Opinion
ON MOTION for New Trial Nov. 14, 1938 This case having been heard by the Court of Claims, the court, upon the stipulation of the parties, makes the following special findings of fact:
1. Plaintiff is a corporation organized on April 4, 1918, as a cooperative agricultural society under the laws of the State of Nebraska, with an authorized capital stock of $75,000, divided into 750 shares of common stock of a par value of $100 per share. Approximately $60,000 in par value of stock was originally subscribed for. Plaintiff is owned and controlled by producer farmers living in the vicinity of Stanton, Nebraska, where it has its principal place of business.
2. The general nature of the business for which plaintiff was organized was to buy, sell, store, ship, and handle grain products and to sell articles needed and used by farmers, such as lumber, coal, cement, line, farm implements and machinery,and other kinds of farmers' necessities. During the period involved in this case plaintiff operated a mercantile store and did buying for the purpose of the cooperative marketing of products of farmer producer patron members and non-members, and purchased for and sold to patrons, both members and non-members, farm supplies and equipment, lumber, coal and other personal property generally.
3. The Constitution of plaintiff provides that only members of the Farmers Educational and Cooperative State Union of Nebraska may become members of this Association, and under the Constitution and By-Laws of the Farmers Educational and Cooperative State Union of Nebraska, the last-mentioned corporation, membership is restricted to farmers, retired farmers, members of their families, country mechanics, rural school teachers, physicians, and ministers of the gospel. Ownership of at least one share of stock is required to be a member of plaintiff.
Plaintiff's By-Laws further provide that:
"(a) Out of the net earnings of the Association two (2) per cent shall be set aside as a sinking fund and eight (8) per cent shall be paid on the paid up capital stock; the remainder of the net earnings shall be divided pro rata among those customers who are Union members in proportion to their patronage upon the basis of products sold to and goods bought from the Association. "(b) Dividends shall be declared in the following classes: First, upon goods purchased by a Union member and his own family; Second, upon products sold to the Association by such classes of persons; Third, dividends arising out of collective operations. "(c) Dividends shall be paid annually. "(d) The dividends of non-stockholders eligible for membership and stockholders who have not fully paid for at least one share of stock shall be held by the Association as a payment on a share of stock until one share is fully paid. If such non-stockholder shall neglect to comply with the requirements for membership within thirty days after declaration of this dividend, such dividend shall revert to the surplus fund of the Association."
The By-Laws were amended on January 2, 1922, to provide as follows:
"The interest dividends shall be cumulative, so that if in any year dividends amounting to eight (8) per cent shall not have been paid, the deficiency shall be payable out of the net profits of the next or succeeding years."
The foregoing amendment was stricken out of the By-Laws at a stockholders' meeting on February 6, 1928.
4. During the years 1923 to 1927, inclusive, plaintiff conducted its business with both member and non-member producers on the ordinary cooperative plan, i.e., it marketed the products of the farmer producer patron members and non-members, advancing to them at the time of delivery the estimated fair market value of the products so delivered, less a margin estimated to take care of the necessary expenses of the sale of such products. No difference in the amount of the advancement or method of handling the produce was made between members and non-members. Said products were sold in the open market, and the books of plaintiff were closed at the end of each year, showing the accumulation of savings resulting from over-estimating the necessary expenses charged against such sales.
5. During the years 1923 to 1927, inclusive, plaintiff furnished its patrons supplies and equipment on the basis of the cost thereof, plus freight and the estimated cost of handling such supplies. No difference was made in the treatment of, or charges made to, members or non-members in the purchase and furnishing of said supplies and equipment. The books of plaintiff were closed at the end of each year, showing the accumulation of savings resulting from over-estimating the necessary expenses charged against such sales and the purchase of such supplies.
6. The amount of products marketed and supplies and equipment purchases for and furnished to farmer producer members of plaintiff at all times during the years involved herein exceeded the amount of products marketed and supplies and equipment furnished for farmer producer patron non-members of plaintiff.
The following table shows the value of the purchases made for, and supplies and equipment furnished to, all patrons, both members and non-members, of plaintiff during the year 1927:
(Line 1) Total supplies furnished to all patrons.................................
$109,718.33
(Line 2) Total supplies furnished to members...................................
86,513.40
(Line 3) Total supplies furnished to nonmembers................................
16,412.19
(Line 4) Total supplies furnished to nonproducers, suchas towns, counties, schools, churches, doctors,lawyers, bankers ....................................
6,792.74
The amounts shown in lines 2, 3, and 4 are included in the amount shown in line 1.
7. During the years 1923 to 1927, inclusive, plaintiff paid no patronage dividends to either member or non-member patrons, but the savings or profits--due to indebtedness of plaintiff existing at the beginning of 1923--after paying dividends on the stock were treated by plaintiff as a part of its assets and the excess as thus determined over its working capital requirements was used to extinguish plaintiff's fixed and current liabilities. During said period 1923 to 1927, inclusive, a dividend of 8 per cent was paid on plaintiff's outstanding capital stock, and the remainder of its profits was accumulated in a surplus account, with the result that at the end of 1927 there was a surplus of $9,139.81, compared with a deficit of $4,517.96 at the end of 1923.
