T.C. Memo. 1997-381

UNITED STATES TAX COURT

WILLIAM G. AND VIVIAN LOOMIS, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8748-95. Filed August 20, 1997.

Gary C. Randall and James J. Workland, for petitioners.

John M. Altman and David A. Winsten, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

FAY, Judge: Respondent determined a deficiency in petitioners' Federal income tax for the taxable year 1991 in the

amount of $35,528. After concessions, the sole issue for

decision is whether petitioners must include the fair market

value of grain contracts in their alternative minimum taxable

income (AMTI) for 1991. 
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FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulation

of facts and attached exhibits are incorporated herein by this

reference. 

Petitioners resided in Lind, Washington, at the time of the

filing of their petition. Petitioners timely filed their joint

1991 Federal income tax return with the Internal Revenue Service

Center at Ogden, Utah. Petitioners reported their income using

the cash method of accounting.

During 1991, petitioners engaged in the business of farming. 

Specifically, they grew and sold grain. They have been in the

business of farming for over 25 years. In October and November

1991, petitioners entered into deferred payment contracts (the

contracts) with the Union Elevator Warehouse Co. (Union

Elevator). Pursuant to the contracts, title to the grain passed

to Union Elevator at the time of sale. However, petitioners

contracted for payment to occur the following year. One of the

contracts with Union Elevator, which is representative of all the

contracts at issue, provides: 

The Seller agrees to sell and Buyer agrees to buy from

Seller the following commodities and both agree to

abide by the terms and conditions listed below:

Quantity: 2,000 BU.

Commodity: Soft white wheat

Price: 4.00

Price basis: FOB whse

Title passes on: 11-22-91

Payment date: Jan 1992
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1The amount shown for contract 5554A is net of the portion

pledged to secure a loan from Commodity Credit Corporation (CCC). 

Respondent argues, and we agree, that, if we find for respondent,

then the full amount of this contract should be included in

income, not reduced for the amount pledged to CCC.

The contracts do not provide for interest. Nevertheless, Union

Elevator paid petitioners interest at a rate of 5 percent per

annum. The following table contains the material terms of the

contracts in question:1

Number

5554A

5644A

5654A

5658A

5658A

5682A

5785A

5793A

5793A

5798A

 Total

Net Payment

$38,618.65

 854.30

 2,210.50

 6,636.61

 12,534.33

 11,790.75

 7,880.40

 37,925.87

 17,869.47

 19,800.50

156,121.38

Interest

$449.67

 7.37

 18.77

 56.37

 106.46

 92.06

 42.10

 187.03

 88.12

 94.93

1,142.88 

Total

$39,068.32

 861.67

 2,229.27

 6,692.98

 12,640.79

 11,882.81

 7,922.50

 38,112.90

 17,957.59

 19,895.43

157,264.26

The wheat that petitioners sold pursuant to the contracts was

sold at the prevailing market price for wheat as of the date of

each contract. 

Union Elevator used grain settlement statements in determining the amount to be paid to petitioners. The amount to be

paid consisted of the gross price agreed upon for the wheat, less

any grade discount or premiums, storage charges, and Washington

State Wheat Commission tax. Also, petitioners pledged the
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2All section references are to the Internal Revenue Code in

effect for the taxable year in issue, and all Rule references are

to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated.

proceeds from contract 5554A to secure a loan from Commodity

Credit Corporation (CCC).

On January 2, 1992, Union Elevator paid petitioners

$157,264.26, the amount due under the contracts. It was not

unusual for petitioners to collect payment on the contracts soon

after the first of the year. The balance of the loan from CCC on

this date was $32,725.37, consisting of principal and interest. 

This amount was not paid to petitioners but was withheld and

remitted to CCC. Petitioners, in preparing their 1991 Federal

income tax return, did not include in income any amount relating

to the contracts for regular tax or alternative minimum tax (AMT)

purposes.

By statutory notice of deficiency, respondent determined

that petitioners' AMTI for 1991 should be increased to take into

account the deferred sales proceeds from the contracts. Respondent increased petitioners' AMTI by $156,121 to account for these

proceeds.

