Opinion
Docket No. 57651.
1957-03-21
LONG POULTRY FARMS, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Hugh C. Bickford, Esq., for the petitioner. Marion B. Morton, Esq., for the respondent.
Hugh C. Bickford, Esq., for the petitioner. Marion B. Morton, Esq., for the respondent.
During its fiscal year ended June 30, 1953, petitioner, a poultry grower, was advised by a marketing cooperative of which it was a member, that a patronage refund credit had been allocated to its account. The cooperative's bylaws provided that members and patrons would currently furnish money for its operating capital through their patronage. The credit was payable in cash only at the discretion of the cooperative's directors, and they could retain the credits for use as cooperative capital as long as they desired. In addition, if the cooperative sustained a loss in any year, the directors were authorized to reduce previously allocated credits or capital contributions on a proportionate basis. All debts of the cooperative had priority over the credits. The cooperative was in sound financial condition at the end of 1952, and its net savings on operations from the time petitioner became a member, to and throughout the years in issue, were substantial. Petitioner kept its books and reported its income on an accrual basis. Held, the patronage refund credit was a properly accruable item of income to petitioner during its fiscal year ended June 30, 1953.
The respondent determined deficiencies in petitioner's income tax in the amounts of $178.94 and $180.22 for its fiscal years ended June 30, 1952, and June 30, 1953, respectively. Petitioner does not contest the adjustments resulting in the deficiencies, but claims that an amount reported as taxable income on its return for the fiscal year ended June 30, 1953, should not have been so reported; and that a refund is due it for that year and the preceding one because of a loss carryback.
The only issue is whether petitioner received taxable income by virtue of a so-called patronage dividend which was credited to its account during its fiscal year ended June 30, 1953, by a poultry marketing cooperative of which it was a member and patron.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
Petitioner was incorporated in 1946 as a Virginia corporation with its principal place of business in New Market, Virginia. It was the successor of Long Produce Company, a partnership. It filed its income tax returns for the fiscal years here in issue with the former collector of internal revenue at Richmond, Virginia. Petitioner kept its books and records and reported its income on an accrual basis.
Petitioner was a poultry raiser, and during the years in issue was a member of the Rockingham Poultry Marketing Cooperative, Inc., of Broadway, Virginia (hereinafter sometimes referred to as Rockingham). The general plan under which Rockingham operated was to provide centralized marketing facilities for its members and patrons, and at the end of each year to allocate to the members and patrons their proportionate share of the cooperative's earnings. In order for it to maintain a revolving capital fund for its operation, the bylaws of the cooperative provided that its members and patrons would currently furnish money for its capital through their patronage. The cooperative, at the discretion of its directors, might retain all patronage refund credits, allocated to its members, for its use for so long as it wished. If the cooperative sustained a loss in any year, the directors were authorized to reduce capital contributions or previous patronage refund credits on a proportionate basis. All debts of the cooperative, both secured and unsecured, had priority over patronage refund credits. Such credits were not transferable.
Rockingham was an organization exempt from taxation under the provisions of section 101(12) of the 1939 Code.
On April 1, 1953, Rockingham wrote petitioner a letter reading, in part, as follows:
Based on the tonnage which you delivered as an individual grower to the plant during the year, you are entitled to a patronage refund credit of $6,781.94, which has been entered to the credit of your account as of this date. Please keep this letter for your own personal record, together with previous information sent to you, in order that your records will be complete.
This credit will be redeemed in cash at a later date and you will be notified when it is payable. Do not present it for payment until you are notified.
Previous patronage refund credits known as certificates of equity were issued and called for payment by Rockingham, as indicated below:
+-----------------+ ¦Issued ¦Called ¦ +--------+--------¦ ¦1942 ¦1945 ¦ +--------+--------¦ ¦1943 ¦1952 ¦ +--------+--------¦ ¦1944 ¦1954 ¦ +--------+--------¦ ¦1945 ¦1955 ¦ +-----------------+
Rockingham was in sound financial condition at the end of 1952. Its balance sheet on December 31, 1952, disclosed the following principal assets and liabilities:
+---------------------------------------------------------------------------+ ¦Assets ¦Liabilities ¦ +--------------------------------------+------------------------------------¦ ¦Cash ¦$602,523.67 ¦Accounts payable ¦$403,382.53 ¦ +-------------------------+------------+-----------------------+------------¦ ¦Accounts receivable ¦1,261,874.91¦Notes payable ¦1,372,720.00¦ +-------------------------+------------+-----------------------+------------¦ ¦Inventory ¦989,126.57 ¦Allocations due patrons¦2,098,867.36¦ +-------------------------+------------+-----------------------+------------¦ ¦Real estate and equipment¦1,275.009.03¦Stock ¦468,500.00 ¦ +---------------------------------------------------------------------------+
