Music Trade Review
Issue: 1925 Vol. 80 N. 6 - Page 3
Music Trade Review -- © mbsi.org, arcade-museum.com -- digitized with support from namm.org
REVIEW
THE
VOL. LXXX. No. 6
Piblwhed Every Satirday. Edward Lyman Bill, Inc., 383 Madison Ave., New York, N. Y. Feb. 7,1925
sln
«JI.^°K r "
Solving the Instalment Sale Problem
in the 1924 Income Tax
An Analysis of the Regulations Issued by the Treasury Department Governing the Sale of Musical Instru-
ments on Time Payments and the Methods by Which Gross Profit Must Be Reported by the
Merchant in His Income Tax—An Article by Frank J. Langley, C. P. A.
ECENT legislative changes in the income
tax laws and contemplated changes bring
to the fore the necessity for the proper
procedure in reporting profits from time pay-
ment sales. The reduction in tax rates in the
1924 revenue law and the impending reductions
are most important to the music merchant who
sells for the most part on the instalment plan.
In the final analysis profits are not realized
until a transaction is closed by cash or its
equivalent, hence the piano merchant who re-
ports his profits before they are fully realized
is at a distinct disadvantage. Government regu-
lations are provided especially so that a mer-
chant selling on time payments is amply pro-
tected. A clear understanding of these regu-
lations is very important.
The Treasury Department regulations gov-
erning the sale of personal property (pianos,
etc.) on the instalment plan are as follows:
Dealers in personal property ordinarily sell
either for cash or on the personal credit of
the buyer or on the instalment plan. Occasion-
ally a fourth type of sale is met with in which
the buyer makes an initial payment of such a
substantial nature (for example, a payment of
more than 25 per cent) that the sale, though
involving deferred payments, is not one on the
instalment plan. Dealers in personal property
who sell on the instalment plan usually adopt
one of four ways of protecting themselves in
case of default: (a) By an agreement that title
is to remain in the seller until the buyer has
completely performed his part of the transac-
tion; (b) by a form of contract in which title
is conveyed to the purchaser immediately, but
subject to a lien for the unpaid portion of the
purchase price; (c) by a present transfer of
title to the purchaser, who at the same time
executes a reconveyance in the form of a chat-
tel mortgage to the seller; or (d) by convey-
ance to a trustee pending performance of the
contract and subject to its provisions. The
general purpose and effect being the same in
all these plans, it is desirable that a uniformly
applicable rule be established.
The rule prescribed is that in the sale or con-
tract for sale of personal property on the in-
stalment plan, whether or not title remains in
the vendor until the property is fully paid for,
the income to be returned by the vendor will
be that proportion of each instalment payment
which the gross profit to be realized when the
R
property is paid for bears to the gross contract
price. Such income may be ascertained by
taking as profit that proportion of the total
cash collections received in the taxable year
from instalment sales (such collections being
allocated to the year against the sales of which
r
HE retail music trade because of its
instalment selling feature involves many
complicated income tax problems and it is
extremely important that the income tax
reports of the merchants be made out in
strict conformity ivith the law. For this
reason The Review has inaugurated a spe-
cial tax service for its readers, in charge
of an income tax expert who has had practi-
cal experience in the music industry.
If
you are in doubt regarding your report,
your inquiries should be addressed to Tax
Editor, Music Trade Review, 383 Madison
avenue, New York.
they apply) which the annual gross profit to
be realized on the total instalment sales made
during each year bears to the gross contract
price of all such sales made during that re-
spective year.
In any case, when the gross profit to be
realized on a sale of personal property has been
reported as income for the year in which the
transaction occurred, and a change is made to
the instalment plan of computing net income,
no part of any instalment payment received
subsequent to the change, representing income
previously reported on account of such transac-
tion, should be reported as income for the year
in which the instalment payment is received.
