Before DUFFY and CASTLE, Circuit Judges, and MERCER, District Judge.
By its judgment, the tax court determined that there is a deficiency in income tax due from petitioner to the United States in the amount of $173,960.20, for the taxable year 1953 and in the amount of $75,691.22 for the taxable year 1954*fn1 The case is before us upon a petition to review that judgment.
The single legal issue presented by the petition is a question of the construction and application of remedial legislation*fn2 enacted by Congress to cushion the effect upon accrual-basis taxpayers of the decision in Commissioner of Internal Revenue v. Hansen, 360 U.S. 446, 463, 79 S. Ct. 1270, 3 L. Ed. 2d 1360. The facts bearing upon that issue are not in conflict. In fact, the issue is a study in simplicity, but concise disposition thereof is made difficult because of its superimposition upon an unwieldy factual background.
During its taxable years, 1953 and 1954, petitioner, an Illinois corporation, was engaged in the business of developing, constructing, renting and selling residential, commercial and industrial real estate*fn3 In the course of its business, petitioner developed a community which is known as Park Forest, Illinois. During the taxable years 1953 and 1954 a number of homes in Park Forest were sold by petitioner to various purchasers upon contracts for warranty deed, each of which provided for installment payment of the purchase price for the respective parcel of land involved, in excess of a down payment received at the time of the transaction. In each of the taxable years in question, petitioner assigned and sold a number of the contracts for warranty deed to lending agencies. The precise arrangement under which those contracts were sold is not material. It is sufficient to relate that a part of the face amount of each was retained by the lending agency as security for the performance of the contract by the purchaser of the land, the lending agency agreeing to release the reserves thereby created to petitioner in installments geared to receipt of specified amounts upon the principal of the several contracts. Amounts so held by the lending agency as security were set up in dealer reserve accounts to the credit of petitioner. As a result of that activity, dealer reserves were accrued to the account of petitioner in the amount of $95,675.00 in fiscal 1953 and in the amount of $385,211.36 in fiscal 1954.
Petitioner employed an accrual accounting method, and reported its income for tax purposes upon an accrual basis. Petitioner omitted the amounts of such dealer reserve accounts from its reports of accrued income contained in its consolidated returns*fn4 for 1953 and 1954, respectively. Ultimately, the Commissioner determined that the amounts held in the reserve accounts to petitioner's credit should have been included in its accrued income for those years. A deficiency assessment, based in part upon that determination, was made. It is from that determination by the Commissioner that the present controversy arises.
A comparison of the summarized facts with the factual background of the decisions reviewed in Commissioner of Internal Revenue v. Hansen, 360 U.S. 446, 463, 79 S. Ct. 1270, 3 L. Ed. 2d 1360, reveals no material distinction between this case and the cases there reviewed*fn5 Affirming our decision in Baird v. Commissioner, 7 Cir., 256 F.2d 918*fn6, and reversing decisions of the Courts of Appeals for the Eighth and Ninth Circuits*fn7, the Court there held that amounts withheld by finance companies from the face value of installment paper purchased by them, as security for performance by the obligor on the paper of his contract, which were carried on the books of the finance company as a dealer reserve account, were reportable as income to an accrualbasis taxpayer for the year in which the paper was sold and in which the reserve was set up on the finance company's books. In reaching that decision, the Court held that the taxpayer dealer acquired a fixed right to receive the moneys retained by the finance company as reserves, either in cash payments to be subsequently made or as a credit in satisfaction of contractual obligations of the dealer to the finance company.
Thus, the legal consequences of Hansen were twofold. First, the decision resolved a conflict between decisions of the Courts of Appeals of the several Circuits. Secondly, the decision required dealers in tangible property, who employed an accrual method of accounting, and who, through the sale of negotiable installment paper, acquired dealer reserve accounts, to adopt a method of accounting which included such dealer reserves as income accrued in the year in which the negotiable paper was sold and to report such reserve accounts as accrued income for tax purposes in accordance with that change in their accounting method. Were it not for the intervention of remedial legislation enacted subsequent to that decision, Hansen would control the disposition of this petition.
To alleviate the possibility of harsh consequences upon a substantial number of dealer-taxpayers expected to arise from the involuntary change of accounting method which Hansen required, Congress, on May 13, 1960, enacted the Dealer Reserve Income Adjustment Act of 1960. 74 Stat. 124, 26 U.S.C.A. § 481 note. That statute, inter alia, granted taxpayers affected by the Hansen decision a conditional right to elect "a year of the change" of their accounting method other than the year in which the dealer reserves were actually created.
It is not disputed that petitioner is within the class of persons to whom the Act applies*fn8 The only question is whether, in the light of the following chronology of events, petitioner is entitled to claim the benefits of the Act.
In July of 1958, petitioner was orally informed by a revenue agent in the Office of the District Director at Chicago that petitioner's dealer reserve income for 1953 and 1954 was in issue. Under date of September 17, 1958, the District Director mailed to petitioner a so-called 10-day letter, inviting petitioner to request an informal conference to discuss proposed adjustments, thereon listed, of petitioner's adjusted gross net income as reported in its returns for those years. Among the proposed adjustments thereon listed was the inclusion of the dealer reserve accounts in petitioner's income for each of those years, subject, however, to a net operating loss deduction which was not thereon specified. Thereafter, on October 8, 1959, the Commissioner sent to Petitioner a statutory notice of deficiency, determining deficiencies in income tax of $374,903.24 for fiscal 1953 and of $97,086.71 for fiscal 1954. The assessed deficiencies were in part derived from the Commissioner's inclusion in petitioner's taxable income for the years in question of the amount standing to petitioner's credit in the dealer reserve accounts. The Tax Court petition followed that determination.
The Hansen decision had intervened between the 10-day letter and the statutory notice of deficiency, a fact which becomes material to the issue of this case because Congress chose the date of the Hansen decision, June 22, 1959, as a line of demarcation and a condition affecting the right of a taxpayer to cushion the effect of Hansen by electing his first taxable year after the date of Hansen as the taxable year in which such dealer reserve income would be reported.
Thus, Section 3 of the Act ...