Growers Cold Storage Co. v. Commissioner

GROWERS COLD STORAGE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Growers Cold Storage Co. v. Commissioner Docket No. 19859. United States Board of Tax Appeals 17 B.T.A. 1279; 1929 BTA LEXIS 2146; November 7, 1929, Promulgated *2146 1. A cooperative corporation composed of seven members organized for the purpose of operating a cold storage warehouse in which the members stored their perishable produce in the operation of their business and as an adjunct thereto is not a business league exempt from taxation, even though it was not organized for profit and no part of the net earnings inured to the benefit of any private stockholder or member. 2. Where the income of the corporation was derived from assessments against the members for the exclusive purpose of paying the expenses of operation, any amount left over because of over-assessment is not taxable as net income. George H. Koster, Esq., for the petitioner. C. H. Curl, Esq., for the respondent. LITTLETON *1279 The Commissioner determined a deficiency of $26.93 for 1922. Petitioner claims (1) that it is a business league not organized for profit and no part of its net earnings inures to the benefit of any private stockholder or member, and therefore it is exempt from taxation under section 231(7) of the Revenue Act of 1921, and (2) that its entire income is derived from assessments against members for the sole purpose*2147 of paying operating expenses, and that any excess is not profit or taxable net income. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of California, with its principal office at 5050 Alameda Street, Los *1280 Angeles, Calif. It was organized under the provisions of Title 22, Part 4, of the Civil Code of California, relating to the formation and operation of purely nonprofit cooperative corporations, and its purpose was to provide cold storage facilities for its members at cost on a cooperative plan. The members of the corporation were fruit growers, or dealers, or both, and petitioner's facilities were used to store and preserve their products until sale and delivery. Title 22, Part 4, of the Civil Code of California provides in part as follows: 653t. Non-profit co-operative corporations may be formed by the voluntary association of any three or more persons in the manner prescribed in this title. A majority of such persons must be residents of this state, and such corporations shall have and may exercise the powers authorized by this title, and the powers necessarily incident thereto, and also all other powers granted to private corporations*2148 by the laws of this state, excepting such powers as are inconsistent with those granted by this title. 1921-465. 653u. Such corporation shall not issue capital stock, but shall issue a membership certificate to each member. Its business shall not be carried on for profit. Any person or any number of persons including and in addition to the original incorporators, may become members of such corporation upon such terms and conditions as to the membership, and subject to such rules and regulations as to their, and each of their, contract and other rights and liabilities between it and the member, as the said corporation shall prescribe in its by-laws. The corporation shall issue a certificate of membership to each member, but the said membership or the said certificate thereof, shall not, except as herein provided, be assigned by any member to any other person, nor shall the assigns thereof be entitled to membership in the corporation, or to any property rights or interest therein, nor shall a purchaser at execution sale, or any other person who may succeed, by operation of law or otherwise, to the property interests of the member, be entitled to membership, or become a member*2149 of the corporation by virtue of such transfer. The board of directors may, however, by motion duly adopted by it, consent to such assignment or transfer, and to the acceptance of the assignee or transferee as a member of the corporation. The corporation shall also have the right, by its by-laws, to provide for or against the transfer of membership and for or against the assignment of membership certificates, and also the terms and conditions upon which any such transfer or assignment shall be allowed. 1941-465. 654zc. Nothing in this title shall be deemed to prohibit any co-operative corporation formed or existing hereunder from having and exercising the same powers in carrying out its purposes as are enjoyed or exercised by corporations which issue capital stock. Any corporation formed or existing under this title shall conduct and carry on its business without profit to itself; it may, however, conduct its business for the profit of its members; it may use or employ any of its facilities for any purpose except the handling for others, not members, of products similar to the products handled for its members, provided the proceeds arising from such use and employment shall*2150 go to reduce the cost of operation for its members. *1281 The purposes of the corporation are set forth in paragraph 2 of its articles of incorporation, as follows: That the purposes for which said corporation is formed are: To lease, purchase or otherwise to acquire and to hold, own, enjoy, lease, let, sell, exchange, mortgage, pledge, hypothecate, and