Anamosa Farmers Creamery Co. v. Commissioner

ANAMOSA FARMERS CREAMERY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Anamosa Farmers Creamery Co. v. Commissioner Docket No. 29352. United States Board of Tax Appeals 13 B.T.A. 907; 1928 BTA LEXIS 3158; October 10, 1928, Promulgated *3158 Patronage dividends due members of a cooperative business association held to be a part of the cost of goods sold. Robert Cahn, C.P.A., for the petitioner. Arthur H. Murray, Esq., for the respondent. LANSDON *907 The respondent asserts a deficiency in income tax for the year 1925 in the amount of $414.45. The only issue is whether a certain amount received by the petitioner from sales of butterfat is taxable as income to it, or under its by-laws is a liability to its patrons. FINDINGS OF FACT. The petitioner is an Iowa corporation with its principal office at Anamosa, where it is engaged in the operation of a creamery and to some extent in the sale of coal, flour and feed to its stockholders and others. The by-laws of the petitioner, so far as they are pertinent to the issue here, are as follows: 6. A sinking fund shall be provided by taking from each pound of butter fat, such amount as the Board of Directors may determine; such sinking fund to be used only for paying insurance and taxes, buying new machinery, and for erecting new buildings; also, for advancing money on supplies, and for paying interest and dividends on stock. *3159 Provided, however, that such sinking fund may be entirely discontinued for a time if the Board of Directors shall decide this to be for the best interest of the Company. 7. All milk and cream to be sound, fresh and unadulterated, and patrons of the Company not stockholders may furnish amounts of milk or cream as they have. The Company shall purchase (?) and sell such milk or cream, manufacture the same into butter, cheese or ice cream, and receive all money from the products, and from money so received deduct such a percentage thereof as shall have been agreed upon by the Company, in the by-laws or otherwise, and deduct the running expenses of the Creamery, the remainder thereof to be distributed among the stockholders and patrons proportionately to the amount of whole milk or fat furnished by each. * * * 16. Each stockholder shall have one vote only, at all meetings of the Company regardless of the number of shares of stock he may own. 17. No stockholder shall own to exceed three shares of stock in this Company. * * * 20. When the face value of the Capital Stock shall have been paid back, no further interest or dividends shall be paid to the stockholders. Necessary*3160 sinking funds will be provided for but no profits will be allowed to accumulate and all the balance left after purchases, expenses and sinking funds have been provided for, shall be paid over to patrons for butterfat. *908 In February, 1925, the by-laws of the petitioner were amended by the addition thereto of the following: When the face value of the Capital Stock shall have been paid back, no further interest or dividends shall be paid to the stockholders. Necessary sinking funds shall be provided but no profits will be allowed to accumulate and all balance left after purchases, expenses and sinking funds have been provided for shall be paid over to the patrons for butterfat. At December 31, 1925, the books of the petitioner disclosed a net operating income in the amount of $4,784.13, which was prorated to patrons from whom it had purchased cream, credited to each patron in proportion to his deliveries of cream and the amounts so credited accrued as liabilities of that date. The petitioner kept its accounts and made its income-tax returns on the accrual basis. The petitioner did not include the amount of $4,784.13 in its gross income on its income-tax return for*3161 the taxable year. Upon audit of such return the Commissioner added $4,784.13 to the income of the petitioner and asserted the deficiency in controversy. OPINION. LANSDON: The petitioner is what is generally known as a share capital cooperative association. From the evidence we conclude that the situation here is on all fours with that which we have previously considered in proceedings involving the taxability of the receipts of cooperative business organizations. After the payment of operating expenses and of an 8 per cent dividend on outstanding stock, in conformity with its by-laws, it credited the remainder of its receipts for the taxable year to its patrons in proportion to their deliveries of butter fat. This procedure was in recognition of a liability created by the by-laws which are a contract between such a corporation and its patrons. In this situation neither the basis of accounting nor the fact that no cash was paid to the patrons in the taxable year is material. At December 31, 1925, the amount of $4,784.13 was a liability of the petitioner as additional cost of butter fat purchased from its patrons and should not be included in its taxable income for such*3162 year. ; . Decision will be entered for the petitioner.