Producers Livestock Marketing Asso. v. Commissioner

PRODUCERS LIVESTOCK MARKETING ASSOCIATION OF SALT LAKE CITY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Producers Livestock Marketing Asso. v. Commissioner Docket No. 99706. United States Board of Tax Appeals 45 B.T.A. 325; 1941 BTA LEXIS 1137; October 10, 1941, Promulgated *1137 A farmers' cooperative association, the articles of which restrict membership to common stockholders, and which does business with nonstockholders the value of which is greater than the value of business done with stockholders, is not entitled to exemption under Revenue Acts of 1934 and 1936, section 101(12). Hadlond P. Thomas, Esq., for the petitioner. Thomas M. Mather, Esq., for the respondent. STERNHAGEN *325 The Commissioner determined deficiencies of $3,056.34 in income tax and $1,030.73 in excess profits tax for 1935, and $589.10 in income tax and $371.72 in excess profits tax for 1937. Petitioner claims exemption under section 101(12) of the Revenue Acts of 1934 and 1936. FINDINGS OF FACT. Petitioner is a nonprofit agricultural cooperative marketing association incorporated as such under Utah law, and filed its returns in the collection district of Utah. The petition alleges and the answer admits: During the two tax years in question petitioner marketed livestock and livestock products for producer patrons as follows: (1) For producers who held common stock and who technically were thereby members. These are hereinafter*1138 referred to as stockholder patrons. (2) For producers who did not hold common stock. These are hereinafter referred to as non-stockholder patrons. The amount of business done with stockholder patrons was less than, and was exceeded by, that done with non-stockholder patrons. All persons with whom it dealt were producers of livestock. Some held common stock, but there was no discrimination in handling the products of stockholders and of nonstockholders. It maintained records of all its business, and these showed as to each item whether it was handled for a stockholder or a nonstockholder, and also the proportion of net savings attributable to each item, if and when a distribution was declared by the directors. As to each transaction, the record shows whether it was with a nonstockholder or a common or preferred stockholder. In 1935 and 1937 the value of the produce marketed for nonstockholders exceeded the value of produce marketed for stockholders, preferred and common. In 1935 balance on hand was $22,227.94 and in 1937 it was $4,014.61. These balances were kept as a reserve for operations and for possible losses. In 1936 petitioner had a loss of $4,828.22. *326 *1139 It was the understanding of the secretary and manager and of the treasurer and accountant that petitioner's policy was to treat all its customers alike, whether they were shareholders or not, and to distribute any patronage dividends which might be declared to all of its customers proportionately to the amount of business as shown by the records. No dividends were declared or paid on preferred or common, and no patronage distributions were made in the taxable years. The petitioner's articles of incorporation and bylaws are in evidence and are hereby made part of these findings. The articles provided: Article V (a): * * * that the Association shall not deal in the products of * * * non-members to any extent greater in value in any one year than such as are handled or sold by it for members during such year. Article IX. - Stock is divided into two classes, common and preferred. Preferred shall not vote. The common is the voting stock: and only producers of livestock or livestock products who have become members of the Association and have signed and entered into all agreements and fulfilled all requirements with respect to membership therein shall be eligible and entitled*1140 to hold the common stock * * *. Preferred is entitled to a 6 percent noncumulative dividend. On liquidation, after the preferred distribution, the common is entitled to all the remaining assets. After the preferred dividend for any year, common may receive a dividend not to exceed 8 percent. After both such dividends, the remaining earnings and profits may be distributed as a patronage dividend, prorated as the board may determine. Article XIII. - The association is declared a nonprofit organization, its object being not to pay dividends on invested capital but to provide a method of sale and distribution whereby producers may secure a reasonable return "and for the purpose of marketing the products of members or other producers" and turning back the proceeds on the basis of either quantity or value. The bylaws provided: Article II: The holders of the common stock of this Association are its members. Any producer of livestock in the territory served by the Association, deemed acceptable by the Board of Directors, may become a member by subscribing for a share of the common stock of this Association, and by entering into a marketing agreement with the Association in*1141 the form prescribed thereby. * * * Article III, section 1: All net earnings of the Corporation, after a sufficient surplus, as determined by the Board of Directors, has been accumulated, shall accrue to the credit and benefit of members of the Association in proportion to the patronage volume of business given the Association by the members, the patronage volume to be computed on a cash basis. *327 OPINION. STERNHAGEN: The claim for exemption is based upon section 101(12) of the Revenue Acts of 1934 and 1936. 