1950 U.S. Tax Ct. LEXIS 287">*287 Decision will be entered under Rule 50.
Petitioner was a member stockholder of a cooperative nonprofit association organized as a corporation under the laws of the State of Washington (Rem. Rev. Stat., §§ 3904-3923) to engage in the export of plywood and other forest products as authorized by the Webb Export Trade Act. During each of the taxable years 1943, 1944, and 1945 the association, pursuant to its bylaws, issued to petitioner a credit memorandum, representing petitioner's pro rata share of the excess of the association's income over its expenses for the year, and credited such amounts to petitioner in its books. In each instance, the association notified petitioner that it would not distribute the additional amounts represented by the credit memorandums until it had been settled whether it was subject to renegotiation, as the Government was contending. Both the petitioner and the association kept their books on the accrual basis. Held, that the amounts represented by the credit memorandums accrued and are taxable to petitioner in the years when the credit memorandums were received.
14 T.C. 158">*158 This proceeding involves deficiencies in income and excess profits taxes as follows:
| Excess profits | ||
| Year | Income tax | tax |
| 1943 | $ 95,028.66 | |
| 1944 | 17,407.58 | |
| 1945 | $ 24,219.57 |
A portion of the above deficiencies are not contested in this proceeding and have been assessed by respondent since the mailing of the notice of deficiency.
The parties have filed a written stipulation, which covers most of the essential facts.
14 T.C. 158">*159 FINDINGS OF FACT.
The facts stipulated are found accordingly. Those facts and the additional facts shown by the evidence may be stated as follows:
Petitioner is a Delaware corporation, organized in 1929, with its principal place of business located at Hoquiam, Washington. It was engaged, during the taxable years involved, in the business of manufacturing and distributing plywood, doors, and other building materials. It kept its books and made its returns on an accrual basis and for a calendar year. Its returns were filed with the collector of internal revenue for the district of Washington.
Petitioner was one of about 25 stockholder members of a cooperative1950 U.S. Tax Ct. LEXIS 287">*289 selling association, Pacific Forest Industries. That company, hereinafter referred to as Pacific, was organized as a corporation under the laws of the State of Washington, solely for the purpose of exporting plywood and other forest products, as authorized under the provisions of the Webb Export Trade Act. At the close of its accounting year, and pursuant to article XIII of its bylaws 1 it credited to its members all of its income for the year in excess of its operating expenses. Its income consisted of commissions on sales which it made on behalf of its members. It operated on the basis of a fiscal year ending March 31.
1950 U.S. Tax Ct. LEXIS 287">*290 At the close of each of its fiscal years 1943, 1944, and 1945 Pacific issued to petitioner a credit memorandum representing petitioner's proportionate share of the excessive commissions which had been charged to the members on the sales of their products during the year in the respective amounts of $ 11,591.36, $ 33,113.41, and $ 15,996.95. The face amount of each such credit memorandum was credited to the petitioner on the books of the association as of the date of its issuance and was claimed and allowed as an exclusion from gross income in the return filed by Pacific for that year.
In issuing to petitioner the credit memorandum for the year ended March 31, 1943, Pacific wrote to the petitioner in a letter dated April 24, 1943, as follows:
We are pleased to enclose Credit Memorandum to cover price adjustment on orders supplied by you and shipped by us during the period April 1st, 1942 14 T.C. 158">*160 through March 31st, 1943. The amount represents slightly more than the 6% commission deducted by us when settling your invoices. This means that P. F. I. business during the past fiscal year was handled at no expense to you and we hope to be able to continue on this basis.
May we point1950 U.S. Tax Ct. LEXIS 287">*291 out, however, that the Treasury Department has filed with us a request for renegotiation of the contracts which we have accepted and are filling. It is, therefore, impossible to distribute the additional price evidenced by the enclosed Credit Memorandum until the results of the renegotiation are known. We believe, however, that the results will be favorable since, in the first place, we are a non-profit organization and secondly, all plywood which we have shipped has gone outside the Continental United States and thus the contracts should not be subject to renegotiation under the law.
Each of the other credit memorandums for the fiscal years 1944 and 1945 was issued subject to the same restriction as to payment. Petitioner at all times maintained that it was not subject to renegotiation and was finally sustained in that contention.
The renegotiation of Pacific for its fiscal years ended 1943, 1944, and 1945 was barred by the running of the statute of limitations on the dates of March 31, 1944, May 11, 1945, and May 29, 1946, respectively.
Pacific paid the credit memorandums issued to petitioner for 1943, 1944, and 1945 in cash on the dates of December 12, 1944, January 29, 1946, 1950 U.S. Tax Ct. LEXIS 287">*292 and July 23, 1946, respectively. The delay of these payments beyond the dates of expiration of the statute of limitations on renegotiation was due to the fact that Pacific had not collected for all of its sales and did not have sufficient cash on hand to make the payments sooner.
