Value-Added Payment Receipt Not Deferral

BY MICHAEL H. BROWN

he Eighth Circuit Court of Appeals affirmed the Tax Court’s decision that when a cooperative makes “value-added” payments to its members and allows them to defer the cash receipts, such payments do not constitute a deferral for tax purposes. In a case argued before the Eighth Circuit, a cooperative had made discretionary yearend, value-added payments based upon its net proceeds, which were determined after its September 30 yearend.

Keith Scherbart, a calendar-year taxpayer, was a corn farmer who belonged to the Minnesota Corn Processor cooperative (MCP), a fiscal-year entity. During the calendar year, Scherbart delivered corn three times to MCP, which processed the corn and sold it to third parties. MCP paid Scherbart upon delivery. In addition, when the fiscal year ended, MCP made value-added payments to its members. Members could elect to receive payment in November of the current year or January of the following year. Scherbart deferred and included the payments in his taxable income for the following year. The IRS disallowed the deferral and assessed a deficiency. The Tax Court (TC Memo 2004-143) held for the IRS.

Result. For the IRS. Scherbart argued that the corn sales qualified as installment sales between him and third parties. He maintained that the transactions were a deferral because MCP required members to select their own payment option. The Tax Court held that MCP was Scherbart’s agent; thus the date that MCP received the payments for the corn was the date Scherbart received them.

The circuit court affirmed the Tax Court’s decision, holding that the corn sales were not installment sales. MCP’s equity disclosure statement did not characterize them as sales, nor did it state that ownership of the corn passed to MCP. Further, because MCP was Scherbart’s agent and the deferrals were self-imposed limitations, the value-added payments were taxable to Scherbart when MCP received them. Self-imposed limitations do not change the principal-agent relationship.

This case illustrates the interplay of the principal-agent relationship and the constructive receipt doctrine. Income is taxable when received by the agent, even when the principal has the option of determining when to take possession.

Keith Scherbart v. Commissioner, 453 F3d 987 (CA8).

Prepared by Michael H. Brown, CPA, PhD, assistant professor of accounting, Tabor School of Business, Millikin University, Decatur, Ill.

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