*9 Decision will be entered under Rule 50.
1. Income -- Constructive Receipt -- Cooperative -- Revolving Fund Certificates. -- Amounts retained from marketing operations of a cooperative performed on behalf of members, for which amounts it voluntarily issued revolving fund certificates having no fair market value, which amounts belonged to and represented taxable income of the cooperative and were not made available to the members, were not income of the members for the year in which they were retained.
2. Deduction -- Expense -- Amounts Realized -- Revolving Fund Certificate -- Pre-Existing Obligation -- Section 23 (a). -- An amount transferred by a member to a fruit growers cooperative for caretaking services, in excess of the cooperative's actual caretaking cost, which by prior contract with the member is retained for a special purpose and evidenced by revolving fund certificates, never ceased to belong to the member and reduces the deduction allowable for actual caretaking expense.
*1027 The Commissioner*10 determined the following deficiencies in the petitioners' income taxes for the calendar year 1946:
| P. Phillips | $ 1,025.04 |
| Della Phillips | 1,755.38 |
| Howard Phillips | 1,673.77 |
The issue for decision is whether or not the Commissioner erroneously adjusted each petitioner's net income upward by an amount equaling the amounts for which revolving fund certificates were issued to the petitioners by an agricultural cooperative, of which they were members, *1028 representing proceeds from marketing operations and receipts from caretaking services retained by the cooperative.
FINDINGS OF FACT.
The petitioners are P. Phillips, his wife, Della, and their son, Howard. They maintained their books of account and filed their returns for the calendar year 1946 on the basis of cash receipts and disbursements. Their individual returns for that year were filed with the collector of internal revenue for the district of Florida.
The petitioners are members of Dr. P. Phillips Cooperative, a corporation engaged in marketing fruit and taking care of groves. The petitioners marketed fruit through the cooperative and employed the cooperative to take care of their groves. The receipts of the*11 cooperative exceeded its costs and expenses and it returned a part of that excess to the petitioners in cash as patronage dividends. But it retained all of the net proceeds from its 1946 caretaking activities and a part of the proceeds from the marketing activities. It placed the retained portions in a reserve and issued to the petitioners non-interest-bearing, nonnegotiable, nonassignable revolving fund certificates payable only at the discretion of the Board of Directors, to evidence the amounts retained. Its contracts for caretaking required it to issue such revolving fund certificates but its contracts for marketing did not require it to issue such revolving fund certificates. It was not required by law, by its constitution, or by its by-laws to issue revolving fund certificates for amounts retained as a reserve.
The following table shows the amounts retained in 1946 from the caretaking operations and from the marketing operations for which revolving fund certificates were issued to the petitioners:
| Caretaking | Marketing | |
| certificates | certificates | |
| P. Phillips | $ 365.64 | $ 920.52 |
| Howard Phillips | 559.69 | 2,263.23 |
| Della Phillips | 758.15 | 4,059.05 |
The certificates*12 had no fair market value at the times they were issued.
The petitioners did not report the above amounts as income for 1946. The petitioners, on their returns for 1946, claimed deductions for the expenses of maintaining and taking care of their groves.
The Commissioner, in determining the deficiencies, adjusted the net income upward by the amounts retained for which revolving fund certificates were issued.
*1029 The oral stipulations of fact and joint exhibits filed in this case are incorporated herein by this reference. The findings of fact in the case of , are incorporated herein by this reference.
OPINION.
The Cooperative was under no obligation either to return the amounts to the members or to issue revolving fund certificates for the amounts it retained as a reserve from marketing operations. They belonged to and were taxable income of the Cooperative. . Cf. , affirmed per curiam ; ,*13 both of which dealt with amounts which did not belong to or represent taxable income of the cooperative there in question. Dr. P. Phillips Cooperative voluntarily issued revolving fund certificates against the amounts retained from marketing operations. Those certificates had no fair market value and did not represent income to the recipients on that basis. The Cooperative never made the funds themselves subject to the demand of any member so that constructive receipt might apply. The funds belonged to and were retained by the Cooperative. They were not income of the members for 1946. Furthermore, if a member ever receives any cash or thing of value in lieu of the certificates, that will represent an additional "amount realized" from the sale of his 1946 crop which will be taken into income at that later date if it represents unreported profit. The Commissioner has advanced no sound reason for including these amounts in the income of the petitioners for 1946.
The situation with respect to the amounts retained by the Cooperative from its 1946 caretaking activities is different. It has been held in , that those*14 amounts never belonged to the Cooperative. It was required by its contracts with the members to issue revolving fund certificates for the funds thus retained. The members agreed in advance that those funds, which continued to belong to them, could be retained by the Cooperative for the special purpose of the reserve. Those members deducted as expenses of their business the amounts which they transmitted to the Cooperative for caretaking services, including the amounts retained. At least the evidence does not show the contrary and the assumption is logical. It developed for the first time in 1946 that the amounts under discussion were in excess of the caretaking expenditures of the Cooperative for its fiscal year 1946, continued to belong to the members, did not represent true expenses of the business of those members, and reduced to that extent the amount otherwise allowable as an expense deduction to those members. It then appeared that these amounts represented, not expenses *1030 of the members, but amounts which, they had agreed in advance, could be used by the Cooperative for a special purpose from which the contributors of the funds desired and expected to benefit. *15 Thus, although the retained amounts, which never ceased to belong to the members, were not income of the contributors for 1946, nevertheless the result reached by the Commissioner in determining the deficiency is correct since the deductions taken for expenses in 1946 should be reduced to correspond to the amounts actually spent by each member as caretaking expenses. Cf. , affd. , certiorari denied ; ; ; ; .
Decision will be entered under Rule 50.