T.C. Memo. 2004-143
UNITED STATES TAX COURT
KEITH AND JANET SCHERBART, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3345-99. Filed June 17, 2004.
Kathryn J. Sedo and Ryan Kelly, for petitioners.
Blaine C. Holiday, for respondent.
MEMORANDUM OPINION
PAJAK, Special Trial Judge: Respondent determined
deficiencies of $3,791 and $2,582 in petitioners’ 1994 and 1995
Federal income taxes, respectively. Unless otherwise indicated,
section references are to the Internal Revenue Code in effect for
the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
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After resolution of other issues as a result of Bot v.
Commissioner, 353 F.3d 595 (8th Cir. 2003), affg. 118 T.C. 138
(2002), the sole issue remaining for decision is whether
petitioners are entitled to defer income.
Some of the facts in this case have been stipulated and are
so found. Petitioners resided in Balaton, Minnesota, at the time
they filed their petition.
Section 7491 does not affect the outcome because
petitioners’ liability for the deficiencies is decided on the
preponderance of the evidence.
During taxable years 1994 and 1995, petitioner Keith
Scherbart (petitioner) was a member of Minnesota Corn Processors
(MCP). MCP is an agricultural cooperative organized under the
laws of the State of Minnesota and owned by corn producers for
the purpose of marketing and processing their corn.
Under the Uniform Marketing Agreement, petitioner designated
MCP as petitioner’s agent. Petitioner was obligated to deliver
bushels of corn equal to the number of “Units of Equity
Participation” he held in MCP. MCP required 3 deliveries of raw
corn per year. Members were permitted to fulfill their delivery
obligations through a variety of means, including the use of
MCP’s “pool” corn. “Pool” corn is corn purchased and maintained
by MCP, and at the request of a member is used to fulfill a
specified portion of the member’s delivery obligation. During
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the taxable years in issue, petitioner fulfilled his delivery
obligations to MCP with “pool” corn. MCP charged a flat per-
bushel service charge to members who fulfilled their delivery
obligations with “pool” corn.
MCP’s processing added value to the corn delivered by its
members. As a result, in addition to the payments and fees for
delivered corn, MCP made “value added” payments to its members
subsequent to each of the 3 required delivery periods. In
addition, MCP made discretionary yearend value-added payments
determined after the close of MCP’s fiscal year ending September
30. Such yearend value-added payments were not mandatory and
were based upon MCP’s “net proceeds”. Only yearend value-added
payments are before us.
Petitioner received a letter from MCP, dated August 30,
1995, which stated in pertinent part that the yearend value-added
payment for 1995 would “be determined after MCP’s annual audit
and paid out by mid-November.” The letter indicated that
petitioner could check a statement that he “would like” to have
his 1995 yearend value-added payment deferred until January 1996.
In the space above the deferral paragraph, the letter noted that
“Value added must still be reported as income on your tax forms.
Consult your tax advisor with any questions.”
On September 25, 1995, petitioner deferred his yearend
value-added payment for 1995 until January 1996. Petitioner
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stated that he deferred his yearend value added payment for 1994
to 1995. For tax purposes, petitioner has deferred the yearend
value added payments for each year since becoming a member of MCP
in the early 1980s.
Section 451(a) provides that the “amount of any item of
gross income shall be included in the gross income for the
taxable year in which received by the taxpayer, unless, under the
method of accounting used in computing taxable income, such
amount is to be properly accounted for as of a different period.”
Section 1.451-1(a), Income Tax Regs., provides, in relevant
part, that
Gains, profits, and income are to be included in gross
income for the taxable year in which they are actually or
constructively received by the taxpayer unless includible
for a different year in accordance with the taxpayer’s
method of accounting. * * * Under the cash receipts and
disbursements method of accounting, such an amount is
includible in gross income when actually or constructively
received.
Section 1.451-2(a), Income Tax Regs., provides that
income although not actually reduced to a taxpayer’s
possession is constructively received by him in the taxable
year during which it is credited to his account, set apart
for him, or otherwise made available so that he may draw
upon it at any time, or so that he could have drawn upon it
during the taxable year if notice of intention to withdraw
had been given. However, income is not constructively
received if the taxpayer’s control of its receipt is subject
to substantial limitations or restrictions.
We find a direct parallel to Warren v. United States, 613
F.2d 591 (5th Cir. 1980). The court held that the gins were the
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sellers’ agents for the sale of cotton. The sellers could
instruct the gins to defer the proceeds of the sale to the
following year. It was the sellers’ decision to defer payments.
The agreement of deferral was between the sellers and their
agents. The sellers’ decision “to have the gins hold the sales
proceeds until the following year was a self-imposed limitation *
* * Such a self-imposed limitation does not serve to change the
general rule that receipt by an agent is receipt by the
principal.” Id. at 593. The court found that “The income was
received by the * * * [sellers’] agents in the year of the sale.
The fact that the * * * [sellers] restricted their access to the
sales proceeds does not change the tax status of the money
received.” Id.
Here, in accordance with Bot v. Commissioner, supra, and
with the terms of the Uniform Marketing Agreement, we find MCP
was the agent of petitioner. As indicated in the August 30,
1995, letter from MCP, the 1995 yearend payment representing his
share of sales proceeds received by MCP during its fiscal year
ending September 30, 1995, was made available to him as of mid-
November of that year. Petitioner conceded that the same
practice was followed in 1994, which means that the yearend
payment for that year constituting his share of sales proceeds
received by MCP during its fiscal year ending September 30, 1994,
was made available to petitioner as of mid-November 1994.
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Because MCP served as his agent for making the sales and
receiving the sales income, the only limitations placed on
petitioner’s receipt of that income were self-imposed and
therefore ineffective to achieve a deferral for tax purposes.
On this record, we conclude that petitioner constructively
received the yearend value-added payments during the respective
taxable years in issue.
Lastly, because we have held petitioners taxable in 1994 and
1995, we find that petitioners are entitled to offsetting
adjustments in each of the respective years to take into account
the yearend value-added payments previously reported as income
for those years. Sec. 481.
Contentions we have not addressed are irrelevant, moot, or
meritless.
Decision will be entered
under Rule 155.