otherwise to encumber and in any way to deal in and with all and every kinds of real and personal property or property rights and any and all interests therein. To lease or to acquire, by purchase or to construct, and to own, control, maintain and operate a complete plant for the common or cold storage and preservation of fruit and other products and to engage in the business of storing fruit and other products. To enter into contracts of any and all kinds; to borrow money and to hypothecate any or all of its property as security therefor; and to loan money and as security therefor or as security for any obligation due or owing to it to accept and to enforce mortgages, pledges and hypothecations of real and personal property. To do anything and everything necessary, proper or expedient to accomplish any of the*2151 purposes hereinabove enumerated or to the exercise of any of the powers vested in such corporation by the laws of the State of California. The corporation had no capital stock. Membership therein was denominated a "membership," or "unit." There were 20 units and each member was required to own one unit. During the taxable year the 20 units were owned by seven members, as follows: Howard L. Rivers, 10 units, H. S. Darling, 4 units, F. L. Sellick, 2 units, and L. P. Cikuth, C. J. Rodgers, Yucaipa Valley Fruit Co., and P. Stolich, 1 unit each. In order to defray the expenses of maintenance and operation monthly assessments were made against members according to the number of units owned by each, and where there was a surplus of assessments over expenses, article XIII of the by-laws provided as follows: At the end of each fiscal year, the board of directors shall determine the amount of the surplus moneys, if any, remaining in the treasury of the corporation, (exclusive of any surplus accumulated as in this article permitted) and the same shall be distributed to the members in proportion to the number of memberships owned by each. Provided, however, that wherever, in the opinion*2152 of the board of directors, it shall be necessary to carry on the business of the corporation, said board may postpone the distribution of such surplus or of any part thereof, and may cause the same to be accumulated for use as a revolving fund; but at no time shall the surplus so accumulated exceed in amount the sum of $20,000. Whenever the board of directors shall elect to postpone the distribution of any such surplus, it shall cause to be issued to each of the members a certificate of indebtedness, for the amount of his share of the surplus distribution of which is postponed, which cert ficate shall be payable, without interest, when so ordered by the board of directors or upon the dissolution of the corporation and on surrender of the certificate. Petitioner had no other source of income except that occasionally it performed labor in unloading and loading trucks or cars of *1282 produce for members or nonmembers who were selling to or purchasing from members. During the taxable year this amounted to $154. This was done at actual cost of the labor and produced no taxable income. Statement of income and expenses for the year 1922 is as follows: RECEIPTS Assessments collected from members $36,915.70 Loading cars - charges collected 154.00 Refund of deposit - electric power 318.00 Refund of deposit - water 43.45 Collections of assessment balance due from year 1921 251.09 Sale of extra supplies 3.00 $37,685.24 EXPENDITURES Attorneys' fees 683.13 Employers liability insurance 441.42 Fire insurance 5.60 General expense 656.57 Labor 11,649.25 Manager's salary 4,950.00 Office expense 624.30 Office salaries 591.45 Office equipment 152.60 Taxes - State and county 594.60 Warehouse supplies and expense 1,442.48 Warehouse operating expense 3,968.72 Warehouse salaries 4,373.53 Warehouse equipment 2,824.08 Total 32,957.73 Overassessment of membership 4,727.51 37,685.24 *2153 Petitioner's method of doing business was to estimate its expenses and make monthly assessments in advance. Any unexpended balance remaining at the end of the month or year was not refunded to the members, but was carried over to the following month or year and used for the same purpose and thus reduced the assessment accordingly. For the taxable year 1922 there was an unexpended balance of $4,727.51, upon which the respondent based his determination of the deficiencey. Occasionally members sold produce in storage and such produce remained in storage for the purchaser until needed. In such cases if any charges were made against the purchaser they were made and collected by the member and not the petitioner. Petitioner did not accept storage from nonmembers except as above specified. Petitioner's activities were confined entirely to its members, and it was not operated for profit, but it was not and is not a business *1283 league. No dividends were paid members and no official was paid any salary except the manager. OPINION. LITTLETON: Petitioner bases its claim for exemption from taxation upon section 231(7), Revenue Act of 1921, which is as follows: *2154 Business leagues, chambers of commerce, or boards of trade not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or member. The petitioner performed no public functions whatever and its