Opinion
Docket Nos. 18860 18861.
1949-08-8
J. D. AMEND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.EVA AMEND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Dorothy Ann Kinney, Esq., and Walter G. Russell, C.P.A., for the petitioners. Allen T. Akin, Esq., for the respondent.
Petitioner J. D. Amend is a wheat farmer and his custom since 1942 has been to sell his wheat in the year when produced, for delivery and payment in January of the following year. He followed this practice in the years 1944 and 1946 and received payment for his 1944 wheat in January 1945 and payment for his 1946 wheat in January 1947. Petitioners were on the cash basis and returned the amounts received for taxation in the year when received. The Commissioner has applied the doctrine of constructive receipt on the ground that petitioner could have sold his wheat for cash to the same buyers in the years when the contracts of sale were made and he contends that the deferring of payment in the following year was at petitioner's own request. Hold, that the contracts of sale were bona fide arm's length transactions and petitioner had no legal right to demand and receive payment for his wheat until in January of the year following the contract of sale and the doctrine of constructive receipt is not applicable Dorothy Ann Kinney, Esq., and Walter G. Russell, C.P.A., for the petitioners. Allen T. Akin, Esq., for the respondent.
Docket No. 18860, J. D. Amend, petitioner, involves deficiencies in income tax of $15,389.03 for the year 1944 and $4,034.68 for the year 1946.
Docket No. 18861, Eva Amend, petitioner, involves deficiencies in income tax of $8,716.23 for 1944 and $2,237.55 for 1946.
Upon audit of petitioner J. D. Amend's 1944, 1945, and 1946 income tax returns, the Commissioner adjusted income for the years 1944 to 1946, inclusive, with the following explanation in the notice of deficiency:
For the year 1944 . . .
(a) Profit from business has been increased by * * * (2) the inclusion in 1944 income of wheat sales credited to your account on August 25, 1944 and which you reported as 1945 income because you received and cashed the check therefor in January 1945— $40,164.08.
For the year 1945 . . .
(a) Profit on a sale of grain in 1945 was reported by you in 1946 instead of in 1945 because the check on the sale was not deposited until January 3, 1946. Since the amount was constructively received in 1945, the profit is included in 1945 income. Amount $7,721.59.
(b) The profit on the sale of wheat constructively received in 1944 is here eliminated from 1945 income. See Schedule 3-A(a)(2). Amount $40,164.08.
For the year 1946 . . .
Wheat sales in 1946 reported in 1947 (when check cashed) are held to have been reportable in 1946 when the proceeds were constructively received.
+-----------------------------------------------+ ¦Amount ¦$17,774.28¦ +------------------------------------+----------¦ ¦Less: Sales in 1945 reported in 1946¦7,721.59 ¦ +------------------------------------+----------¦ ¦Net adjustment on wheat ¦$10,052.69¦ +-----------------------------------------------+
Similar adjustments were made with respect to the returns of Eva Amend, she and her husband having filed their returns on the community property basis.
Petitioners contest the foregoing adjustments for 1944 and 1946 by appropriate assignments of error. The year 1945 is not before us because the Commissioner determined an overassessment of $2,672.64 as to J. D. Amend and an overassessment of $2,842.64 as to Eva Amend.
FINDINGS OF FACT.
The petitioners are individuals who reside in Amarillo, Texas. J. D. Amend will sometimes hereinafter be referred to as the petitioner.
The income tax returns of the petitioners for the periods here involved were filed with the collector for the second district of Texas. All items of income in dispute, with the exception of that arising in January 1944 and prior periods, constituted community income of the petitioners, who were married June 17, 1944. Petitioners employed the cash basis method of accounting and filed their returns on that basis.
