Molsen v. Comm'r of Internal Revenue
| Citation | 85 T.C. No. 28,85 T.C. 485 |
| Decision Date | 26 September 1985 |
| Docket Number | Docket Nos. 22699-82,22700-82,22702-82.,22701-82 |
| Parties | HEINZ MOLSEN, JR. and CHRISTINA T. MOLSEN, ET AL., 1Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
M, a cotton merchant, employs the accrual method of accounting and reports its income on a calendar year basis. Some of the cotton is purchased by M through on-call contracts, under which cotton is delivered to M and a provisional price is paid to the seller, but the purchase price remains open until the seller exercises his call right, fixing the price. The purchase price is tied to the market price of cotton futures prevailing at the time the seller calls the contract. In accordance with generally accepted accounting principles and industry-wide practice, M has consistently accounted for its cost of goods sold by valuing ending cotton inventory at market and by bringing its unfixed, delivered, on-call purchases to market at year-end through an accrual to the cost of purchases of an amount determined as if such contracts were called at the end of the year.
HELD: (1) M's method of accounting for such purchases clearly reflects its income; the Commissioner abused his discretion under sec. 446(b), I.R.C. 1954, in determining that M may include only the provisional prices paid for the cotton during the year and that M may not bring the on-call contracts to market.
(2) The Tax Court is not empowered to award costs or attorneys' fees under the Equal Access to Justice Act (McQuiston v. Commissioner, 78 T.C. 807 (1982), affd. without published opinion 711 F.2d 1064 (9th Cir. 1983), followed), and Ps are not entitled to an award of such costs or fees under sec. 7430, I.R.C. 1954, because they commenced these cases before the effective date of sec. 7430. ROBERT W. RYAN, JR., and PAUL E. PESEK, for the petitioners.
WILLIAM B. LOWRANCE, for the respondent.
The Commissioner determined deficiencies in the petitioners' Federal income taxes for 1977 as follows:
+---------------------------------------------+
¦Docket No.¦Petitioner ¦Deficiency¦
+----------+-----------------------+----------¦
¦22699-82 ¦Heinz Molsen, Jr., ¦$243,048 ¦
+----------+-----------------------+----------¦
¦ ¦and Christina T. Molsen¦ ¦
+----------+-----------------------+----------¦
¦22700-82 ¦Frederick G. Molsen ¦243,048 ¦
+----------+-----------------------+----------¦
¦ ¦and Jayne F. Molsen ¦ ¦
+----------+-----------------------+----------¦
¦22701-82 ¦Peter F. Kandel ¦243,047 ¦
+----------+-----------------------+----------¦
¦ ¦and Barbara M. Kandel ¦ ¦
+----------+-----------------------+----------¦
¦22702-82 ¦Elizabeth Molsen ¦40,483 ¦
+---------------------------------------------+
The issues for decision are: (1) Whether the Commissioner abused his discretion under section 446(b) of the Internal Revenue Code of 1954 2 in determining that a cotton merchant that values its ending inventory at market may not accrue an estimated liability at year-end for cotton purchased under on-call contracts where the cotton has been delivered but the price has not yet been fixed, and (2) whether the petitioners are entitled to an award of costs and attorneys' fees.
Some of the facts have been stipulated, and those facts are so found.
All of the petitioners maintained their legal residences in Dallas, Tex., at the time they filed their petitions in these consolidated cases. All filed their Federal income tax returns for 1977 with the Internal Revenue Service Center, Austin, Tex. All filed their petitions in this Court on September 10, 1982.
