E. E. R. Shapiro and Rubye Shapiro v. Commissioner of Internal Revenue

Taxpayers, husband and wife, have petitioned for review of a tax court decision sustaining deficiencies in income for the years 1945 to 1948, plus penalties. Since the amounts in dispute result from business dealings of the husband, we shall, in discussing the problem, refer to him as though he were the sole taxpayer.

During the years in question, taxpayer was engaged in business in San Francisco as a dealer in used automobiles. The financing of time sales was accomplished by arrangement with Pacific Finance Company, by which that company accepted taxpayer’s conditional sales contracts, paying taxpayer a sum equal to the unpaid balance of the purchase price. On time sales an additional sum covering interest and service charges and termed “time-price-differential” was charged to the purchaser as an addition to the purchase price. Pacific Finance, upon accepting a conditional sales contract, assigned a portion of the time-price-differential to a dealer’s reserve maintained for taxpayer as security for the discharge by taxpayer of all direct or contingent liabilities owing by him to Pacific through their course of dealing. From time to time, as this reserve exceeded what Pacific…