Petitioner reported the income represented by the credit memorandums in the years when it received the cash payments on them. The respondent determined that the amounts accrued and were taxable to petitioner when the credit memorandums were received. Both parties make the alternative contention that the running of the statute of limitations on renegotiation of petitioner determined the time of the accrual and the time for reporting each of the credit memorandums.
OPINION.
Our sole question here is whether the amounts represented by the credit memorandums issued by Pacific are taxable to petitioner in the years when it received them, as contended by the respondent, or in the years when they were paid by Pacific, as petitioner contends; or, as both parties contend in the alternative, in the years when renegotiation of Pacific became barred by the statute of limitations.
A taxpayer keeping its books and making1950 U.S. Tax Ct. LEXIS 287">*293 its returns on an accrual basis must report income when the right to receive it becomes fixed. 14 T.C. 158">*161 . In , the court said, after a thorough review of the leading cases dealing with the different aspects of the accrual question:
The complete definition would therefore seem to be that income accrues to a taxpayer, when there arises to him a fixed or unconditional right to receive it, if there is a reasonable expectancy that the right will be converted into money or its equivalent.
If there is any contingency as to the taxpayer's right to the income, as distinguished from an uncertainty as to the time of its receipt, it is taxable in the year when the contingency is removed. . Here the income in dispute had already been earned and had been credited to the petitioner on the books of Pacific when the credit memorandums were issued. There was no contingency as to the amount of income represented by the credit memorandums1950 U.S. Tax Ct. LEXIS 287">*294 or of Pacific's right to receive it; nor was there any contingency as to the petitioner's right to whatever income might remain after renegotiation, should that occur. The mere possibility of renegotiation did not give rise to a liability which either Pacific or the petitioner could have accrued on its books, since it had not become fixed and was being strenuously protested by Pacific. No liability for renegotiation was set up in Pacific's books. Conceding that there was a possibility of renegotiation, there was no way of even approximating the amount of excessive profits that might be claimed by the Government. See ; .
There can be no question but that Pacific, keeping its books on an accrual basis, was required to account for the entire amount of the commissions on sales made during the taxable years. It is now well settled, however, that cooperative associations, such as Pacific, engaged exclusively in selling the products of its stockholder members on a commission basis are not taxable on the income which, pursuant to their1950 U.S. Tax Ct. LEXIS 287">*295 articles of incorporation or bylaws, or contracts, they are required to return to the stockholders each year as patronage dividends or rebates. See ; ; . This is true whether the amounts are actually paid to the members in cash during the taxable year or merely credited to them on the books of the association. The reason for this rule is that the patronage dividends or rebates are at all times the property of the member stockholders, and nonmembers, and that the selling association is an agent or trustee or mere conduit for the income.
14 T.C. 158">*162 The petitioner devotes a substantial portion of its opening brief to the argument that it did not constructively receive the amounts represented by the credit memorandums in the years when they were issued. The question of constructive receipt is not involved. It might have been had the petitioner reported on a cash basis rather than 1950 U.S. Tax Ct. LEXIS 287">*296 an accrual basis. The Commissioner has not determined and does not now argue that petitioner constructively received any of the disputed income. Cases like , and , which petitioner cites, have no application here.
We think that the respondent has correctly determined that the amounts represented by the credit memorandums issued to petitioner in each of the taxable years accrued and are taxable to petitioner in those years.
Decision will be entered under Rule 50.
Disney, J., dissenting: The majority opinion recognizes that a taxpayer on the accrual basis is to report income when the right to receive it becomes fixed. At the time that the petitioner was informed, by the cooperative corporation, that a credit memorandum was being enclosed for the year, the petitioner was also informed that the Treasury Department had requested renegotiation and the distribution could not be made until the results of renegotiation were known. It seems to me this is a case where the right to receive income had not become fixed, but that there was a very great contingency. 1950 U.S. Tax Ct. LEXIS 287">*297 Until that contingency was removed I do not think that item was accrued. The majority opinion appears to treat the renegotiation as not of sufficient importance to constitute a contingency. It is referred to as "the mere possibility of renegotiation." Obviously it was a probability, for the Treasury Department had asked for it. The result of renegotiation was altogether problematical and contingent. In my opinion, the taxpayer upon the accrual basis should not be required to accrue such an uncertain and contingent item. I, therefore, dissent.
Footnotes
1. Article XIII
* * * *
2. It is not the purpose of this Association to make a profit; and the commission charged and remuneration received by the Association shall be the cost of transacting its business as sales agent, plus the cost of developing new foreign markets.
3. If during any fiscal year the total commissions and remuneration received by this Association in such fiscal year exceeds the amount that has been incurred during said fiscal year for the payment by the Association of its expenses, including the cost of market development, then, unless the Board of Trustees by resolution shall direct otherwise, the Treasurer shall, before closing the books as of the close of said fiscal year, return or credit such excess to the accounts of the respective members and associate members, as an addition to the purchase price of the merchandise sold by them * * *.↩