The Installment Method for Retailers
BY OLEN W. CHRISTOPHERSON Partner, Milwaukee Office
Presented at Marquette University Annual Institute
on Taxation, Milwaukee — October 1960
AN "INSTALLMENT PLAN" SALE is any sale of real or personal property • in which parts of the selling price are payable at stated intervals. The transaction may take the form of. a conditional sale, a sale with purchase money mortgage, etc., and it is immaterial when title passes. Profits from lease-purchase arrangements treated as sales for tax purposes under Revenue Ruling 55-5401 may be reported on the installment
Installment paper may be interest-bearing (written for the amount of the sales price but requiring the payment of interest), it may take the form of discount paper (in which a charge for the use of the money is included in the face amount of the instrument), or it may be for the sale price only with no provision for interest or discount. In the case of discount paper the total amount of the installment obligation includes
a charge for delayed payments as well as the seller's usual gross profit from the sale.
The installment method of accounting is authorized by Section 453 of the Internal Revenue Code. Section 453(a) permits a dealer in personal property (a person who regularly sells personal property on the installment plan) to return as income from installment sales in any taxable year that proportion of the installment payments actually received in such year determined by the ratio of the gross profit to the total contract price. Section 453(b) permits similar treatment for sales of real estate and for casual sales of personal property for a price exceeding $1,000, provided payments in the year of sale do not exceed 30 per cent of the selling price.
A change from the accrual basis to the installment basis is governed by Section 453(c). If a taxpayer elects for any taxable year to report his taxable income on the installment basis, then in computing
his taxable income for such year (or for any subsequent year) installment payments actually received during the year for sales made prior to the year of change shall not be excluded, but the tax is to be reduced by an "adjustment," which is the tax attributable to the item
1 Rev Rul 55-540 (CB 1955-2, 39).