Taxation – Income Tax – Accurabilty of Dealer Reserves Withheld by Finance Company

Petitioner, a dealer in new and used trailers, had agreements with several finance companies whereby they agreed to buy promissory notes he received on installment sales. The agreements permitted the finance company to withhold a portion of the unpaid balance on each note and credit such amount to the petitioner’s “dealer reserve” account. The petitioner was liable for all notes in default and the finance company could charge the reserve with any unpaid balance. The reserve could also be charged with any debts of the petitioner to the company. Periodically, the dealer was to receive portions of the reserve in excess of a certain percent of the total balance outstanding. The ultimate balance in the reserve was to be paid to the petitioner whenever all indebtedness for which it was security had been discharged. Reporting his income for 1949 and 1950, petitioner, an accrual basis taxpayer, did not include as taxable income the amounts credited to the reserves. The Commissioner included such amounts in his income and the Tax Court affirmed. On appeal, held, reversed. At no time during the taxable years in question was any excess in the reserves payable to the petitioner. Therefore, his right to receive the sums in the reserve funds was contingent and not accruable as income. Johnson v. Commissioner, (4th Cir. 1956) 233 F. (2d) 952.