Riverfront Groves, Inc. v. Comm'r of Internal Revenue
| Decision Date | 18 June 1973 |
| Docket Number | Docket No. 1378-72. |
| Citation | 60 T.C. 435 |
| Parties | RIVERFRONT GROVES, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
James E. Miller, for the petitioner.
Kenneth B. Wheeler, for the respondent.
Petitioner is a corporation which assists citrus grove owners in marketing their fruit. Petitioner became a member-patron of the Plymouth Citrus Products Cooperative to provide a means of marketing the grove owners' fruit which was unsuitable for packing. As a member-patron of Plymouth petitioner consented to include in income noncash per-unit retain certificates distributed to petitioner by Plymouth. These certificates represented petitioner's equity interest in Plymouth. Held, the inclusion in petitioner's income of the face amounts of the per-unit retain certificates does not violate petitioner's rights under the 16th, 5th, and 13th amendments to the Constitution. Held, further, petitioner was not merely a conduit and the income is not properly taxed to the citrus grove owners instead of petitioner.
Respondent determined deficiencies in the Federal income tax of petitioner as follows:
+------------------------------+
¦TYE July 31— ¦Deficiency ¦
+-----------------+------------¦
¦ ¦ ¦
+-----------------+------------¦
¦1968 ¦$10,335.62 ¦
+-----------------+------------¦
¦1969 ¦10,529.37 ¦
+-----------------+------------¦
¦1970 ¦14,795.90 ¦
+------------------------------+
The issue for consideration is whether petitioner should take the face amount of qualified per-unit retain certificates into income as it has consented to do pursuant to the provisions of section 1388(h).1
Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
The petitioner, Riverfront Groves, Inc. (Riverfront), is a corporation duly organized and existing under the laws of the State of Florida. At the time of the filing of the petition herein, the principal office of petitioner was located in Vero Beach, Fla. Petitioner's corporate income tax returns for the taxable years ended July 31, 1968, 1969, and 1970, were filed with the office of the director, Southeast Internal Revenue Service Center, Chamblee, Ga.
Riverfront is engaged primarily in the business of harvesting and packing citrus fruit. Petitioner, for a fee, performs services for and on behalf of a number of citrus grove owners (the growers) in the Indian River, Fla., area, assisting them in harvesting, packing, and marketing their fruit.
In the case of fruit harvested by Riverfront which is unsuitable for packing, petitioner has another means of marketing such. That fruit is harvested and processed into canned and frozen concentrated citrus juices, citrus essential oils, citrus feed, and molasses. Plymouth Citrus Products Cooperative (Plymouth or the cooperative) is the recipient and processor of this unsuitable-for-packing fruit.
Plymouth is a cooperative organization as described by section 1381(a). Petitioner is a stockholder in Plymouth and was a member-patron of Plymouth during the years in issue. During the years at issue, when petitioner shipped fruit to Plymouth, which it harvested for its grower-customers, petitioner was responsible for any loss which occurred to the fruit during the time of shipment. When the fruit was received by Plymouth it made no effort to separate or allocate the fruit as being the property of anyone other than petitioner. No agreement exists between petitioner and Plymouth that petitioner is acting as an agent for the individual growers serviced by petitioner. Plymouth paid for the fruit it received with an initial advance to petitioner on delivery, and then from time to time as the product was sold, Plymouth made further remittances to Riverfront.
The amount of money received by petitioner from Plymouth was directly proportional to the amount of fruit petitioner shipped to Plymouth. In addition to the money received for the processed fruit, petitioner received from Plymouth per-unit retain certificates (certificates), the face amount of which was computed on the basis of the amount of fruit marketed for petitioner. The amounts represented by these certificates represent payment which would otherwise be a further remittance to petitioner; however, the actual amounts were retained by the cooperative as part of an established base capital requirement plan. Pursuant to this plan, the board of directors of Plymouth determined what the cooperative's capital requirement was. This capital requirement was translated into a per-box-of-fruit figure that would result in the receipt of the necessary working capital as determined. The certificates represented 10 cents per box on each box of fruit placed with Plymouth during the years at issue. The per-unit retain certificates issued by the cooperative to Riverfront recognized petitioner's growing equity interest in the cooperative which resulted from the cooperative's retention of the additional earnings in its capital fund.
