Arnwine v. C.I.R., 81-4384

• Decision Date: 31 January 1983
• Docket Number: No. 81-4384,81-4384
• Parties: 83-1 USTC P 9179 Billy E. ARNWINE and Shirley S. Arnwine, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1102

696 F.2d 1102

83-1 USTC P 9179

Billy E. ARNWINE and Shirley S. Arnwine, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 81-4384.

United States Court of Appeals Fifth Circuit.

Jan. 31, 1983.

Michael L. Paup, Chief, Appellate Section, John H. Menzel, Director, Robert B. Miscavich, Senior Technician Reviewer, Tax Lit. Div., I.R.S., Glenn L. Archer, Jr., Asst. Atty. Gen., Richard W. Perkins, R. Russell Mather, Robert Pomerance, Attys., U.S. Dept. of Justice, Tax Div., Washington, D.C., for respondent-appellant.

William Norton Baker, Stephen Thomas Krier, Deborah Brown, Lubbock, Tex., for petitioners-appellees.

Appeal from the Decision of the United States Tax Court.

Before WISDOM, RANDALL and TATE, Circuit Judges.

RANDALL, Circuit Judge:

This case concerns the federal income tax consequences of loosely defined relationships among a West Texas cotton farmer anxious to shift his liability for federal income taxes on the proceeds of the sale of part of his 1973 cotton crop to 1974, the purchasers of his 1973 crop and a cotton gin anxious to be of service to all concerned. The Tax Court held that the proceeds were not taxable in 1973, finding that the cotton gin was acting as the agent of the purchasers, rather than the farmer, when payment for the cotton was made to the gin in 1973 and that the farmer did not constructively receive the sales proceeds in 1973. Arnwine v. Commissioner, 76 T.C. 532 (1981). We are required by our decision in Warren v. United States, 613 F.2d 591 (5th Cir.1980), to reverse. We hold that the cotton gin was acting as the agent of the farmer insofar as the distribution of the proceeds from the sale of the 1973 crop was concerned and, alternatively, that the farmer constructively received the proceeds in 1973. The moral of the story is that when it comes to deferring federal income tax liability, loosely defined relationships are dangerous and may be fatal.

I. THE FACTS AND DECISION BELOW.

During 1973, the taxpayer ¹ was primarily involved in the business of cotton farming in the Levelland, Texas, area. He maintained his books and records and reported his income and expenses based upon the cash receipts and disbursements method of accounting. Owens Independent Gin, Inc. (the Gin) was an independent cotton gin in the Levelland area, owned and operated by Fred Owens (Owens). The taxpayer was not a director or an employee of the Gin. W.A. Wadlington (Wadlington) was a cotton buyer in the Levelland area representing several large purchasers. He was designated as an agent for such purposes by these purchasers and was paid on a commission basis for cotton that he purchased on their behalf. In 1973, he represented two cotton purchasers, Dan River Cotton Co., Inc. (Dan River) and C. Itoh & Co. (America), Inc. (Itoh).

Early in 1973, Wadlington contacted Owens and informed him that his principals were willing to purchase a specified number of acres of cotton to be grown and harvested in 1973. Wadlington outlined the prices that his principals would be willing to pay for cotton of varying grades and staples. Wadlington, in turn, approached Owens with this information because he knew that Owens might be helpful in finding cotton growers who would be willing to contract for the sale to Wadlington's principals of the cotton grown on their acreage during 1973. The Tax Court found that utilizing a cotton ginner in this manner was the usual practice in the area. Because the ginner foresaw an opportunity to clinch some ginning business, he would help cotton buyers locate potential cotton sellers.

Owens contacted the taxpayer to see if he would sell some of his yet-to-be-planted 1973 cotton crop under the terms given to Owens by Wadlington. After considering this opportunity, the taxpayer informed Owens that he would be willing to make such sales. As a result of these discussions, on March 5, 1973, the taxpayer contracted to sell the cotton to be grown on certain described acreage to Dan River, and on March 13, 1973, he contracted to sell the cotton to be grown on certain other acreage to Itoh. The Dan River and Itoh contracts, which are sometimes referred to herein as the forward contracts, were virtually identical in all respects. Both contracts listed the Gin as the "Seller" and the taxpayer as the "Grower" in the heading. Both contracts were signed "For the Seller" by Owens, by the taxpayer as the "Participating Grower" and "For the Buyer" by Wadlington. The forward contracts recited that the purchaser "does herewith confirm the purchase of the entire production" on certain specific tracts of farmland. The contracts set forth the price schedule, based upon the grade and staple, which would be paid for the contract cotton when it was harvested and delivered. The contracts further provided that the cotton covered thereby was to be processed at the Gin and described the obligations of the Gin as follows:

The [Gin] is to keep records of harvesting dates on all fields and will supply the Buyer information as to the Grower's compliance to [sic] this feature of this contract.