8. Plaintiff filed its corporation income tax return for the year 1923 on March 13, 1924, disclosing therein a tax liability of $71.63, which it paid on March 13, 1924. On March 10, 1925, plaintiff filed its corporation income tax return for the year 1924, disclosing therein a tax liability of $314.75, which it paid on March 10, 1925. On May 11, 1926, plaintiff filed its claim for refund of the above taxes for the years 1923 and 1924 on grounds not rejected on July 12, 1926, and June 30, 1927, respectively.
Plaintiff filed its corporation income tax returns for the years 1925, 1926, and 1927 on March 15, 1926, March 15, 1927, and March 14, 1928, respectively, disclosing in each of the returns no tax due.
9. Thereafter, and upon audit of plaintiff's income tax liability for the years 1924 to 1927, inclusive, the Commissioner of Internal Revenue assessed additional taxes against plaintiff, and which were paid by plaintiff as follows:
----------------------------------------
Year
Date of Payment
Amount
----------------------------------------
1924 ..
September 28, 1927 ..
$502.45
1925 ..
November 26, 1928 ...
904.14
1926 ..
November 26, 1928 ...
1,037.92
1927 ..
February 25, 1929 ...
715.34
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10. On October 17, 1929, plaintiff filed its claim for the refund of $502.45 for the year 1924, and on December 9, 1929, filed its claims for refund for the years 1925 and 1926 in the total amount of $1,942.06, and for the year 1927 in the amount of $715.34--all upon the ground that it was entitled to exemption as a cooperative organization under the respective applicable Revenue Acts.
Plaintiff's claims for refund for the years 1924 to 1927, inclusive, were rejected by the Commissioner of Internal Revenue on a schedule dated February 12, 1932. Louis B. Montfort, of Washington, D.C., for plaintiff.
Guy Patton, of Washington, D.C., and James W. Morris, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
PER CURIAM.
This case was submitted together with the case of Farmers Co-operative Company of Wahoo, Nebraska, v. United States, Ct.Cl., 23 F.Supp. 123, upon the same argument. The facts of the two cases are similar and the same principles of law apply. The parties agree that unless the plaintiff is exempt from taxation, the taxes in controversy were properly assessed and collected by the Commissioner. Following the decision this day rendered in the case last named, the plaintiff's petition must be dismissed and it is so ordered.
On Motion for New Trial.
GREEN, Judge.
On the former trial of this case only a memorandum opinion was filed stating that the facts in the case were "similar" to the case of Farmers Co-operative Company of Wahoo, Nebraska, v. United States, Ct.Cl., 23 F.Supp. 123, which was submitted at the same time and that following the rule laid down therein the case now before the court should also be dismissed.
Plaintiff asks for a new trial contending that the facts in the instant case differed materially from those in the Wahoo Case, supra, and that a different rule should be applied. Plaintiff, however, takes no exception to the findings of fact which the court made but argues that they show that it is entitled to exemption from tax under the statute.
Upon re-examination of the findings in the two cases, it appears that while the facts are not exactly similar, those of the case at bar do not differ materially from the facts in the Wahoo case. In the last named case up until 1920 (a period not involved) the plaintiff had paid patronage dividends to its stockholder patrons but none to non-members. Since 1920 no patronage dividends were paid to either class by its bylaws were such that under no circumstances could the non-members receive any dividends out of the profits which had been derived by the company.
In the case at bar, the plaintiff paid no patronage dividends to either class of its members but did pay its indebtedness out of the profits derived; also interest dividends on the stock as provided by its bylaws. The remainder of the profits went into a moderate surplus. None of these matters would, under the statute, prevent its being entitled to the exemption but the plaintiff's bylaws provide, as shown in Finding 3, that after 2 per cent had been set aside as a sinking fund and 8 per cent paid on the capital stock, the remainder of the net earnings should be divided pro rata among those customers who were "Union members," that is, members of the association, and under this provision no one who was not a member could receive anything out of the profits of the company. There is another provision of the bylaws with reference to the dividends but it does not change the effect of the provision first referred to. It reads as follows:
"(d) The dividends of non-stockholders eligible for membership and stockholders who have not fully paid for at least one share of stock shall be held by the Association as a payment on a share of stock until one share is fully paid. If such non-stockholder shall neglect to comply with the requirements for membership within thirty days after declaration of this dividend, such dividend shall revert to the surplus fund of the Association."
Under this provision a nonmember would have to become a member and a stockholder before he could receive any dividends. In the final analysis we have the same situation that was found in the Wahoo Case. Where one who is not a stockholder or a member is obliged to become a stockholder and a member in order to share in the profits of the association, we think it is obvious that the members and the nonmembers are not treated with that equality which is required in order that the association be entitled to the exemption. As was said in the case of Farmers Union Co-op. Co. v. Commissioner, 8 Cir., 90 F.2d 488, 493, the bylaws of plaintiff "effectively prevented petitioner from according to nonmember patrons the treatment required" by the Federal statute, as "nonmember patrons were wholly excluded from any possible participation."
Following the rule laid down in the case last cited, the motion for new trial must be overruled. It is so ordered.