Farmers' Union Co-Op. Ass'n v. Commissioner

FARMERS' UNION CO-OPERATIVE ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Farmers' Union Co-Op. Ass'n v. Commissioner Docket No. 11055. United States Board of Tax Appeals 13 B.T.A. 969; 1928 BTA LEXIS 3131; October 12, 1928, Promulgated *3131 Patronage dividends due members of a cooperative business association held to be part of cost of goods sold. Clark Jeary, Esq., and Lester M. Buckley, C.P.A., for the petitioner. L. A. Luce, Esq., for the respondent. LANSDON *969 The respondent asserts a deficiency in income and profits tax for the fiscal year ended May 31, 1920, in the amount of $1,821.11. The only issue is whether a certain sum received by the petitioner in handling the products and purchases of members of a cooperative association was taxable to it, or under its by-laws was a liability to its patrons. FINDINGS OF FACT. The petitioner is a cooperative business association organized under the laws of Nebraska. Its principal office is at Walton, where it is engaged in handling farm products marketed by its members and in the sale of supplies and materials to such members. The by-laws of the petitioner, so far as they are pertinent to the issue here are as follows: ARTICLE VII. - DIVIDENDS AND PROFITS. Section 1. Out of the proceeds of the business the operating expenses and the interest on indebtedness shall first be paid. Section 2. Of the then*3132 remaining balance, interest not to exceed (8) per cent on the subscribed capital stock may be paid. Section 3. The remaining balance shall be divided pro rata among those customers who are Union Members on the basis of the value of business transacted with the corporation. Section 4. The dividends of non-stockholders eligible for membership and the dividends of stockholders who have not fully paid for at least one share of stock may, in the discretion of the board of directors be held by this corporation as payment on a share of the stock until one share is fully paid for. Section 5. The dividends and distribution of earnings shall be declared and made annually. *970 At May 31, 1920, the books of the petitioner disclosed a net operating income in the amount of $6,263.85 after the payment of all expenses and of an 8 per cent dividend on capital stock outstanding at that date. On June 19, 1920, the annual meeting of the stockholders ordered that such amount should be credited to the accounts of its members and certain others in proportion to their sales and purchases through the association, and that in certain conditions stock should be issued in liquidation of*3133 such credits. On December 17, 1921, a meeting of the stockholders of the petitioner voted that the distributions authorized at June, 1920, should be returned to the association and that any stock issued therefor should be canceled. The petitioner did not include the amount of $6,263.85 in its taxable income in its income and profits-tax return for the taxable year. Upon audit of such return the Commissioner added such amount to the taxable income of the petitioner and determined the deficiency in controversy. OPINION. LANSDON: The single contention of the petitioner herein is that under its by-laws the provisions of which were authorized by the law of Nebraska, the amount of $6,263.85 was a liability to its patrons at May 31, 1920. The respondent denies that any liability was accrued or accruable at May 31, 1920, and asserts that if such liability for the payment of the amount in controversy ever existed it was incurred by the action of the annual stockholders' meeting on June 19. He further contends that if any dividend, patronage or otherwise, was declared, it was a stock dividend and had no effect on income of the petitioner for the taxable year. He also points out*3134 that the amount in controversy was never paid to the patrons. We are not convinced by the reasoning of the respondent. Under its by-laws, which were a contract with its members, the petitioner was liable to its members at the end of any fiscal year for the full amount of its operating income for such year, after the payment of expenses and the fixed dividend of 8 per cent on outstanding capital stock. An entry on its books was no more than the record of a liability created by its by-laws and in this situation we are of the opinion that whether the books were kept on an accrual or cash basis is not material. The books did show the amounts distributable as patronage dividends and this was a liability at the close of the petitioner's fiscal year. The amount of $6,263.85 was additional purchase money due its members on products delivered during the year and was a liability at the end of such year. The Commissioner erroneously included such amount in petitioner's taxable income for the taxable year. ; *3135 ; . *971 In view of our conclusion that the amount involved was a liability of the petitioner at the end of its fiscal year the respondent's contention that the dividend, if any, was a stock dividend requires little consideration. It is enough to say that the distribution authorized was to both stockholders and nonstockholders and that any stock that may have been issued was not a distribution of corporate assets but was in discharge of a recognized liability of the petitioner. These facts are clearly inconsistent with the theory that a stock dividend was authorized. Decision will be entered for the petitioner.