The [Gin] is to make available to the buyer copies of contracts of the participating Growers which is to list their individual acres and the farm serial numbers. The buyer shall be afforded the opportunity, at his request, to examine any and all records as pertains to his interest concerning this acreage....

The cotton will be invoiced to [the buyer] by the Gin as soon as it is ginned and placed on the compress. The drafts are to contain green card invoices and warehouse receipts. A copy of the invoices to W.A. Wadlington. The Cotton Board assessment shall be paid by the Gin.

The forward contracts were drafted by Wadlington. The Gin was made a party to the forward contracts because Wadlington had, in the past, been confronted with situations where the ginner had helped cotton growers try to evade their obligations under such contracts. He drafted the contracts at issue in this case in order to bind the Gin to the contract. The Tax Court found, and no one seems to contest, that the Gin was not the seller of the cotton covered under these forward contracts in spite of its designation as such in the contracts.

The taxpayer planted the cotton on the acreage covered by the contracts. While the cotton was growing, Owens kept Wadlington advised as to the status of the crop.

Upon harvesting his cotton, a cotton grower takes it to a cotton gin where he pays to have the cotton ginned. The ginned cotton is then sent to a compress where it is pressed into bales and stored. The owner of the cotton receives warehouse receipts for the cotton, i.e., negotiable bearer instruments evidencing title to the cotton stored in a warehouse. Samples from each bale are sent to the government classing office where the cotton is classified according to grade and staple. The classing office then issues classing cards (green cards) to the owner of the cotton. A green card indicates the grade of the cotton represented by a warehouse receipt.

In October and November of 1973, the taxpayer harvested the cotton from the acreage covered by the forward contracts and paid to have the cotton ginned at the Gin. Following the ginning, the Gin delivered the cotton to a warehouse and obtained warehouse receipts and green cards. The Gin maintains a separate box or drawer for each grower for whom it gins cotton and places the grower's warehouse receipts and green cards in the appropriate box or drawer when they are received. The Tax Court found that it is common practice for growers to leave their warehouse receipts and green cards in their respective boxes at the Gin until their cotton is sold. In the case of the taxpayer, the warehouse receipts and green cards for the cotton covered by the forward contracts, along with warehouse receipts and green cards for other cotton, were placed in the taxpayer's box at the Gin. The taxpayer had unrestricted access to his box at the Gin. The Tax Court found that the taxpayer's warehouse receipts and green cards for cotton that had been ginned prior to November 20, 1973 were not in the taxpayer's box immediately prior to that date.

On November 20, 1973, the taxpayer and Owens, on behalf of the Gin, executed a document entitled "Deferred Payment Contract." The deferred payment contract designated the taxpayer as the seller and the Gin as the buyer and covered 101,665 pounds of cotton listed on an attached invoice. Under the contract, the taxpayer agreed to sell and the Gin to buy that cotton at "the agreed market price on date of delivery." The contract provided that upon delivery of the cotton to the Gin, title would pass to the Gin, and the market price to be paid to the taxpayer would be fixed at the date of such delivery. The contract provided further that "[r]egardless of the time when Cotton is [sic] delivered under this Deferred Payment Contract is sold by the [Gin], it is agreed by the parties hereto that NO PAYMENT OF ANY KIND will be made by the [Gin] on account thereof prior to January 1, 1974." Finally, the contract provided that within five days after January 1, 1974, the Gin would pay to the taxpayer the full market price determined under the contract, minus the customary charges. The contract provided for no collateral or other security for payment of the purchase price. After signing the deferred payment contract, the taxpayer turned over to the Gin, for delivery to various cotton buyers, the warehouse receipts and green cards for the cotton that had been ginned up to that time. The cotton described in the deferred payment contract included the cotton which had been sold under the forward contracts, as well as cotton that was purchased by two other buyers.

The Tax Court found, and no one argues otherwise, that the taxpayer entered into the deferred payment contract in order to defer until 1974 the receipt of income from the sale of part of his 1973 cotton crop....