Rev. Rul. 67-316

The Commissioner of Internal Revenue has acquiesced in the decisions of the Tax Court of the United States in the cases of Gunderson Bros. Engineering Corp. v. Commissioner , 42 T.C. 419 (1964), and Luhring Motor Company, Inc. v. Commissioner , 42 T.C. 732 (1964). See page 3 of this Bulletin.

In the above decisions, the Tax Court held that an accrual basis taxpayer selling motor vehicles on credit may accrue the finance charges, included as part of the sale price in the installment contract of sale executed by the purchaser, ratably over the period of the contract. In Gunderson , the purchaser also executed a nonnegotiable promissory note for the balance due on the contract, including the finance charge. In both cases the taxpayer handled the financing arrangements itself. In Gunderson , the Court noted that state law, which was embodied in the terms of the contract, required an abatement of a portion of the finance charge in the event of prepayment by the purchaser. While the State law in Luhring did not specifically require an abatement, the Court, in that case, stated it was the custom of the taxpayer, as well as other dealers in the geographical area, to abate a portion of the finance charge in the event of early payment.

The Tax Court in both cases held that the taxpayer's right to receive the finance charge was not fixed at the time of sale since a portion of the charge would be abated in the event the purchaser prepaid the indebtedness, and, accordingly, that the taxpayer was not entitled to a portion of the finance charge until each monthly installment became due.

The Internal Revenue Service agrees with the reasoning of the Tax Court in these decisions that because of the purchaser's right to abatement, the taxpayer's right to receive the finance charge becomes fixed only through the passage of time without the purchaser making early payments. The existence of the purchaser's right to an abatement may be evidenced in any one of the following ways: (1) as a requirement of state law, (2) if written into the terms of the contract, or (3) if allowed as a matter of trade or business custom in the geographical area concerned. As to ( 3) above, the existence of such practice and the substantiality of its use will be determined on a case by case basis.

Accordingly, the Service will follow the decisions in the Gunderson and Luhring cases, as well as the decision in the case of Smith Motors, Inc. v. United States , United States District Court for Vermont, entered August 9, 1961, and, under circumstances similar to these cases, finance or carrying charges included in an installment contract of sale shall be accrued ratably over the period of the contract.

The decision in the case of Weyand Furniture Company v. Commissioner , Tax Court Memorandum Opinion, entered August 30, 1951, which was cited in Revenue Ruling 64-126, C.B. 1964-1 (Part 1), 170, will no longer be followed since it is inconsistent with the Service position as expressed herein. Accordingly, Revenue Ruling 64-126 is modified only to eliminate the reference to the Weyand decision. The holding of the Revenue ruling remains applicable with respect to installment sales made in taxable years beginning before January 1, 1960, the effective date of the amendment by section 3(a) of Public Law 88-539 to section 453(a) of the Internal Revenue Code of 1954.