H. Molsen & Co., Inc. (Molsen & Co. or the company), is a cotton merchant engaged in the business of buying and selling cotton throughout the world. Originally formed as a partnership in 1928, Molsen & Co. was incorporated under the laws of the State of Texas in 1966. It has maintained its principal place of business in Dallas, Tex., since its incorporation. During 1977, Molsen & Co. was an electing Subchapter S corporation for Federal income tax purposes, and its outstanding shares of stock were owned as follows:
+------------------------------------+
¦Shareholder ¦Number of shares¦
+-------------------+----------------¦
¦Heinz Molsen, Jr. ¦2,250 ¦
+-------------------+----------------¦
¦Frederick G. Molsen¦2,250 ¦
+-------------------+----------------¦
¦Barbara M. Kandel ¦2,250 ¦
+-------------------+----------------¦
¦Elizabeth Molsen ¦375 ¦
+------------------------------------+
Heinz Molsen, Jr., Frederick G. Molsen, Barbara M. Kandel, and Elizabeth Molsen will sometimes be referred to as the petitioners.
As a cotton merchant, Molsen & Co. purchases cotton from farmers, ginners, and other merchants and then resells the cotton to domestic and foreign textile mills and, occasionally, to other merchants. Cotton is planted between March and June and is harvested from late July to January. The traditional cotton crop year, or season, runs from August 1 to July 31, but cotton merchants buy and sell cotton throughout the year.
There are two basic methods of purchasing cotton: the ‘spot purchase‘ and the ‘forward purchase.‘ In a spot purchase, the cotton is available for immediate delivery to the buyer. In a forward purchase, the seller contracts to deliver the cotton to the buyer at a specified future date.
Both spot purchases and forward purchases can be made at either ‘fixed‘ or ‘on-call‘ prices. In a fixed price contract, the price per pound of cotton is established or ‘fixed‘ on the day the agreement is entered into by buyer and seller. In an on-call contract, the price remains open or ‘on call‘ until the seller exercises a call right granted by the contract. The purchase price is ultimately determined by a formula tied to the market price of cotton: the contract price is a specified number of ‘points‘ 3 above or below the futures price for the base quality cotton 4 traded on the New York Cotton Exchange for a particular month for future delivery. Such price is then adjusted to reflect any difference in quality between base quality cotton and the cotton actually delivered under the contract. Cotton is traded on the futures market for the months of March, May, July, October, and December. The seller may exercise the call right at any time between the execution of the contract and the day preceding the first ‘notice day‘ of the designated call month. The first notice day generally falls on about the fifth day preceding the first day of the call month. For example, on December 8, 1977, Molsen & Co. entered into an on-call purchase contract which provided for a contract price of ‘850 points off 5 July 1978, futures price at time of seller's fixation.‘ Under the contract, the seller had until about June 25, 1978, to call and fix the price, and he would receive a price per pound of 8.5 cents less than the July futures price on the day he exercised the call. If the seller failed to exercise the call, the price would be determined by reference to the futures settlement price at the close of the last day before the first notice day of a July 1978 futures contract. In a large purchase, Molsen & Co. might permit the seller to call the price in increments of 100 bales per call, with the result that the price of the entire contract would not be fixed until the seller made several calls or the first notice day arrived. Cotton bought on call and delivered to the cotton merchant may be resold by the merchant long before the original seller fixes the price and receives payment in final settlement of the contract.
In most on-call cotton purchases, the price is a specified number of points off (below) the futures market price. All of the Molsen & Co. on-call purchase contracts at issue here provided for a price off the price of July 1978 futures. The exact price terms of on-call cotton purchase contracts are influenced by a competitive marketplace. Molsen & Co. bases the price terms of its on-call purchase contracts on the difference between the spot price and the futures price existing at the time it enters into the contract. The ‘spot price‘ of cotton is the price at which cotton can be purchased for cash in the open market for immediate delivery. The difference on any given day between the spot price of cotton and the futures price for cotton traded on the New York Cotton Exchange for a particular month is called the ‘basis.‘ For example, if on December 1, 1977, the spot price of cotton was 45 cents per pound and the market price for July 1978 futures was 50 cents per pound, the basis would have been 5 cents (500 points). The basis fluctuates over time but not to the same extent as the futures price, which may fluctuate by as much as 2 cents per pound in a single day. By looking to the basis existing at the time it enters into an on-call contract, Molsen & Co. determines the price terms of the contract; in our example, the price formula would be 500 points off July 1978 futures.
