)
of the Code, the effect of this provision has been to subject the 'amounts actually received during any such year on account of sales * * * made in any prior year' to double taxation. This has been upheld as a valid exercise of legislative power not imposing an unconstitutional direct tax. See Willcuts v. Gradwohl, 8 Cir., 1932, 58 F.2d 587, rehearing denied 1932; Jackson Furniture Co. v. McLaughlin, 9 Cir., 1936, 85 F.2d 606, 608; Hoover-Bond Co. v. Denman, 6 Cir., 1932, 59 F.2d 909. See, also, Commissioner of Internal Revenue v. South Texas Lumber Co., 1948, 333 U.S. 496, 501-503, 68 S. Ct. 695, 92 L. Ed. 831.
Plaintiff contends that the sales by its subsidiaries,
Lowenstein and Maison Blanche, of installment accounts to the Union Bank and the National Bank, respectively, prevents the imposition of the second tax, since neither plaintiff nor its subsidiaries during the taxable year here involved 'actually received' any collections on such installment accounts.
Though the Commissioner of Internal Revenue refused to treat the transfer of plaintiff's installment accounts to the banks as sales effecting 'closed' transactions (stipulation, paragraph 13), the Appellate Division -- Philadelphia Region, Internal Revenue Service, 'conceded that the contracts transferring the installment receivables to the respective banks constituted sales of said receivables' (stipulation, paragraph 17).
Considering all of the circumstances,
particularly the creation of Installment Payment Reserve Accounts in both instruments by which plaintiff stood to lose substantial sums of money, and the principles of law in East Coast Equipment Co. v. Commissioner of Int. Rev., 3 Cir., 1955, 222 F.2d 676, 677,
the hearing judge concludes that these contracts did constitute sales effecting completed transactions.
Defendant, in the alternative, contends that if the transactions are sales, the requirement of § 41 of the 1939 Code, 26 U.S.C.A. § 41,
would be violated if the 'amounts actually received' under § 44(c) by plaintiff's subsidiaries from these installment sales during the taxable year were excluded from plaintiff's income tax return.
Further, defendant contends that Congress intended by § 44(c) to require the collections on installment accounts during the period of transition to be included in computing income during that period as a consequence of permitting a taxpayer to change his method of accounting from the accrual to the installment basis.
But since the collections made by plaintiff's subsidiaries on behalf of the purchasing banks, and the transmittal of such collections to ...