Keith Scherbart v. CIR ( 2006 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 05-1325
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Keith Scherbart; Janet Scherbart, *
*
Appellants, *
* Appeal from the
v. * United States Tax Court.
*
Commissioner of Internal Revenue, *
*
Appellee. *
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Submitted: March 13, 2006
Filed: July 5, 2006
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Before ARNOLD, JOHN R. GIBSON, and SMITH, Circuit Judges.
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ARNOLD, Circuit Judge.
Keith and Janet Scherbart appeal the ruling of the tax court1 that they were not
entitled to defer as income on their joint tax returns payments that Mr. Scherbart
received from a corn-processing cooperative. We affirm.
Mr. Scherbart, a corn farmer, was a member of the Minnesota Corn Processors
(MCP) cooperative during 1994 and 1995. As a member of MCP, Mr. Scherbart was
obligated to make three deliveries of corn per year, with the total number of bushels
1
The Honorable John J. Pajak, Special Trial Judge. See 26 U.S.C. § 7443A.
delivered equaling the number of "units of equity participation" that he held in the
cooperative. MCP processed the corn that it held and sold the processed product to
third parties. Its members received contemporaneous payments for their deliveries,
as well as "value-added" payments derived by splitting MCP's net proceeds at the end
of each fiscal year among the units of equity participation.
In August of 1994 and 1995, Mr. Scherbart received letters from MCP that
advised him that value-added payments would be calculated after MCP's annual audit
and would be paid out in mid-November. The letters offered the option to have these
payments deferred until January of the next taxable year. Each year, Mr. Scherbart
elected to defer the value-added payment. The Scherbarts filed joint tax returns that
listed the value-added payments as income for the years that Mr. Scherbart received
them.
In 1998, the IRS issued a notice of deficiency to the Scherbarts based on the
contention that they could not defer the value-added payments as income because
those payments were earned and payable in the preceding taxable year. The
Scherbarts filed a petition with the tax court challenging the decision, and the tax court
ruled in favor of the IRS. The tax court held that MCP was Mr. Scherbart's agent, and
that because the proceeds from the sale of Mr. Scherbart's corn were in MCP's
possession during its fiscal year and Mr. Scherbart imposed the limitation that kept
MCP from sending him the payments in November, the proceeds were received by the
taxpayers at that time.
The parties agree that MCP acted as Mr. Scherbart's agent for purposes of
processing and marketing the corn, and a written agreement between MCP and its
members reflects the agency relationship. Cf. Bot v. Commissioner, 353 F.3d 595, 601
(8th Cir. 2003). The parties disagree, however, on the legal consequences of the
relationship. The Commissioner contends that receipt by MCP, the agent, amounts
to receipt by Mr. Scherbart. The Scherbarts, however, maintain that the IRS is
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required by statute to treat the deliveries of corn to MCP as an installment sale and
that under the installment method of reporting, the value-added payments should have
been recognized in the taxable years in which they were sent by MCP. See 26 U.S.C.
§ 453. We review the factual findings of the tax court for clear error, and review its
interpretation of the tax laws de novo. See id.
Under the Internal Revenue Code, an "installment sale" is "a disposition of
property where at least 1 payment is to be received after the close of the taxable year
in which the disposition occurs," and the income from such sales generally will be
accounted for by using the "installment method." 26 U.S.C. § 453(a), (b)(1). While
the installment method is not used for "dealer dispositions," which include
dispositions of personal property by someone who regularly disposes of property of
a particular type on the installment plan, 26 U.S.C. § 453 (b)(2)(A), (l)(1)(A), the
disposition of farm property such as the corn in this case is not considered a "dealer
disposition" and thus the installment method may be used, 26 U.S.C. § 453(l)(2)(A).
The Scherbarts argue that because Mr. Scherbart made dispositions of corn to MCP,
the value-added payment is simply a final installment in payment for that corn. Under
§ 453(l)(2)(A), recognition of the value-added payments would thus occur in the
taxable year in which MCP transferred them to the Scherbarts.
The success of the Scherbarts' installment-sale theory depends entirely on
characterizing the corn deliveries and subsequent payments as sales transactions. An
equity disclosure statement, which describes the obligations of MCP and its members,
however, does not refer to the transactions as sales. It talks about deliveries and
payments, but at no point does the agreement establish that ownership of the corn
passes from the member to MCP. We noted in Bot, 353 F.3d at 601-02, that MCP's
"program operated on the basis that [the members] were producers or owners of the
corn delivered under the program and that MCP acted as their agent in further
processing and marketing the corn." Bot's holding would collapse into nonsensicality
if MCP owned the corn in question; MCP's agency with regard to processing and
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marketing is meaningful only if the corn is owned by the member after delivery.
Since Bot dealt with the same type of relationship and transaction as this case does,
we hold that the transactions at issue here were not sales.
Because the value-added payments are not installments pursuant to an
installment sale agreement, we turn to the Scherbarts' argument that Mr. Scherbart did
not receive the payments when MCP first made them available to members. They
contend that because Mr. Scherbart elected to defer receipt of any post-audit value-
added payment in August, before MCP had calculated whether such a payment would
be made at all, the payment should be recognized as income in the following taxable
year, not the taxable year in which he had the first opportunity to receive the value-
added payment.
The general rule is that receipt by an agent is equivalent to receipt by the
principal, Maryland Casualty Co. v. United States, 251 U.S. 342, 347 (1920), even if
the agent agrees not to distribute income to the principal until the following year. See
Crimmins v. United States, 655 F.2d 135, 138 (8th Cir. 1981). Self-imposed
limitations on receipt do not trump this rule. Arnwine v. Commissioner, 696 F.2d
1102, 1109 (5th Cir. 1983). Because Mr. Scherbart's deferrals of the value-added
payments were self-imposed limitations, the payments were received when they were
held by Mr. Scherbart's agent, MCP, in the years before the payments were sent to
Mr. Scherbart.
The Scherbarts seek to rely on Schniers v. Commissioner, 69 T.C. 511, 516
(1977), which permitted a farmer to report income from what were termed "Deferred
Payment Contract[s]" for the year in which he received the payments; the court ruled
for the taxpayer because the Commissioner failed to show that the sales agreements,
which specifically required the deferred payments, were "shams." Id. at 519. But in
Schniers the transaction was unquestionably a sale, and the payments were to be
received by the taxpayer-seller from the agent for the buyer. Id. at 516-19. Here, the
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relevant sale was between MCP and the buyers of processed corn products, not MCP
and the Scherbarts, and MCP was Mr. Scherbart's agent. Therefore requiring that the
Commissioner prove that any sale was a sham in order to invalidate the deferred
payment agreement is inapposite; the agreement in question here is simply not a sale.
Given the agency relationship between MCP and Mr. Scherbart and the
voluntary nature of the deferral, 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.
The Scherbarts received the value-added payments in November of 1994 and 1995.
They were therefore not entitled to defer recognition of the payments as income until
the next taxable year.
We affirm the judgment of the tax court.
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