Commissioner v. Hansen - Oral Argument - April 29, 1959

Commissioner v. Hansen

Media for Commissioner v. Hansen

Audio Transcription for Oral Argument - April 30, 1959 in Commissioner v. Hansen

Audio Transcription for Oral Argument - April 29, 1959 in Commissioner v. Hansen

Earl Warren:

Number 380, Commissioner of Internal Revenue, Petitioner, versus John R. Hansen and Shirley G. Hansen, and Number 381, Commissioner of Internal Revenue, Petitioner, versus Burl P. Glover.

Mr. Rothwacks, you may proceed.

Meyer Rothwacks:

May it please this Court.

Numbers 380, 381 and 512, the Baird case, are all income tax cases.

They involve the so-called Dealers Reserve issue.

They are three cases in a long line of litigation extending, since 1940, on this important issue.

And they have all been litigated against a background of a consistent administrative practice since 1931, which supports the position which the Commissioner takes before this Court.

Since 1931, of course, there had been two enactments of the Internal Revenue Code.

Congress has not seen fit to enact any provisions in support of the position which the taxpayer dealers advocate before this Court.

Now these cases, all of them, involved dealers who are on an accrual basis of accounting.

They sell goods on credit.

They receive, from their customers, contracts and other retail paper which embodies the customer's obligation, an obligation to pay a full-time deferred balance.

Now, this contract is entered into between the dealer and the purchaser.

The finance company is not a part or party to that contract.

The dealer may retain the contract, he may retain the notes, or he may sell them.

And in all of these cases, he did indeed sell them to one or more finance companies.

Having sold the obligations of his purchasers to finance companies, the dealer was then paid a certain amount of approximately the face value of the paper in cash by the finance company, and the remaining portion was paid in the form of a credit that was entered on the finance companies' books as a liability of the finance company.

And eventually, as we shall make more clear in the development of our argument, eventually, the amounts of those credits were paid to the dealers either in cash or in the discharge of the dealer's obligations to the finance companies.

Now, the question that is raised here in all of these cases is an important one.

It's important, not only from the purpose from the viewpoint of maintaining the integrity of the accrual basis of accounting, it's also important from a practical point of view.

Now, the taxpayers' representatives will, no doubt, urge upon this Court why is the Government seeking to report -- to have the dealers report the amounts that were credited in the dealer's reserve accounts when they were credited, when, eventually, they will report them when they get paid or when their obligations to the finance company are discharged?

As I said before, the question is not only of great academic importance in connection with the integrity of the -- maintaining the integrity of the accrual principle, but if this Court were to accept the position advocated by the taxpayers, the effect of it would be, not only with respect to the thousands of automobile and trailer dealers throughout the country, to take them off the pay as you go basis and unto a, more or less, rollback basis, but it would also give the green light to hundreds, if not thousands, of other credit businesses all over the country to do precisely the same thing.

Now, there are two simple controlling principles in these cases.

The first is -- and this Court has stated it many times, the first is that, while a cash basis taxpayer reports income on an actual or constructive receipt of the cash, there is a difference in the accrual basis of accounting.

An accrual basis taxpayer must report his income and pay the tax on it upon the fixation of his right to receive the income and not upon actual or constructive receipt of income.

And the fact that the payment may be deferred, the fact that the agreement between the parties may contemplate that, while the amount is fixed, while the obligation is presently fixed, payment may be made in the future is irrelevant and immaterial to the accrual basis of accounting.

And in --

William O. Douglas:

Is that an exemption in the body of regulation and --

Meyer Rothwacks:

Yes, it is, Your Honor.

It -- it arises, I believe, under the regulations that were promulgated pursuant to Sections 41, 42 and possibly 43 of the Internal Revenue Code.