The intent and purpose of this provision is that
where the entire profit from instalment sales
has been included in gross income for the year
in which the sale was made no part of the
instalment payments received subsequently on
account of such previous sales shall again be
subject to tax for the year or years in which
received. Where the taxpayer makes a change
to this method of computing net income his
balance sheet should be adjusted conformably.
If for any reason the vendee defaults in any
of his instalment payments, and the vendor re-
possesses the property, the entire amount re-
ceived on instalment payments, less the profits
already returned, will be income of the vendor
for the year in which the property was repos-
sessed, and the property repossessed must be
included in the inventory at its original cost
to himself less proper allowance for damage
and use, if any.
If the vendor chooses as a matter of consist-
ent practice to treat the obligations of pur-
chasers as the equivalent of cash, such a course
is permissible.
The Treasury Department regulations give
the taxpayer the choice of one of two methods
of reporting income from instalment sales. One
method permits the taxpayer to treat the entire
amount of the sales as the equivalent of cash
provided he follows this course consistently. If
he chooses this method the entire profit is tax-
able in the year in which the sales were made.
This method presents no difficulties when the
books arc kepi on the accrual basis. Under
the same method it is necessary to keep a sep-
arate record ol the instalment payments on
account of instalment sales effected in each
year. The dialer should then be able to tell
the total amounts received in 1924 on account
of instalment sales effected in 192.*, 1922, 1921,
etc. He will then return as gross profit the
proportion of the instalments received on ac-
count of instalment sales effected in each year
which the gross profit to be realized on the
sales made during such year bears to the gross
instalment sales made during the year. Under
the latter method the dealer must keep a clear
record of collections made during 1924 cover-
ing instalment sales made during the year 1924
and prior years separately. He must then re-
port as his gross profit on instalment sales such
a proportion of these collections as the gross
profit to be realized bears to the total instal-
ment sales for each year. This method is gen-
erally referred to as the "deferred profits"
method.
The first step in the "deferred profits" method
is to determine the rate of gross profit on each
year's sales. Then classify collections on in-
stalment accounts received during the year
1924, according to the year in which the sales
were made. Multiply the amount of collections
on each year's accounts by the rate of gross
(Continued on fa<)c 7)
REVIEW
THE
VOL. LXXX. No. 6
Piblwhed Every Satirday. Edward Lyman Bill, Inc., 383 Madison Ave., New York, N. Y. Feb. 7,1925
sln
«JI.^°K r "
Solving the Instalment Sale Problem
in the 1924 Income Tax
An Analysis of the Regulations Issued by the Treasury Department Governing the Sale of Musical Instru-
ments on Time Payments and the Methods by Which Gross Profit Must Be Reported by the
Merchant in His Income Tax—An Article by Frank J. Langley, C. P. A.
ECENT legislative changes in the income
tax laws and contemplated changes bring
to the fore the necessity for the proper
procedure in reporting profits from time pay-
ment sales. The reduction in tax rates in the
1924 revenue law and the impending reductions
are most important to the music merchant who
sells for the most part on the instalment plan.
In the final analysis profits are not realized
until a transaction is closed by cash or its
equivalent, hence the piano merchant who re-
ports his profits before they are fully realized
is at a distinct disadvantage. Government regu-
lations are provided especially so that a mer-
chant selling on time payments is amply pro-
tected. A clear understanding of these regu-
lations is very important.
The Treasury Department regulations gov-
erning the sale of personal property (pianos,
etc.) on the instalment plan are as follows:
Dealers in personal property ordinarily sell
either for cash or on the personal credit of
the buyer or on the instalment plan. Occasion-
ally a fourth type of sale is met with in which
the buyer makes an initial payment of such a
substantial nature (for example, a payment of
more than 25 per cent) that the sale, though
involving deferred payments, is not one on the
instalment plan. Dealers in personal property
who sell on the instalment plan usually adopt
one of four ways of protecting themselves in
case of default: (a) By an agreement that title
is to remain in the seller until the buyer has
completely performed his part of the transac-
tion; (b) by a form of contract in which title
is conveyed to the purchaser immediately, but
subject to a lien for the unpaid portion of the
purchase price; (c) by a present transfer of
title to the purchaser, who at the same time
executes a reconveyance in the form of a chat-
tel mortgage to the seller; or (d) by convey-
ance to a trustee pending performance of the
contract and subject to its provisions. The
general purpose and effect being the same in
all these plans, it is desirable that a uniformly
applicable rule be established.
