Schniers v. Comm'r of Internal Revenue
| Decision Date | 27 December 1977 |
| Docket Number | Docket No. 10225-75. |
| Citation | 69 T.C. 511 |
| Parties | CHARLES B. SCHNIERS and DOROTHY M. SCHNIERS, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held, petitioners did not constructively receive income in 1973 from the sale of their cotton in that year but realized income in 1974 when they were actually paid for it. Held, further, the gin with which petitioner dealt in selling the cotton was the purchaser's agent, not petitioner's agent, in handling the transaction. Held, further, petitioner's sale of cotton grown in 1973 under agreements calling for him to be paid for such cotton in 1974 did not constitute a change in his method of accounting or a distortion of his 1973 income. William Norton Baker and Karl Norman Clifford, for the petitioners.
Charles R. Billings, for the respondent.
Respondent determined a deficiency of $22,000.11 in petitioners' Federal income tax for 1973. Concessions having been made by petitioners, the sole issue presented for decision is whether petitioners realized income of $45,376.48, representing the proceeds of the sale of their cotton crop, in 1973 even though they did not receive checks in payment for the cotton until 1974.
Petitioners Charles B. Schniers and Dorothy M. Schniers, husband and wife, were legal residents of Slaton, Tex., when they filed their petition. They timely filed a joint Federal income tax return for 1973, employing the cash receipts and disbursements method of accounting. For convenience, Charles B. Schniers will be referred to as petitioner.
During 1973, petitioner was engaged in cotton farming in the vicinity of Slaton, Tex. Part of his operations covered Farm No. B-360, consisting of 156 acres which he owned, and Farm No. B-233, consisting of 187 acres which he rented from A. H. Buxkemper. Under the rental arrangement, three-fourths of the proceeds from the sale of cotton from the rented property belonged to petitioner and one-fourth to A. H. Buxkemper.
On March 13, 1973, petitioner entered into two contracts entitled “Confirmation of Purchase” in which he agreed to sell, and the Idris Traylor Cotton Co., “Purchaser, or his agent,” (sometimes hereinafter Traylor) agreed to buy, at a price keyed to the Government loan values, all cotton harvested and ginned from Farm Nos. B-233 and B-360. The contracts provided that all such cotton would be ginned at the Slaton Co-op Gin (sometimes hereinafter the gin). All cotton was to be delivered to the purchaser promptly upon receipt by the seller of Government classing cards and warehouse receipts. The contracts contained no provision as to when and in what manner the seller would be paid for the cotton. Each contract form was completed by a gin employee, Ethlyn Akin, and signed at the gin on behalf of Traylor by another employee, W. H. Adkins. The contract covering the cotton grown on Farm No. B-233 included the landlord's share as well as that of petitioner. These standardized agreements were developed and printed by Traylor and were placed in several gins through which it contracted to buy cotton.
Subsequent to signing these contracts, petitioner planted and cultivated cotton on Farm Nos. B-360 and B-233. In November and early December 1973, petitioner harvested the cotton from these farms and had it ginned as provided in the March 13, 1973, contracts. The gin delivered the cotton to a warehouse and obtained a warehouse receipt, a negotiable bearer instrument which evidenced title, and a Government classing card for each bale so delivered.
The gin maintained a separate box or drawer for each farmer for which it ginned cotton. In that box, the gin placed the farmer's warehouse receipts and Government classing cards. It is common practice for farmers to leave these documents in their respective boxes at the gin until their cotton is sold.
