Summary of a Recent
Judicial
Development in
Cooperatives
Cooperative Member Not Allowed To Defer
Value-Added Payments
Gaby R. JabbourNational AgLaw Center Research Assistant
Summary of Decision
In Scherbart v. C.I.R., No. 3345-00, 2004 WL 1354120 (U.S. Tax Ct. June 17, 2004), the United States Tax Court held that a member of an agricultural cooperative was not entitled to defer the year-end value-added payments issued to him by the cooperative.
Background
Petitioner Keith Scherbart was a member of the Minnesota Corn Processors (MCP), an agricultural cooperative owned by corn producers for the purpose of marketing and processing corn. See id. In his marketing agreement with the MCP, Scherbart designated MCP as his agent for selling his corn. See id.
MCP's processing added value to the corn delivered by its members, and as a result, it issued "value-added" payments to its members. See id. On August 30, 1995,Scherbart received a letter from MCP stating that "the yearend value-added payment for 1995 would 'be determined after MCP's annual audit and paid out by mid-November'" and that Scherbart could defer his 1995 yearend value-added payment until January of 1996. See id. Scherbart exercised his option to defer payment until January of 1996. See id. In the previous year, Scherbart deferred his 1994 value added payment until 1995. See id. The Commissioner of Internal Revenue determined deficiencies of $3,791 and $2,582 in the Scherbart's 1994 and 1995 Federal income taxes, respectively. See id. Scherbart challenged the Commissioner's determination, arguing that he was entitled to defer the income. See id.
Analysis and Holding
The court stated that there was a "direct parallel" between this case and Warren v. United States, 613 F.2d 591 (5th Cir. 1980). See id. In Warren, the Fifth Circuit held that cotton gins were the sellers' agents for the sale of cotton where the sellers could authorize the gins to defer sale proceeds to the next year. See id. The Fifth Circuit also held that "[t]he sellers decision 'to have the gins hold the sales proceeds until the following year was a self-imposed limitation. . . . Such a . . . limitation does not serve to change the general rule that receipt by an agent is receipt by the principal.'" Id. (citation omitted).
The court stated that, in accordance with the terms of the marketing agreement between Scherbart and the MCP, MCP was the agent of Scherbart for the sale of his corn. See id. It added that because MCP was Scherbart's agent "for making the sales and receiving the sales income, the only limitations placed on . . . [Scherbart's] receipt of that income were self-imposed and therefore ineffective to achieve a deferral for tax purposes." Id. The court thus concluded that Scherbart "constructively received the yearend value-added payments during the respective taxable years in issue" and, as such, the payments were not deferrable. Id. See also id. (quoting 26 C.F.R. §§ 1.451-2(a)) (stating, in relevant part, that "income although not actually reduced to a taxpayer's possession is constructively received by him . . . 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 the intention to withdraw had been given.").
The case was decided on June 17, 2004; this summary was posted Sept. 2, 2004.