American Lace Mfg. Co. v. Commissioner

8 B.T.A. 419, 1927 BTA LEXIS 2884

• Court: United States Board of Tax Appeals
• Decided: October 1, 1927
• Docket: Docket No. 8293.
• Status: Published

Opinion

OPINION.

Lansdon :

All the facts pertinent to the issues herein are either admitted by the respondent or proved by the evidence adduced by the petitioner. The only question for us to answer is whether the 7 per cent allowance to customers was a trade discount arising out of market conditions or a cash discount made to expedite payments for merchandise purchased by customers.

The petitioner contends that the billing, which it proves is a trade custom in the lace business, indicates a trade discount and that the actual sales represented by all its invoices to customers within the United States was, in all cases, 7 per cent less than the figures at which its merchandise was invoiced. The evidence in support of this contention is convincing, and it follows that the deductions claimed are allowable either in reducing the amount of gross income for the year in which sales and charges are made or as business expenses to be applied against income for the year in which payments are made.

Standard accounting authorities sustain the contention of the petitioner. Colonel Montgomery in his work, entitled, “Audit Theory and Practice,” vol. 1, p. 331, says:

Many so-called cash discounts are 7% flat. When such a rate is used it is not logical to deal with it in any other way than as a deduction from sales. The concern making such sale should deduct the discount (in an aggregate sum, if more convenient) from outstanding accounts and the purchasers should deduct the discount from their cost prices and from their inventories. The rule is a somewhat rough and ready one, hut it is accurate enough. It is not inflexible, but should be followed unless a better general rule can be devised. In defining “ cost and net sales ” there must be some uniformity, even though precise formulae are not always possible.

At page 533 of the same volume the author says:

Trade discounts should be deducted directly from purchases on the one hand, and from sales on the other hand, that is, no ledger account should be kept for trade discounts. The term itself rarely appears on books of account

In Appeal of Thomas Shoe Co., 1 B. T. A. 124, in which the Board has passed on a similar question in harmony with the position of this petitioner, we say:

It also appears that, by trade practice, as abundantly proven by evidence, these discounts are, as a rule, actually deducted in making payments for goods, whether payment is made on the due date or not. The real nature of a transaction is to be judged by all the evidence, not by isolated items or partial extracts.

The evidence is conclusive that customers of the petitioner always deducted 7 per cent from the face of their invoices entirely regardless of the date of payment. To our minds this means that the petitioner’s sales price to be used as the basis for computing gross income from sales was always 7 per cent less than the invoice figures. We are of the opinion, therefore, that the deduction of $6,823.38 from the gross amounts of accounts receivable for merchandise sold to customers within the United States was necessary in order to ascertain the true amount of the gross sales of the petitioner for the taxable year.

Judgment will be entered for the petitioner on 15 days'1 notice, under Rule 50.

Considered by Sternhagen and Arundell.