Rockingham realized the following net savings from its operations for its members and patrons during the indicated years:
+------------------+ ¦Year ¦Amount ¦ +------+-----------¦ ¦1946 ¦$57,183.98 ¦ +------+-----------¦ ¦1947 ¦94,606.09 ¦ +------+-----------¦ ¦1948 ¦15,354.57 ¦ +------+-----------¦ ¦1949 ¦172,792.76 ¦ +------+-----------¦ ¦1950 ¦428,937.62 ¦ +------+-----------¦ ¦1951 ¦522,776.88 ¦ +------+-----------¦ ¦1952 ¦578,175.46 ¦ +------+-----------¦ ¦1953 ¦547,804.06 ¦ +------+-----------¦ ¦1954 ¦289,479.10 ¦ +------+-----------¦ ¦1955 ¦9,907.25 ¦ +------------------+
The allocations due patrons in the amount of $2,098,867.36 represented credits for the following years:
+--------------------------------------------------------+ ¦Year ¦Amount ¦ +------------------------------------------+-------------¦ ¦1942 ¦$8,056.12 ¦ +------------------------------------------+-------------¦ ¦1943 ¦92,680.47 ¦ +------------------------------------------+-------------¦ ¦1944 ¦68,349.98 ¦ +------------------------------------------+-------------¦ ¦1945 ¦172,007.58 ¦ +------------------------------------------+-------------¦ ¦1946 ¦36,679.38 ¦ +------------------------------------------+-------------¦ ¦1947 ¦85,186.23 ¦ +------------------------------------------+-------------¦ ¦1948 ¦50.67 ¦ +------------------------------------------+-------------¦ ¦1949 ¦152,048.31 ¦ +------------------------------------------+-------------¦ ¦1950 ¦405,994.65 ¦ +------------------------------------------+-------------¦ ¦1951 ¦499,638.51 ¦ +------------------------------------------+-------------¦ ¦Net savings Jan. 1, 1952, to Dec. 31, 1952¦578,175.46 ¦ +------------------------------------------+-------------¦ ¦Total ¦$2,098,867.36¦ +--------------------------------------------------------+
After receiving the notice of the credit to its account from Rockingham, petitioner's president attempted to borrow money at a Charlottesville, Virginia, bank on the letter, but was unable to do so. Petitioner's president likewise attempted to obtain some cash from Rockingham itself, on the letter, but was unable to do so.
On its income tax return for its fiscal year ended June 30, 1952, petitioner did not accrue and report a patronage credit from Rockingham in the amount of $20.98, nor a similar credit received from another cooperative in the amount of $10. Respondent determined that such credits should have been accrued and reported, and petitioner did not contest that determination.
On its income tax return for its fiscal year ended June 30, 1953, petitioner reported the amount of the patronage refund credit received from Rockingham in that year in the amount of $6,681.94 as taxable income. It now claims that such amount should not have been included in income, and claims a refund for taxes paid for that fiscal year and the preceding one, by virtue of a loss carryback.
OPINION.
RICE, Judge:
The petitioner argues that the patronage refund credit allocated to its account on Rockingham's books had no fair market value when received, and that because of that fact such credit was not properly includible in its income during the fiscal year here in issue, citing B. A. Carpenter, 20 T.C. 603 (1953), affd. 219 F.2d 635 (C.A. 5, 1955); William A. Joplin, Jr., 17 T.C. 1526 (1952); and San Francisco Stevedoring Co., 8 T.C. 222 (1947). The respondent, on the other hand, argues that the patronage refund credit was properly accruable and taxable to petitioner during such year on the authority of Harbor Plywood Corporation, 14 T.C. 158 (1950), affd. 187 F.2d 734 (C.A. 9, 1951); and George Bradshaw, 14 T.C. 162 (1950).
Petitioner's reliance on B. A. Carpenter and William A. Joplin, Jr., supra, is misplaced because in both of those cases the taxpayers kept their books and reported their income on the cash basis.
Petitioner here was an accrual basis taxpayer. It has long been recognized that a taxpayer using such a system of accounting must accrue as income any unconditional right to receive an amount of money in the year in which he acquires the right, even though actual payment of the sum is deferred until some later date. Spring City Foundry Co. v. Commissioner, 292 U.S. 182 (1934).
The exception to that rule is where there is a real uncertainty as to whether the taxpayer will ever receive the amount in question. The petitioner attempts to show that such was the case here, relying on San Francisco Stevedoring Co., supra. In that case we found that there was an uncertainty qualifying the payment which the taxpayer there was entitled to receive. We said that it was not only uncertain in the year in which the taxpayer received the right to the payment that it would actually receive the payment itself, but that it was uncertain as to whether the payment would ever be made. That was not true of the credit allocation which the petitioner received here. It had an unequivocal right to receive the sum of $6,781.94, and while there were some remote contingencies that the amount might possibly be reduced, the only real uncertainty was the time of payment. Rockingham was in sound financial condition at the end of 1952; and, from the time when petitioner first became a member in 1946, it had realized substantial net savings during all of the ensuing years here material. In the face of those facts we are unable to distinguish this case from Harbor Plywood Corporation and George Bradshaw, supra. In both of those cases, the taxpayers' right to receive the sum was unconditional and only the time when they could expect payment was uncertain.
We therefore conclude that the credit allocation in the amount of $6,781.94 which petitioner received from Rockingham was a properly accruable item of income in its fiscal year ended June 30, 1953.
Decision will be entered for the respondent.