Sheldon v. Comm'r of Internal Revenue
| Decision Date | 25 April 1974 |
| Docket Number | Docket No. 5550-71. |
| Citation | 62 T.C. 96 |
| Parties | HAROLD N. SHELDON AND RETHA M. SHELDON, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Fenton Williamson, Jr., and James O. Demsey, for the petitioners.
Joyce E. Britt, for the respondent.
In the fall preceding each year in controversy, petitioners gathered their cotton and had it ginned and placed in a marketing pool operated by Calcot, Ltd., a cooperative of which they were members. The cooperative commingled its members' cotton and expeditiously marketed it according to grade and staple. In January of each year in issue, petitioners invoiced designated bales of cotton to their church, and it received the net proceeds attributable to those bales. Petitioners claimed and were allowed charitable contribution deductions under sec. 170, I.R.C. 1954, for the amounts received by the church as well as deductions for the costs of growing the cotton. Held: At the time petitioners invoiced the cotton to the church, they did not own specific bales of cotton but possessed only the right to collect a proportionate amount of the proceeds received by Calcot from marketing its members' cotton. Petitioners are taxable under sec. 61, I.R.C. 1954, on those proceeds notwithstanding the assignment to the church.
Respondent determined deficiencies in petitioners' income tax for 1965 through 1969 as follows:
+-----------------+
¦Year ¦Amount ¦
+------+----------¦
¦1965 ¦$1,739.12 ¦
+------+----------¦
¦1966 ¦2,434.30 ¦
+------+----------¦
¦1967 ¦2,935.55 ¦
+------+----------¦
¦1968 ¦1,945.00 ¦
+------+----------¦
¦1969 ¦3,752.00 ¦
+-----------------+
The issue is whether petitioners properly excluded from their gross income, as defined in section 61, I.R.C. 1954, amounts received by the Porterville Church of the Nazarene from the marketing of their cotton by a cooperative marketing association. The answer depends on whether petitioners made gifts to the church of bales of cotton as such or the sales proceeds attributable to those bales.
Petitioners Harold N. and Retha M. Sheldon, husband and wife, were legal residents of Strathmore, Calif., at the time they filed their petition. They filed their joint income tax returns for 1965, 1966, and 1967 with the district director of internal revenue at San Francisco and for 1968 and 1969 with the Western Service Center, Ogden, Utah. In maintaining their records and filing their returns, petitioners used the cash method of accounting. Most of their business activities were handled by Harold N. Sheldon, and he will be referred to herein as petitioner.
During the period in controversy, petitioner owned and operated a 700-acre farm on which he raised various crops, including cotton, and in computing his income tax for each year he deducted his expenses pertaining to all the cotton produced that year. He had the cotton ginned and processed through the Tule River Cooperative Gins, Inc. (the gin), at Woodville, Calif. He marketed the cotton through Calcot, Ltd. (Calcot), a nonprofit cooperative association of which he was a member.
Calcot was organized and is operated under the provisions of The agricultural Code of the State of California for the purpose of marketing cotton, cottonseed, and other cotton products of its members. Its principal office and its storage facilities are located in Bakersfield, Calif.
On November 18, 1950, petitioner and Calcot executed a contract entitled ‘Marketing Agreement,‘ which was in effect during the years in controversy. The pertinent provisions of the contract, which refers to Calcot as ‘the Association,‘ include the following:
1. That during the life of this agreement the Association agrees to receive and the Grower agrees to deliver to the Association all cotton produced by or for him, or as much thereof as he may control.
3. (a) The Grower hereby appoints the Association his agent for the purpose of handling and marketing his cotton according to the most practicable method as determined by the Association.
(b) The Association shall make rules and regulations with respect to the classing, grading, financing, shipping, pooling and selling cotton as well as with respect to accounting to the Grower for the proceeds from the sale of cotton, less deductions hereinafter specified. The grading and classing of cotton by the Association shall be conclusive as between the parties hereto. Pools may be established, altered, or discontinued at any time by direction of the Board of Directors of the Association.
(c) The Association is hereby authorized to affiliate and contract with such marketing or other agencies as the said Board of Directors shall determine.
4. Title to cotton shall pass from the Grower to the Association upon its delivery to the Association (sic). The Association may borrow such sums of money on the security of cotton or other assets as the Board of Directors shall deem necessary or advisable.
5. The Association shall market the cotton delivered by the Grower and there shall be deducted from the proceeds of sale thereof the cost of freight, insurance, storage, and any other expense incurred in handling cotton, including all costs of operating and maintaining the Association together with retains for the Association Revolving Fund and other fund or funds provided for in the Association's by-laws. Such retains shall in no event be less than one per cent of the gross sale price of the cotton delivered hereunder.
8. This agreement shall be governed by and subject to all the provisions of the Articles of Incorporation and By-Laws of the Association and any amendments or revisions thereof.
Calcot's ‘By-Laws' contain the following pertinent provisions:
Section 2.01. QUALIFICATIONS FOR MEMBERSHIP. Any person engaged in the production of products shall be eligible to membership in Association. The word ‘person’, as used in this Article includes individuals, firms, partnerships, corporations, and associations; and also, lessees and tenants of lands used for or in the production of products, and any lessor or landlord who receives as rent all or part of the products raised on leased premises.
A cooperative association as defined by the Act of Congress known as the Agricultural Marketing Act (12 United States Code, 1141(j)(a)) shall be eligible for membership in the Association. The Association shall be eligible to be a member of another cooperative association organized under the provisions of the Cooperative Act of California, or under the laws of any other state.
Section 2.07. MEMBER TO FILE AGREEMENT. Each member shall execute and file with Association an agreement to market products through the facilities of the Association, and containing such other provisions and being in such form as the Board shall prescribe.
Such agreement may be combined with and incorporated in the application for membership, and, in such case, acceptance of the application shall be deemed approval and execution of the agreement by Association and shall make the agreement immediately effective and binding upon the applicant (member) and Association.
The agreements with members need not be uniform in all respects. Variations in terms of contracts with members shall be based on the difference of type of patronage of the Association's facilities with the members. In no event shall any such contract with a member obligate or permit the Association to operate otherwise than a non-profit cooperative association.
Section 10.07. HYPOTHECATE PROPERTY. To mortgage, pledge, assign, hypothecate or otherwise alienate, as security for any Association indebtedness, any products, warehouse receipts, bills of lading, or other evidence of ownership or right of possession of any products received by the Association for marketing, and also the proceeds and moneys owing to the Association from the sale of any products, or otherwise; and also any credits, shares of stock or certificates, under any Revolving Fund agreement or agreements, between the Association and other cooperatives, or marketing, or by-product or supply companies; provided, however, the Association shall account to those entitled thereto for the value of any products, or proceeds therefrom, or Revolving Fund Credits or interest in the event of any loss to the Association from any encumbrance created or suffered by the Association.
Section 10.08. COMMINGLE MONEYS. To commingle with its own funds, and use, all proceeds of products, and no member shall be entitled to claim or be paid the specific proceeds from the sale of any specific products under any trust doctrine, or otherwise; but the members shall become general creditors of the Association for any amounts payable to them.
Section 10.13. ADVANCE TO MEMBERS. To make advances to members against the products to be marketed by the Association, or its proceeds; and the provisions of Section 823 of the Corporation Code of California shall not be applicable to the Association, or its business; and loans and advances may be made to members (whether Directors, officers, or others) and obligations guaranteed without any officer or Director incurring any liability on account thereof; and members subscribing or assenting to these By-Laws shall be deemed to have given their continuing assent to such loans and guarantees.
Section 10.14. TIME OF SETTLEMENT FOR PRODUCTS. To determine the time or times when the net proceeds returnable to the members shall be paid. Payment may be made at one time or from time to time in installments as the Board shall determine. Members shall be treated uniformly, and the same proportionate part of the net proceeds returnable to the members shall become payable at the same time. No member shall have any right to require or enforce payment of any net proceeds returnable to him unless and until the Board shall have determined the same to be generally payable.
The processing of petitioners' cotton during the...
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