From 1942 to 1946, inclusive, petitioner, a wheat farmer, annually contracted to sell a portion of his wheat in one year for delivery and payment in January of the subsequent year. The first transaction in which petitioner or his attorney in fact, Paul B. Higgs, contracted to sell wheat for January delivery and payment originated in December 1942 with the Burrus Mill & Elevator Co. in Amarillo, Texas, sometimes hereinafter referred to as Burrus. A check in payment for the wheat in the amount of $17,012.13 was issued to petitioner on January 15, 1943. The second transaction on which petitioner contracted to sell wheat for January delivery and payment originated in December 1943 with the Barnett Grain Co. of Amarillo, Texas. A check in payment for the wheat in the amount of $12,775.30 was issued to petitioner on January 31, 1944. The third transaction in which petitioner or his attorney in fact contracted to sell wheat for January delivery and payment originated on August 2, 1944, with the Burrus Panhandle Elevator Co. in Amarillo, Texas. A check in payment for the wheat in the amount of $40,164.08 was issued to petitioner on January 17, 1945. The fourth transaction in which petitioner contracted to sell wheat and other grains for January delivery and payment originated in 1945 with the Coffee-Davis Grain Co. of Amarillo, Texas. A check in payment for the wheat and other grains in the amount of $7,721.59 was issued to petitioner on January 2, 1946. The fifth transaction in which petitioner contracted to sell wheat for January delivery and payment originated in 1946 with the Coffee— Davis Grain Co. of Amarillo, Texas. A check in payment for the wheat in the amount of $17,774.28 was issued to petitioner on January 4, 1947.
At the time the contract was made in each of the five transactions, the purchaser either had the grains in storage or received them prior to January 1, pursuant to a contemporaneous agreement as to shipping date. Under the terms of the contract made in each of the five transactions, petitioner was to receive his money for the wheat in January of the year following the contract of sale. The contracts of sale in each year were oral. These contracts were bona fide arm's-length transactions between the seller and the buyer.
Petitioner did not attempt to obtain payment, nor was it represented to him or his attorney in fact that he could obtain payment, prior to January of the following year under the contract made in each of the five transactions. The parties traded upon a ‘flat price‘ in each of the above five transactions, without any agreement for payment of storage.
The price of wheat for January delivery was determined by agreement between the parties. A price is not posted for January delivery in the grain business as the grain exchanges do not provide January as a delivery month on future contracts.
On or about August 2, 1944, Higgs, attorney in fact for petitioner, offered to sell petitioner's 1944 wheat, which consisted of approximately 30,000 bushels, for January delivery and payment to Porter Holmes, the manager of the Burrus Panhandle Elevator Co. in Amarillo, Texas. Higgs and Holmes agreed upon a price for the wheat which did not include any provision for storage in that it approximated the market price for wheat on August 2, 1944. The transaction was the only one of its type that the Amarillo office of Burrus handled in 1944. Since the transaction was unusual, Holmes called an official of the company in Dallas, Texas, and secured authority to buy the wheat upon the terms agreed upon between him and Higgs. The Dallas official approved the transaction. A confirmation letter dated August 2, 1944, was issued on the transaction by Burrus to petitioner. The confirmation specified the number of bushels, the price based on top grade, time of shipment, routing, and discounts. The confirmation was not treated by Burrus as intended to reflect all the terms of the oral contract. In the grain business the actual contract is generally oral. The time of shipment specified in the confirmation letter referred only to the date it should be transferred to the physical possession of Burrus and not to the technical delivery or closing date.
After the wheat was received and graded an amount of $40,164.08 was entered on Burrus' books as a credit to petitioner's account and a charge to purchases was made of the same amount. The credit on the books of Burrus to petitioner's account was not intended to reflect that he was immediately entitled to receive his money. The practice of Burrus generally was to issue a check to the seller within a few days after a credit was made. This procedure was followed with respect to a straight sale of wheat which was sold by petitioner, as the agent of Marshall Cator, on August 5, 1944. Cator was paid immediately for his wheat because it was sold outright to Burrus at that time for immediate delivery.
As heretofore stated, petitioner J. S. Amend was not paid for his 30,000 bushels of wheat which he sold to Burrus in August 1944 until January 17, 1945, because by agreement between the parties he was not to be paid for such wheat until some time in that month.
OPINION.
BLACK, Judge:
We have two taxable years before us for decision, 1944 and 1946. The year 1945 is not before us because the Commissioner has determined an overassessment as to each petitioner for that year.
In each of the taxable years there is one common issue and that is whether the doctrine of constructive receipt should be applied to certain payments which petitioner received from the sale of his wheat. There is no controversy as to the amounts which petitioner received or as to the time when he actually received them. Petitioners, being on the cash basis, returned these amounts as part of their gross income in the years when petitioner actually received them. As heretofore explained, the Commissioner has refused to accept petitioner's treatment of the payments and has applied the doctrine of constructive receipt and determined that such amounts were income of the prior years. Other adjustments were made in the determination of the deficiencies, but these are not contested.
In applying the doctrine of constructive receipt, the Commissioner relies upon Regulations 111, section 29.42-2, printed in the margin.