The gin placed the warehouse receipts and Government classing cards for petitioner's cotton covered by the March 13, 1973, contracts in his box at the gin. On or about December 4, 1973, petitioner met with gin employee Ethlyn Akin, and discussed the sale of his cotton, the delivery of the warehouse receipts to Traylor, and the possibility of deferring the receipts from the sale of his cotton. On December 4, 1973, prior to turning over his warehouse receipts and Government classing cards, petitioner entered into five deferred payment contracts, executed in the name of the gin, calling for the sale of the following amounts of cotton at the price indicated from the farm specified:
+--------------------------------+
¦Farm No. ¦Bales ¦Price ¦
+----------+-------+-------------¦
¦ ¦ ¦ ¦
+----------+-------+-------------¦
¦B—360 ¦101 ¦$12,882.19 ¦
+----------+-------+-------------¦
¦B—360 ¦100 ¦12,632.39 ¦
+----------+-------+-------------¦
¦B—360 ¦3 ¦360.64 ¦
+----------+-------+-------------¦
¦B—233 ¦108 ¦1 13,646.01 ¦
+----------+-------+-------------¦
¦B—233 ¦100 ¦1 12,355.67 ¦
+----------+-------+-------------¦
¦ ¦ ¦ ¦
+--------------------------------+
1 Of these amounts, petitioner's three-fourths share was $10,234.51 and $9,266.75, respectively.
These prices were computed pursuant to the deferred payment contracts, all dated December 4, 1973, signed by petitioner as “Grower” and the gin by J. E. Gray, Agent, as “Purchaser.” These agreements provided that the grower may deliver cotton to the purchaser, referred to in the body of the agreement as the “Company,” on the understanding that title and rights to such cotton shall pass to the company. The price at which the cotton is to be sold will be fixed at the date the cotton is delivered, and the company in its discretion may then sell and market such cotton. Regardless of the delivery date, no advance or payment of any kind will be made by the company to the grower prior to January 2, 1974. The agreement is nonnegotiable, nontransferable, and the grower shall have no right, claim, or action against the company for the payment of the purchase price prior to that date. Within 7 days after the date specified in the contract, the company will advance to the grower the full purchase price less any charges.
Petitioner's objective in signing these deferred payment agreements was to postpone the receipt of the income from the sale of his cotton. Ordinarily in west Texas cotton is harvested during the months of November and December of the year in which it is planted. However, during the fall of 1972, the weather was bad, and most of the cotton crop was neither harvested nor sold until early 1973. The result was that some of the income which petitioner ordinarily would have realized in 1972 was not realized until 1973. Petitioner's 1973 crop was harvested in November and December of 1973, and he wished to avoid the necessity of reporting as income the proceeds of both his 1972 and 1973 crops as income in 1973.
Each such deferred payment contract was accompanied by a Traylor invoice listing the cotton covered by the respective deferred payment contract. Such invoices were prepared by gin employee Shirley Evans. After signing these five deferred payment contracts, petitioner turned over the warehouse receipts and Government classing cards for the cotton to Ethlyn Akin for delivery to Traylor.
Shirley Evans, who, along with Ethlyn Akin, was authorized to write checks on Traylor's checking account, then drew the following five checks, payable to the gin, on Traylor's bank account at the First National Bank, Lubbock, Tex.:
These checks were deposited in the gin's bank account. Petitioner had no knowledge of the arrangements between the gin and Traylor regarding the handling of the proceeds of the sale of his cotton. J. E. Gray, manager of the gin, had discussed such arrangements with Traylor and Traylor approved them.
Traylor and other cotton buyers paid the gin for services it performed in arranging the purchase of farmers' cotton; keeping on hand, completing and signing sales contracts and invoices, and making payments for the crops out of their bank account. In 1973, the gin earned approximately $10,000 from the performance of those services. Other gins, both cooperative and independent, performed the same type of service and were compensated in the same manner as the gin.
On January 2, 1974, petitioner went to the gin to collect the proceeds of the sale of his cotton. He received five checks written on the gin's bank account in the amounts set forth in the foregoing table. Of the check in the amount of $13,646.01, only $10,234.51 belonged to petitioner, and of the check in the amount of $12,355.67, only $9,266.75 belonged to him. The remainder of those two checks belonged to A. H. Buxkemper, the owner of Farm No. B-233. A total amount of $45,376.48 from this sale was reported on petitioner's 1974 joint Federal income tax return.
Respondent determined that petitioners' reported gross income for 1973 should be increased by $45,376.48.
OPINIONSection 4511 prescribes the general rule that “any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer” unless, under the taxpayer's method of accounting, such amount is “properly accounted for as of a different period.”...
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