Under an on-call purchase contract, the cotton merchant may or may not agree to make a provisional payment, or advance, to the seller upon delivery of the cotton, with the balance (if any) to be paid when the seller fixes the price. Delivery is made by transferring a negotiable warehouse receipt for each bale of cotton sold. The transfer of the warehouse receipts also effects the transfer of legal title to the cotton. The amount of the provisional payment is determined in different ways depending on where the cotton is purchased: in some areas of the country, farmers demand a provisional payment bearing some relation to the amount that they would receive if they pledged their cotton in return for an agricultural loan from the Federal Government; in other areas, farmers request a provisional payment determined under a formula...
To continue reading
Request your trial
-
Capitol Fed. Sav. & Loan Ass'n & Subsidiary v. Comm'r of Internal Revenue
...different method of accounting, even if such different method, in the Commissioner's view, more clearly reflects income. Molsen v. Commissioner, 85 T.C. 485, 498 (1985); Peninsula Steel Products & Equip. v. Commissioner, 78 T.C. at 1045; Auburn Packing Co. v. Commissioner, 60 T.C. 794, 798-......
-
Cellar v. Commissioner
...a different method even if, in the Commissioner's view, the Commissioner's method more clearly reflects income. Molsen v. Commissioner [Dec. 42,406], 85 T.C. 485, 498 (1985). A taxpayer's accounting method clearly reflects income if it results in accurately reported taxable income under a r......
-
Hamilton Indus., Inc. v. Comm'r of Internal Revenue
...respondent. Such a determination constitutes an abuse of discretion. Rotolo v. Commissioner, 88 T.C. 1500, 1514 (1987); Molsen v. Commissioner, 85 T.C. 485, 498 (1985); Peninsula Steel Products & Equipment Co. v. Commissioner, 78 T.C. at 1058; Garth v. Commissioner, 56 T.C. 610, 618 (1971);......
-
Ford Motor Co. v. Comm'r of Internal Revenue, 14949–91.
...clearly reflects income because the Commissioner considers an alternate method to more clearly reflect income. Molsen v. Commissioner, 85 T.C. 485, 498 (1985); Peninsula Steel Products & Equip. Co. v. Commissioner, 78 T.C. 1029, 1045 (1982); Fort Howard Paper Co. v. Commissioner, 49 T.C. 27......
-
Mr. Park Goes to D.c.: Federal Taxation of Nonresident Aliens' Wagering Gains from Slot Machines and the Per-session Rule
...rule. 123. 2 Cl. Ct. 674 (1983). 124. 136 T.C.M. (CCH) 569 (2011). 125. Treas. Reg. § 1.61-1(a) (1977). 126. See Heinz Molsen v. Comm'r., 85 TC 485, 502 (1985) (stating, "purchases are taken into account in computing cost of goods sold, which is an offset, or exclusion, employed in the comp......
-
Proposed regulations concerning the economic performance requirement under Section 461(h) of the Internal Revenue Code.
...at 530.) The courts have also explicitly held that section 461 is not to be applied to items of gross income. In Molsen v. Commissioner, 85 T.C. 485 (1985), the Commissioner asserted that the "all events" test of Treas. Reg. [subsection] 1.446-1(c)(1)(ii) and 1.461-1(a)(2) operated to precl......
-
Judicial resistance to the IRS's growing power with the clear reflection standard.
...requirement stretch the all-events test beyond the point the Tax Court had indicated it was willing to go. In Molsen v. Commissioner, 85 T.C. 485 (1985), the Tax Court said the all-events test should not be distended to apply in determining the components of cost of goods sold. Nevertheless......
-
Must developers comply with Rev. Proc. 75-25?
...Co. There is also the question of whether the economic performance rules apply only to expenses and not to capitalized costs. In Molsen, 85 TC 485 (1985), the court held that the "all events" test of Regs. Sec. 14.461-1(a)(2) did not apply to purchases that were taken into account in comput......