SEC. 29.42-2. INCOME NOT REDUCED TO POSSESSION.— Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition. A book entry, if made, should indicate an absolute transfer from one account to another. If a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt.
In Loose v. United States, 74 Fed.(2d) 147, the rule providing for the taxation of income constructively received is stated as follows:
* * * the strongest reason for holding constructive receipt of income to be within the statute is that for taxation purposes income is received or realized when it is made subject to the will and control of the taxpayer and can be, except for his own action or inaction, reduced to actual possession. So viewed, it makes no difference why the taxpayer did not reduce to actual possession. The matter is in no wise dependent upon what he does or upon what he fails to do. It depends solely upon the existence of a situation where the income is fully available to him. * * *
Respondent, in his brief, relies upon the Loose case, from which the above quotation is taken, and several other cases which deal with the doctrine of constructive receipt. Needless to say, each of those cases depends upon its own facts. In the Loose case, for example, interest coupons had matured prior to the decedent's death. The decedent had not presented them for payment because of his physical condition. It was held that, even though the decedent had not cashed them, the interest coupons represented income to him in the year when they matured, under the doctrine of constructive receipt.
It seems clear to us that the facts in the instant case do not bring it within the doctrine of Loose v. United States, supra, and the other cases cited by respondent dealing with constructive receipt.
In discussing the situation which we have in the instant case, we turn our attention first to the contract of sale which petitioner made of his 1944 wheat crop to Burrus. The testimony was that 1944 was a bumper wheat crop year and that petitioner produced and harvested about 30,000 bushels, some of which was lying out on the ground and some of which was stored on the farm. Petitioner, through his attorney in fact, Paul Higgs, sold this wheat to Burrus for January 1945 delivery at $1.57 per bushel. It was the understanding that petitioner would ship his wheat to Burrus at once and that Burrus would pay him for it in January of the following year. The contract was carried out. Some time during the month of August 1944, after August 2, petitioner shipped the 30,000 bushels to Burrus. Burrus received it, put it in its elevator, and paid petitioner for it by check dated January 17, 1945.
Respondent's contention seems to be based primarily on the fact that petitioner could have sold Burrus the wheat at the same price for immediate cash payment in August 1944 and that although he did not do so, he should be treated in the same manner as if he had and the doctrine of constructive receipt should be applied to the payments received. We do not think the doctrine of constructive receipt goes that far. Porter Holmes, who was the manager of of the Burrus Panhandle Elevator in Amarillo at the time of the 1944 transaction, testified at the hearing. He testified that it was the usual custom of Burrus to pay cash for wheat soon after it was delivered and that the transaction between Burrus and petitioner for January 1945 delivery and settlement was unusual and that he telephoned the manager at Dallas, Texas, for authority to make the deal that way and secured such authority and the deal was made. He testified that when Burrus' check for $40,164.08 was mailed to petitioner January 17, 1945, it was done in pursuance of the contract. So far as we can see from the evidence, petitioner had no legal right to demand and receive his money from the sale of his 1944 wheat until in January 1945. Both petitioner and Burrus understood that to be the contract. Such is the substance of the testimony of both petitioner, who was the seller of the wheat, and Holmes, who acted for the buyer. Such also is the testimony of Paul Higgs, who represented the seller in the negotiations for the sale. During 1944 all that petitioner had in the way of a promise to pay was Burrus' oral promise to pay him for the wheat in January 1945. Burrus was a well known and responsible grain dealer and petitioner testified that he had not the slightest doubt that he would receive his money in January 1945, as had been agreed upon in the contract. Such a situation, however, does not bring into play the doctrine of constructive receipt. See Bedell v. Commissioner, 30 Fed.(2d) 622, wherein the court said:
While, therefore, we do not think that the case is like a promise to pay in the future for a title which passes at the time of contract, we would not be understood as holding by implication that even in that case the profit is to be reckoned as of the time of sale. If a company sells out its plant for a negotiable bond issue payable in the future, the profit may be determined by the present market value of the bonds. But if land or a chattel is sold, and title passes merely upon a promise to pay money at some future date, to speak of the promise as property exchanged for the title appears to us a strained use of language, when calculating profits under the income tax. * * * it is absurd to speak of a promise to pay in the future as having a ‘market value,‘ fair or unfair. * * *
The doctrine that a cash basis taxpayer can not be deemed to have realized income at the time a promise to pay in the future is made was reiterated by the Circuit Court of Appeals for the Eighth Circuit in the more recent case of Perry v. Commissioner, 152 Fed.(2d) 183. In that case it was stated:
These cases seem to be predicated upon the fact that in a contract of sale of property containing a promise to pay in the future, but not accompanied by notes or other unqualified obligations to pay a definite sum on a day certain, the obligation to pay and the obligation to pass title both being in the future, there is an element of uncertainty in the transaction and the promise has no ‘market value‘, fair or unfair. This theory is supported by the decision of the Supreme Court in Lucas v. North Texas Co. * * *
The Commissioner in the instant case is not contending that Burrus' contract to pay petitioner for his wheat in January 1945 had a fair market value equal to the agreed purchase price of the wheat when the contract was made in August 1944. What he is contending is that petitioner had the qualified right to receive his money for the wheat in 1944; that all he had to do to receive his money was to ask for it; and that, therefore, the doctrine of constructive receipt applies as defined in section 29.42-2, Regulations 111.