OPINION

Section 612 provides that gross income means all income from

whatever source derived. Sec. 61(a)(3). Absent a statutory

exception, section 1001(c) requires a taxpayer to recognize, in
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the year of sale, gain realized from the sale or exchange of

property. Section 453, however, provides an exception to this

rule. Estate of Silverman v. Commissioner, 98 T.C. 54, 62

(1992). 

Specifically, section 453 permits a taxpayer to report

income from an "installment sale" under the "installment method." 

Sec. 453(a). Under the "installment method", a proportionate

amount of income is recognized in the year when a payment is

received. Sec 453(c). Respondent concedes that, under the

installment method, petitioners properly reported income from the

contracts in 1992, the year they received payment.

 The dispute between petitioners and respondent, however,

centers on the proper application of the AMT. Section 55(a)

imposes an alternative minimum tax in an amount equal to the

excess of the "tentative minimum tax" over the "regular tax". 

The “tentative minimum tax” is computed based on a taxpayer's

“alternative minimum taxable income”.

To determine AMTI, taxable income is adjusted as provided by

sections 56 and 58. After adjusting taxable income, as provided

in sections 56 and 58, the redetermined amount is increased by

the “items of tax preference”, as set out in section 57. The

resulting amount constitutes a taxpayer's AMTI. The AMTI in

excess of an exemption amount is multiplied by 24 percent to

determine the tentative minimum tax.
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In general, all Internal Revenue Code provisions that apply

in computing regular taxable income also apply in determining a

taxpayer's AMTI. Sec. 1.55-1(a), Income Tax Regs. However, at

the time of trial, taxpayers like petitioners who used the

installment method in computing their taxable income could not

use the installment method in computing their AMTI. 

Specifically, section 56(a)(6) provided:

SEC. 56(a). Adjustments Applicable to All Taxpayers.--In determining the amount of the alternative

minimum taxable income for any taxable year the

following treatment shall apply (in lieu of the

treatment applicable for purposes of computing the

regular tax):

* * * * * * *

(6) Installment sales of certain property.--

In the case of any disposition after March 1,

1986, of any property described in section

1221(1), income from such disposition shall be

determined without regard to the installment

method under section 453. * * * 

Section 1221(1) describes "property held by the taxpayer

primarily for sale to customers in the ordinary course of his

trade or business". The sale of farm products by a farmer is,

according to respondent, a disposition of section 1221(1)

property. See Rev. Rul. 80-19, 1980-1 C.B. 185. 

Respondent asserts, and petitioners do not dispute, that, in

this case, petitioners engaged in the business of farming, and

the sales of wheat pursuant to the contracts with Union Elevator

were dispositions in the ordinary course of their business. 
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Thus, respondent reasoned that the sales pursuant to the contracts constitute dispositions of property described in section

1221(1). Therefore, respondent concluded, under section 56(a)(6),

for AMT purposes, petitioners must determine income from the

grain sales without regard to the installment method. Accordingly, respondent argued that the gain from the contracts must be

included in petitioners' income in 1991 for purposes of calculating their AMTI.

However, on August 5, 1997, the President signed the

Taxpayer Relief Act of 1997, Pub. L. 105-34, 111 Stat. 788 (the

Act). Section 403 of the Act provides:

SEC. 403. Minimum Tax Not to Apply to Farmers' Installment Sales.

(a) In general.--Subsection (a) of section 56

is amended by striking paragraph (6) (relating to

treatment of installment sales) * * *.

(b) Effective dates.-- 

(1) In general.--The amendment made

by this section shall apply to dispositions in taxable years beginning after

December 31, 1987. 

This provision removes section 56(a)(6) from the Internal Revenue

Code. Further, the amendment is made applicable to dispositions

after December 31, 1987. Thus, this provision covers the sales

made in 1991 under the contracts, and petitioners are therefore

permitted to use the installment method in calculating their AMTI

for 1991. Accordingly, we conclude that income from the con-
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tracts does not have to be included in petitioners' income in

1991 for purposes of calculating their AMTI.

To reflect the foregoing,

Decision will be entered

for petitioners.