facilities were not available to the public, but were strictly private and confined to the seven members and their customers. It was operated solely for the benefit of the individuals composing its membership. It was not in any sense conducted for the common interest of the community, of a number of persons, or for the good or in the interest of the trade. It is plain that it was organized and operated as an adjunct and in the interest of the unit holders' private business. Instead of each member operating his own cold storage plant, or using public storage, seven persons or firms combined in order to save expense. This is permissible, but in our opinion does not constitute a business league, even though it was not organized for profit. In , it was agreed that the petitioner was a business league. It was an unincorporated association organized for the purpose of*2155 encouraging cordial relations between employer and employees and to prevent strikes and lockouts. This was held a business league exempt from taxation, as it was for the common general interest of its members, the community and certain industries. In , the taxpayer was organized for the conduct, management, preservation, care and disposition of the business, property and assets of persons, firms, and corporations, insolvent or bankrupt. In the disposition of this case the Board did not determine the question of whether petitioner was a business league or not, but stated that even if it be conceded to be such, it was not exempt because the members derived a profit from its operations. In , a number of fire insurance companies combined and formed the petitioner corporation for the purpose of printing uniform standard policies, applications, and other forms used in the business. The idea was to charge the members cost only. It was a mere convenience and adjunct to the members' businesses. The Board held that it was not a business league, and that it*2156 was not required to operate at cost. We said in part: *1284 Three types of organizations are mentioned in paragraph (7) - business leagues, chambers of commerce, and boards of trade. Ordinarily chambers of commerce and boards of trade are organized to promote the common welfare of a substantial group of individuals, partnerships, and/or corporations all engaged in business in the same community. The profit advantage derived by the member does not come by way of dividends or other distribution of earnings of the corporation but comes rather from the increased earnings of the business of which the member is the owner. Not uncommonly do the activities of the board of trade or chamber of commerce result in a general good participated in by members and nonmembers alike. It seems to us that a business league, to be entitled to the exemption, should be engaged in and limited to activities similar to those of the ordinary chamber of commerce or board of trade, and that those activities should be of a kind not ordinarily engaged in for profit. This case was affirmed by the Circuit Court of Appeals, Seventh Circuit, April 10, 1929. *2157 In A-1 Cleaners & Dyers Co., 14 B.T.A. 1314, the petitioner operated a cleaning and dyeing establishment to do work for members at cost. Work was also done for outsiders. It was held not entitled to exemption from taxation upon two grounds - (1) because not a business league, and (2) because profit could be made from outside work. In , the taxpayer was organized "to maintain a hay association; to promote uniformity in the customs and usages of merchants; to inculcate principles of justice and equity in the business and to facilitate the speedy adjustment of business disputes; to inspire confidence in the business league, and (2) because profit could be made from outside disseminate valuable commercial and economical information and generally to secure to its members the benefits of cooperation in the furtherance of their legitimate pursuits and to promote the welfare of Kansas City." This was held a business league and exempt from taxation. It is difficult to define "business league" to meet all cases, but in the cases referred to the Waynesboro Manufacturing Association and the Kansas*2158 City Hay Dealers' Association are fair samples of business leagues, and the Uniform Printing & Supply Co. case and A-1 Cleaners & Dyers Co. case are equally fair examples of what is not a business league. The instant case is similar to the latter two and is not a business league. In addition it may be suggested that under section 653 z c, Civil Code of California, it is expressly provided that "it may, however, conduct its business for the profit of its members," and under article XIII of the by-laws petitioner is authorized to accumulate a surplus fund of $20,000. These powers are not compatible with a nonprofit making organization. *1285 It does not follow, however, that the surplus overassessment of $4,727.51 for 1922 was taxable as net income. The evidence is clear that petitioner was not conducted for profit during 1922 and it was admitted by counsel for respondent at the hearing that this surplus was not taxable as net income. It was really an indebtedness or refund due the members and was a liability and not taxable. *2159 ; . It results there was no deficiency. Judgment of no deficiency will be entered.