For reasons already stated, we do not think the Commissioner's determination to this effect can be sustained. If petitioner had begun this method of selling his wheat in 1944, when he had a bumper crop, there might be reason to doubt the bona fides of the contract, but what we have said about the 1944 transaction between Burrus and petitioner is based upon the finding that the contract between Burrus and petitioner was bona fide in all respects, though it was initiated by petitioner, and each party was equally bound by its terms. Petitioner did not begin this method of selling his wheat in 1944— he began it in 1942 and continued it through 1946. No doubt his taxes were more in some years and less in others than they would have been if petitioner had sold and delivered his wheat for cash in the year when it was produced. To illustrate this we need only point out that under the method which petitioner used he reported income in 1944 upon which he paid a tax of $2,672.64. His wife Eva also reported income and paid a tax of about the same amount. By treating petitioner's proceeds from the sale of his 1944 wheat as constructively received in 1944, the Commissioner determined overassessments as to each petitioner for 1945 and deficiencies against each petitioner for 1944.
Petitioner was asked at the hearing why he adopted the manner of selling his wheat which has been detailed in our findings of fact. His answer was as follows:
Well, that had been my practice, to handle that wheat that way since 1942 and I have handled my wheat that way, '42, '43, '44, '45, '46, '47 and into 1948. It is still my practice to do that and there have been some years in that interval that I would certainly have paid less income had I handled it the other way, but that is a semi-arid country and we are uncertain about our wheat crops and our expenses are always pretty well set and we know they are going to be high and we need for our own protection to carry part of this wheat forward.
* * *
As I have already explained, it's been a matter of making my income more uniform and even; about five of those years had it all been set back and sold in the year that it was supposed to have been sold in, my income tax would have been less and in the other two it would have been more. I merely emphasize that to show the consistency of my policy and not as a matter of paying any tax.
Whether the reasons advanced by petitioner in his testimony quoted above are good or bad as a business policy, we do not undertake to decide. The question we think we have to decide is whether the contracts detailed in our findings of fact were bona fide arm's-length transactions and whether under them the petitioner had the unqualified right to receive the money for his wheat in the year when the contracts were made and whether petitioner's failure to receive his money was of his own volition. Our conclusion, as already stated, is that the contracts were bona fide arm's length transactions and petitioner did not have the right to demand the money for his wheat until in January of the year following its sale. This being true, we do not think the doctrine of constructive receipt applies. See Howard Veit, first point decided, 8 T.C. 809.
Petitioner, in each of the years before us, returned as a part of his gross income the checks which he actually receive in payment for his wheat. This being so, we think he complied with the income tax laws governing a taxpayer who keeps his accounts and makes his returns on the cash basis.
We have discussed in detail above only the sale which petitioner made of his wheat to Burrus in August 1944. The sale of his 1945 and 1946 wheat was made to Coffee-Davis Grain Co. under substantially the same circumstances as the sale to Burrus and it need not be separately discussed. For the sale of his 1946 wheat, petitioner received a check for $17,774.28, dated January 4, 1947, from the Coffee-Davis Grain Co. Petitioners returned the amount of that check in their 1947 income tax returns. It is this latter check that the Commissioner put back in petitioners' 1946 income under the doctrine of constructive receipt. For the same reasons that we have held that the Commissioner erred in applying the doctrine of constructive receipt to the payment which petitioner received from Burrus in 1945, we hold that he erred in applying the doctrine of constructive receipt to the check for $17,774.28 which petitioner received from Coffee-Davis Co. in January 1947.
Decisions will be entered under Rule 50.