Summary of a Recent
Judicial Development in
Cooperatives

"Value-Added" Payments Received by Cooperative Deemed
to Be Received by Member in the Same Year

John Stacks,
National AgLaw Center Research Associate

Summary of Decision

In Keith Scherbart v. Commissioner of Internal Revenue, 453 F.3d 987 (8th Cir. 2006), the United States Court of Appeals for the Eighth Circuit affirmed the United States Tax Court's judgment in favor of the Internal Revenue Service.

Background

Scherbart was a corn farmer and a member of the Minnesota Corn Processers Cooperative Association (MCP) during 1994 and 1995. Id. at 988. He was obligated to make three deliveries of corn per year to the MCP, and the number of bushels of corn that he was required to deliver corresponded to the number of MCP equity participation units that he owned. Id. Members of MCP received payment upon delivery of corn, as well as annual "value added" payments based upon equity participation. Id. In August 1994 and 1995, Scherbart received letters from MCP stating that "value added" payments were to be paid in November and that he could defer payment until January of the next year. Id. Scherbart elected to defer those payments; however, in 1998 the Internal Revenue Service (IRS) issued a notice of deficiency. Id. It stated that Scherbart could not defer the "value added" payments until the next taxable year, and Scherbart challenged this deficiency notice. Id.

The tax court held that MCP was Scherbart's agent, that proceeds from the sale were in MCP's possession during the fiscal year, that Scherbart himself imposed the limitation that prevented the payments in November, and that he received the payments in November for the purposes of tax recognition. Id.

Arguments

Scherbart argued that the delivery of corn to MCP constituted an installment sale and that under the installment method, value added payments should be recognized in the taxable year in which they were sent by MCP because they were the final installment payments for the corn. Id. at 989.

The IRS argued that MCP was Scherbart's agent and that Scherbart received the proceeds from the sale of corn when MCP received those proceeds. Id. at 988.

Analysis and Holdings

The court held that the tax court did not err in finding that the Scherbarts received the value added payments in the taxable years in which they were calculated because MCP was acting as Scherbart's agent. Id. at 990. The court stated that "the transactions at issue here were not sales" because ownership of the corn did not pass from Scherbart to MCP. Id. at 989. The court further held that payments should be recognized by Scherbart in the fiscal year during which they were received by MCP as an agent and that the self-imposed limitation (deferral) on payment did not affect this rule. Id.

The case was decided on July 5, 2006.