The rule prescribed is that in the sale or con-
tract for sale of personal property on the in-
stalment plan, whether or not title remains in
the vendor until the property is fully paid for,
the income to be returned by the vendor will
be that proportion of each instalment payment
which the gross profit to be realized when the
R
property is paid for bears to the gross contract
price. Such income may be ascertained by
taking as profit that proportion of the total
cash collections received in the taxable year
from instalment sales (such collections being
allocated to the year against the sales of which
r
HE retail music trade because of its
instalment selling feature involves many
complicated income tax problems and it is
extremely important that the income tax
reports of the merchants be made out in
strict conformity ivith the law. For this
reason The Review has inaugurated a spe-
cial tax service for its readers, in charge
of an income tax expert who has had practi-
cal experience in the music industry.
If
you are in doubt regarding your report,
your inquiries should be addressed to Tax
Editor, Music Trade Review, 383 Madison
avenue, New York.
they apply) which the annual gross profit to
be realized on the total instalment sales made
during each year bears to the gross contract
price of all such sales made during that re-
spective year.
In any case, when the gross profit to be
realized on a sale of personal property has been
reported as income for the year in which the
transaction occurred, and a change is made to
the instalment plan of computing net income,
no part of any instalment payment received
subsequent to the change, representing income
previously reported on account of such transac-
tion, should be reported as income for the year
in which the instalment payment is received.
The intent and purpose of this provision is that
where the entire profit from instalment sales
has been included in gross income for the year
in which the sale was made no part of the
instalment payments received subsequently on
account of such previous sales shall again be
subject to tax for the year or years in which
received. Where the taxpayer makes a change
to this method of computing net income his
balance sheet should be adjusted conformably.
If for any reason the vendee defaults in any
of his instalment payments, and the vendor re-
possesses the property, the entire amount re-
ceived on instalment payments, less the profits
already returned, will be income of the vendor
for the year in which the property was repos-
sessed, and the property repossessed must be
included in the inventory at its original cost
to himself less proper allowance for damage
and use, if any.
If the vendor chooses as a matter of consist-
ent practice to treat the obligations of pur-
chasers as the equivalent of cash, such a course
is permissible.
The Treasury Department regulations give
the taxpayer the choice of one of two methods
of reporting income from instalment sales. One
method permits the taxpayer to treat the entire
amount of the sales as the equivalent of cash
provided he follows this course consistently. If
he chooses this method the entire profit is tax-
able in the year in which the sales were made.
This method presents no difficulties when the
books arc kepi on the accrual basis. Under
the same method it is necessary to keep a sep-
arate record ol the instalment payments on
account of instalment sales effected in each
year. The dialer should then be able to tell
the total amounts received in 1924 on account
of instalment sales effected in 192.*, 1922, 1921,
etc. He will then return as gross profit the
proportion of the instalments received on ac-
count of instalment sales effected in each year
which the gross profit to be realized on the
sales made during such year bears to the gross
instalment sales made during the year. Under
the latter method the dealer must keep a clear
record of collections made during 1924 cover-
ing instalment sales made during the year 1924
and prior years separately. He must then re-
port as his gross profit on instalment sales such
a proportion of these collections as the gross
profit to be realized bears to the total instal-
ment sales for each year. This method is gen-
erally referred to as the "deferred profits"
method.
The first step in the "deferred profits" method
is to determine the rate of gross profit on each
year's sales. Then classify collections on in-
stalment accounts received during the year
1924, according to the year in which the sales
were made. Multiply the amount of collections
on each year's accounts by the rate of gross
(Continued on fa<)c 7)
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