1 The important provision for present consideration is, "Such an association may market the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members." This affirmative statement necessarily implies the exclusion of the negative, so that exemption is denied to an association which markets the products of nonmembers in an amount the value of which exceeds the value of products marketed for members. *1142 Petitioner's claim is based upon the view that all of the producers whose products are marketed by it are expected to share in profits and therefore are its members, and for this view it argues upon legislative and administrative history. The pleadings and the testimony show that more business in value and amount is done for nonstockholders than for stockholders; but petitioner says that, since the statute uses the word members and this has a different meaning from stockholders, this evidence is not as controlling as it appears to be. It says that it has always contemplated that, if ever it was in a position to declare and pay a patronage dividend, the distribution would be to everyone, proportionately to the business done, without discrimination between stockholders and nonstockholders. This, it says, is what the regulations and the legislation have been leading up to as the ground for exemption. Such a liberal application of the statute would be at variance with the condition so clearly expressed. For, if all those for whom business is done are to be regarded as *328 ipso facto members, then there could be no business for nonmembers and the statutory condition is*1143 completely overridden. According to the articles of incorporation and the bylaws, no one can be a member until he becomes a shareholder. No one can vote unless he is a common shareholder, and he must have signed all agreements and fulfilled the requirements of membership. No one can participate in the management unless he is a common shareholder. While the officers testified that there is an intention that any distribution shall be proportionate and that records are kept as data for the apportionment, there is some doubt whether there is authority for this in the articles or bylaws. The administrative interpretation is found in Regulations 86 and Regulations 94, article 101(12). It contains this: An association will not be denied exemption because it markets the products of nonmembers, provided the balue of the products marketed for nonmembers does not exceed the value of the products marketed for members. Anyone who shares in the profits of a farmers' cooperative marketing association, and is entitled to participate in the management of the association, must be regarded as a member of such association within the meaning of section 101(12). Thus the statutory word member*1144 is recognized as qualified not only by the sharing of profits but also by participation in management. Petitioner is not supported by Mim. 3886, C.B. X-2, p. 164 (7/9/31). The paragraph which it cites must be read with its introductory clause, as follows: However, where a cooperative marketing association has otherwise complied with the provisions of the statute respecting exemption, but defers the payment of patronage dividends to nonmembers, exemption will not be denied - * * * 2. Where the by-laws provide for the payment of patronage dividends to members but are silent as to the payment of patronage dividends to nonmembers, and a specific credit to the individual account of each nonmember is set up on the books of the association. Thus the claimant for exemption must have complied with the provisions of the statute. This means that its marketing may not be greater for nonmembers than for members; and "members" means persons who share in profits and participate in management. This is made clear later in the ruling, as follows: However, under the Revenue Acts of 1926 and 1928 farmers' cooperative marketing associations may market the products of nonmembers only in*1145 "an amount the malue of which does not exceed the value of the products marketed for members * * *." Membership in a cooperative association is, generally speaking, acquired in the same manner as membership in any other stock corporation - through the ownership of one or more shares of stock. However, as heretofore stated, the statutes of a number of States provide that farmers' cooperative assocations must be organized without capital stock. Therefore, as the exemption statute *329 is silent as to the qualifications of members in farmers' cooperative marketing associations, it follows that anyone who shares in the profits of such an association, and is entitled to participate in the management of the association, must be regarded as a member within the meaning of that statute. It must, therefore, be concluded that in the taxable years in question the petitioner marketed the procucts of nonmembers in an amount the value of which exceeded the value of the products marketed for members, and that it was not entitled to exemption. Reviewed by the Board. Decision will be entered for the respondent. Footnotes 1. The following organizations shall be exempt from taxation under this title - * * * (12) Farmers', fruit growers', or like associations organized and operated on a cooperative basis (a) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the balue of the products furnished by them, or (b) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. Exemption shall not be denied any such association because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 per centum per annum, whichever is greater, on the value of the consideration for which the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment through the association; nor shall exemption be denied any such association because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessaey purpose. Such an association may market the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, and may purchase supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the purchases made for persons who are neither member nor producers does not exceed 15 per centum of the value of all its purchases. Business done for the United States or any of its agencies shall be disregarded in determining the right to exemption under this paragraph. ↩