Rev. Rul. 60-229

Advice has been requested whether, in connection with installment sales contracts, a retailer who is on the accrual method of accounting for Federal income tax purposes may deduct as an expense, for the year in which an installment contract is executed, an amount of retailers excise tax based upon the entire sale price of any taxable articles covered by the contract.

Section 461(a) of the Internal Revenue Code of 1954 provides the general rule that the amount of any allowable deduction or credit shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.

Section 1.461-1(a)(2) of the Income Tax Regulations provides, in part, that under an accrual method of accounting, an expense is deductible for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy.

Retailers excise taxes are imposed by sections 4001, 4011, 4021, and 4031 of the Code upon the sale at retail of jewelry and related items, furs, toilet preparations, and luggage, handbags, etc., respectively. The incidence of these taxes is upon the sale of the articles at retail. Liability for the retailers excise tax is incurred by the retailer and not by his customers. Except for certain types of sales for which a special rule is provided by section 4053(a) of the Code, liability for the tax is incurred at the time of the sale. In the case of a sale on credit, it is immaterial whether or not the sale price is actually collected.

Section 4053(a) of the Code provides that if an article subject to the retailers excise tax is (1) leased, (2) sold under a contract providing for payment of the sale price in installments with the seller retaining title to the article until full payment has been made, (3) sold on a conditional sale basis, or (4) sold under a chattel mortgage arrangement with the sale price to be paid in installments, the tax is to be paid upon each payment in proportion to the amount of the payment received.

Where a sale of a taxable article is for cash or on open credit account, the retailer incurs liability for the tax imposed by section 4001, 4011, 4021, or 4031 at the time of the sale. However, with respect to sales of the type specified in section 4053(a) of the Code, the retailer incurs liability for the tax only as payments are received. Liability for the tax is not incurred with respect to uncollectible installments. See S.T. 924, C.B. 1941-2, 295.

Accordingly, it is held that with respect to installment sales of the type specified in section 4053(a) of the Code, a retailer who is on the accrual method of accounting for Federal income tax purposes may not deduct, as an ordinary and necessary business expense, the amount of the retailers excise tax applicable to installment payments not received during the taxable year.