Farmers Get Favorable Ruling on Price-Later Contracts

Article excerpt

The Applegates, cash-method farmers, sold grain to grain elevators under price-later contracts. Under these contracts, they received a down payment when they entered into the contract. However, the grain's purchase price was not set in the contract but was to be fixed later.

The Applegates had one year to fix the price by demanding payment. On the Applegates' demand, the buyer had to pay the going price for grain. If the Applegates did not make their demand within one year, the going price as of the end of the year would be the contract price. Obviously, the sellers would exercise their contractual rights only if the market price of grain rose before the year was up.

In this case the Applegates made no demand by the end of the year, so the contract price was neither determined nor paid by that time.

The Applegates claimed these contracts were installment sales and the amounts they received under the contract were reportable under the installment method.

The IRS claimed the installment method did not apply. It argued that because the Applegates had the unrestricted right to demand the entire contract price at any time during the first year, there was in fact full payment during the first year. …