BIR Ruling No. 345-61

July 26, 1961 BIR RULING NO. 345-61 Mr. Medardo Alvarez Mac Financial Enterprises, Inc., 207-208 German Wee Suite Bldg., Zamboanga City S i r : Reference is made to your letter dated July 10, 1961, stating the following: "1. Mac Financial Enterprises, a duly organized corporation in Zamboanga City, is regularly selling personal property on the installment plan. The sales under the installment plan are covered by the provisory notes made out by the buyers. All majority of these notes are sold to a finance company. In cases of default by makers of the notes MAC is required under the terms of the notes to the finance company to purchase back the notes of the delinquent makers. llcd QUESTION: Can MAC still report the income from the installment sales sold to a finance company on the installment basis in accordance with the provision of SEC. 43 of the National Internal Revenue Code?" "2. The finance company charges MAC for the cost of the financing, MAC in turn charges the customers the cost of financial by including it on the installment sales prices. The total of the installment sales prices are taken up in the books of MAC as the gross sales. QUESTION: Can MAC deduct the costs of financing included in the sales price from the total sales so that the sales will only represent the cost of items sold plus a margin of profit? For this purpose we plan to charge the customers for the cost of financing by issuing a debit note covering the costs, so that the sales invoice for the items will only show as the sales cost of the items sold plus a margin of profits." In reply thereto, I have the honor to inform you that though the sale may have been on the installment basis, upon receipt from the financing company of the full purchase price of the personal property sold, the sale become a closed transaction and income arose. The fact that MAC will repurchase the notes in case of default of the customers does not relieve it from reporting as income the full amount received on the sale of the notes. Such transaction does not constitute a loan. (Packard Cleveland Motor Co., v. Commissioner of Internal Revenue, 14BTA (U.S.) 118, Elmer v. Commissioner of Internal Revenue, 12 American Federal Tax Reports, 433; 65 Federal Reporter, 2d Series 564). If the so-called cost of financing is included in the installment sales price and MAC receives from the financing company an amount excluding such cost which is then retained by the letter, MAC can deduct such cost if the total of the installment sales price including such cost is entered in its books; otherwise, it cannot. LibLex Very truly yours, (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue