Keith SCHERBART; Janet Scherbart, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee., United States Court of Appeals, Eighth Circuit., 453 F.3d 987, No. 05-1325., Filed: July 5, 2006
Keith SCHERBART; Janet Scherbart, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
United States Court of Appeals, Eighth Circuit.
453 F.3d 987
Filed: July 5, 2006.
Submitted: March 13, 2006.
Filed: July 5, 2006.
Allan G. Bowen, argued, Minneapolis, MN, for appellants.
Carol Barthel, argued, U.S. Department Office Justice, Tax Division, Washington, D.C., for appellee.
Before ARNOLD, JOHN R. GIBSON, and SMITH, Circuit Judges.
ARNOLD, Circuit Judge.
Keith and Janet Scherbart appeal the ruling of the tax court 1 that they were not entitled to defer as income on their joint tax returns payments that Mr. Scherbart received from a corn-processing coopera╜tive. We affirm.
1. ═ The Honorable John J. Pajak, Special Trial Judge. See 26 U.S.C. ╖ 7443A.
Mr. Scherbart, a corn farmer, was a member of the Minnesota Corn Processors (MCP) cooperative during 1994 and 1995. As a member of MCP, Mr. Scherbart was obligated to make three deliveries of corn per year, with the total number of bushels delivered equaling the number of "units of equity participation" that he held in the cooperative. MCP processed the corn that it held and sold the processed product to third parties. Its members received con╜temporaneous payments for their deliver╜ies, as well as "value-added" payments de╜rived by splitting MCP's net proceeds at the end of each fiscal year among the units of equity participation.
In August of 1994 and 1995, Mr. Scher╜bart received letters from MCP that ad╜vised him that value-added payments would be calculated after MCP's annual audit and would be paid out in mid-No╜vember. The letters offered the option to have these payments deferred until Janu╜ary of the next taxable year. Each year, Mr. Scherbart elected to defer the value-added payment. The Scherbarts filed joint tax returns that listed the value-add╜ed payments as income for the years that Mr. Scherbart received them.
In 1998, the IRS issued a notice of defi╜ciency to the Scherbarts based on the con╜tention that they could not defer the value-added payments as income because those payments were earned and payable in the preceding taxable year. The Scherbarts filed a petition with the tax court challeng╜ing the decision, and the tax court ruled in favor of the IRS. The tax court held that MCP was Mr. Scherbart's agent, and that because the proceeds from the sale of Mr. Scherbart's corn were in MCP's possession during its fiscal year and Mr. Scherbart imposed the limitation that kept MCP from sending him the payments in Novem╜ber, the proceeds were received by the taxpayers at that time.
The parties agree that MCP acted as Mr. Scherbart's agent for purposes of processing and marketing the corn, and a written agreement between MCP and its members reflects the agency relationship. Cf. Bot v. Commissioner, 353 F.3d 595, 601 (8th Cir.2003). The parties disagree, how╜ever, on the legal consequences of the relationship. The Commissioner contends that receipt by MCP, the agent, amounts to receipt by Mr. Scherbart. The Scher╜barts, however, maintain that the IRS is required by statute to treat the deliveries of corn to MCP as an installment sale and that under the installment method of re╜porting, the value-added payments should have been recognized in the taxable years in which they were sent by MCP. See 26 U.S.C. ╖ 453. We review the factual find╜ings of the tax court for clear error, and review its interpretation of the tax laws de novo. See id.
Under the Internal Revenue Code, an "installment sale" is "a disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs," and the income from such sales generally will be accounted for by using the "installment method." 26 U.S.C. ╖ 453(a), (b)(1). While the installment method is not used for "dealer dispositions," which include dis╜positions of personal property by someone who regularly disposes of property of a particular type on the installment plan, 26 U.S.C. ╖ 453(b)(2)(A), (l)(1)(A), the disposi╜tion of farm property such as the corn in this case is not considered a "dealer dispo╜sition" and thus the installment method may be used, 26 U.S.C. ╖ 453(l)(2)(A). The Scherbarts argue that because Mr. Scherbart made dispositions of corn to MCP, the value-added payment is simply a final installment in payment for that corn. Under ╖ 453(l)(2)(A), recognition of the value-added payments would thus occur in the taxable year in which MCP transferred them to the Scherbarts.
The success of the Scherbarts' install╜ment-sale theory depends entirely on char╜acterizing the corn deliveries and subse╜quent payments as sales transactions. An equity disclosure statement, which de╜scribes the obligations of MCP and its members, however, does not refer to the transactions as sales. It talks about deliv╜eries and payments, but at no point does the agreement establish that ownership of the corn passes from the member to MCP. We noted in Bot, 353 F.3d at 601-02, that MCP's "program operated on the basis that [the members] were producers or owners of the corn delivered under the program and that MCP acted as their agent in further processing and marketing the corn." Bot's holding would collapse into nonsensicality if MCP owned the corn in question; MCP's agency with regard to processing and marketing is meaningful only if the corn is owned by the member after delivery. Since Bot dealt with the same type of relationship and transaction as this case does, we hold that the transac╜tions at issue here were not sales.
Because the value-added payments are not installments pursuant to an install╜ment sale agreement, we turn to the Scherbarts' argument that Mr. Scherbart did not receive the payments when MCP first made them available to members. They contend that because Mr. Scherbart elected to defer receipt of any post-audit value-added payment in August, before MCP had calculated whether such a pay╜ment would be made at all, the payment should be recognized as income in the following taxable year, not the taxable year in which he had the first opportunity to receive the value-added payment.
The general rule is that receipt by an agent is equivalent to receipt by the principal, Maryland Casualty Co. v. Unit╜ed States, 251 U.S. 342, 347, 40 S.Ct. 155, 64 L.Ed. 297 (1920), even if the agent agrees not to distribute income to the prin╜cipal until the following year. See Crim╜mins v. United States, 655 F.2d 135, 138 (8th Cir.1981). Self-imposed limitations on receipt do not trump this rule. Arnwine v. Commissioner, 696 F.2d 1102, 1109 (5th Cir.1983). Because Mr. Scherbart's defer╜rals of the value-added payments were self-imposed limitations, the payments were received when they were held by Mr. Scherbart's agent, MCP, in the years be╜fore the payments were sent to Mr. Scher╜bart.
The Scherbarts seek to rely on Schniers v. Commissioner , 69 T.C. 511, 516, 1977 WL 3725 (1977), which permitted a farmer to report income from what were termed "Deferred Payment Contract[s]" for the year in which he received the payments; the court ruled for the taxpayer because the Commissioner failed to show that the sales agreements, which specifically re╜quired the deferred payments, were "shams." Id. at 519. But in Schniers the transaction was unquestionably a sale, and the payments were to be received by the taxpayer-seller from the agent for the buy╜er. Id. at 516-19. Here, the relevant sale was between MCP and the buyers of pro╜cessed corn products, not MCP and the Scherbarts, and MCP was Mr. Scherbart's agent. Therefore requiring that the Com╜missioner prove that any sale was a sham in order to invalidate the deferred pay╜ment agreement is inapposite; the agree╜ment in question here is simply not a sale.
Given the agency relationship between MCP and Mr. Scherbart and the voluntary nature of the deferral, the tax court did not err in finding that the Scherbarts re╜ceived the value-added payments in the taxable years in which they were calculat╜ed. The Scherbarts received the value-added payments in November of 1994 and 1995. They were therefore not entitled to defer recognition of the payments as in╜come until the next taxable year.
We affirm the judgment of the tax court.