Deferred Payment Contracts

By: Dave Thomsen, Partner email

Recently, an issue has been raised with the IRS concerning the deductibility of grain payables recorded in a cooperative’s financial statements, and therefore in its tax return, for deferred payment contracts.  The question was posed as to why the cooperative taxpayer should be allowed to deduct in its tax return a payable for grain purchased under a deferred payment arrangement, allowing the farmer/seller the opportunity to defer the reporting of his income to a subsequent tax year.  Although the issue has yet to be resolved, we thought it would be good to review a list of preferred procedures to follow when using deferred payment contracts.
  • The deferred contract should be signed by both the producer and a cooperative representative, either before delivery or at the time of delivery.  You should refuse to issue a deferred payment contract if at any time there was an oral or written contract for immediate payment. This indicates that the seller at first considered it a cash sale.
  • Refuse to make early payments on deferred contracts under any circumstances.
  • Do not issue a promissory note representing the deferred payment obligation.  This would give rise to a negotiable instrument and therefore constructive receipt could occur.
  • Do not link the balance due on the contract to a patron’s open account in any way.  Again, there could be constructive receipt.
  • The contract should state that the patron’s right to receive payment is not transferable and cannot be used as collateral for a loan.
  • There should be no mention of interest stated in the contract.  A price adjusted payment would be preferable.
The ideal deferred payment program combines both good forms and good procedures.  These suggestions are meant to help reduce any challenge by the IRS.  As always, we are available to assist you and your member’s with any questions you may have.