Petitioner received revolving fund (per-unit retain) certificates issued by Plymouth in the following amounts:
+-----------------------------------------+
¦ ¦Certificate ¦ ¦
+----------------+-------------+----------¦
¦TYE July 31— ¦No. ¦Amount ¦
+----------------+-------------+----------¦
¦1968 ¦3306 ¦$20,348.30¦
+----------------+-------------+----------¦
¦1969 ¦3374 ¦19,942.00 ¦
+----------------+-------------+----------¦
¦1970 ¦3420 ¦28,897.00 ¦
+-----------------------------------------+
These per-unit retain certificates have no fair market value outside of the citrus industry. They cannot be utilized as security for normal, commercial, or banking transactions, or loans, and they are redeemable by the issuing cooperative solely at the discretion of the board of directors. Petitioner has never received any cash payments from Plymouth in redemption of the certificates. In fact, redemptions of similar certificates have not been made by the cooperative for at least 10 years.
Over and above this potential right to eventual redemption, the certificates represent to the member-patron holding such a certain equity interest in the cooperative which entitles him to particular privileges, for some of which privileges a nonmember would have to pay. Specifically, in the present case, because of the per-unit retain certificates held by petitioner, petitioner is entitled to have 100,000 boxes of fruit processed by the cooperative without paying a processing charge. In addition, while the need has never arisen, the cooperative, if necessary, would show a preference to member-patrons if there were only limited facilities available for all of the cooperative's customers.
A customer of the cooperative need not participate as a member-patron in order to process its goods through the cooperative. A non-member-patron doing business with Plymouth does not receive any per-unit retain certificates but, instead, is required by contract to pay a per-box processing charge for the use of Plymouth's processing facilities. Petitioner is no longer a member-patron of Plymouth and no longer receives per-unit retain certificates.
In order to participate as a member-patron and therefore avoid being subject to the per-box processing fee charged to nonmembers, the member-patron must consent to include the per-unit retain certificates received into income at their fact value.
On November 18, 1966, and August 23, 1968, petitioner, by its president, executed written agreements with Plymouth relating to its income allocations and per-unit retain certificates issued by it.
The consent agreements signed by petitioner conform with section 1388(h)(2)(A) as proper expressions of agreement by the distributee of per-unit retain certificates to take the certificate into account at its stated dollar amount as provided in section 1385(a).
Business dealings in the citrus industry, insofar as they relate to Riverfront and the growers it serviced, are very informal. There are no written contractual agreements governing the parties' dealings. If Riverfront is in a position to service a grower it will do so, and after taking out its fee Riverfront remits all the remaining proceeds to the grower whose fruit it has harvested and marketed.
Riverfront keeps its books on a cash basis except that at the end of each tax year it makes certain adjusting and closing entries accruing liabilities to its grower-clients for their fruit. However, for the years at issue the adjusting and closing entries did not reflect liabilities to the grower-clients for per-unit retain certificates received by petitioner from Plymouth. While Riverfront made some attempt to segregate the per-unit retain certificates attributable to each grower on its own ledger, it never informed the growers of the existence of those retain certificates or of their potential rights, if any, to the certificates. In fact, petitioner's grower-clients did not receive notice of and were for the most part ignorant of the fact that petitioner was receiving qualified per-unit retain certificates from Plymouth. Some growers did not even know through which facilities their fruit was processed. The yearly statements which petitioner sent to its grower-clients did not refer to or contain any information whatsoever regarding the per-unit retain certificates received by petitioner from Plymouth. Furthermore, petitioner's directors never adopted any formal indicia of an obligation to pass the retain certificates or any benefits accruing from such on to the growers.
On its Federal income tax returns for the taxable years ending July 31, 1968, 1969,and 1970, petitioner failed to include any of the face amount of the qualified per-unit retain certificates in income. Respon...
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