Opinion
No. 33750.
June 12, 1939. Suggestion of Error Overruled July 8, 1939.
1. TAXATION.
The word "income" is broad enough to include all that comes in, but its specific meaning must be determined by intent of parties employing it, as shown by context of their agreement, subject dealt with, and character of such parties, in ascertaining what is gross income subject to taxation (Laws 1934, chap. 120, sec. 7, as amended by Laws 1936, chap. 151).
2. TAXATION.
The word "income" in taxing statutes, as usually construed, imports actual gain and indicates increase of wealth in hand.
3. TAXATION.
The word "income" in statute imposing tax on gross income of business, less permitted deductions, does not include things received in business transaction by taxpayer not entitled to retain them but required to return them to one from whom received (Laws 1934, chap. 120, sec. 7, as amended by Laws 1936, chap. 151).
4. TAXATION.
Money refunded by co-operative gin company to its patrons from sums paid it for ginning their cotton and money paid them by company for cottonseed in addition to amount previously paid at prices offered by it pursuant to agreement to make equitable price adjustments and refund resulting credits to patrons was not part of company's gross "income" subject to taxation (Code 1906, sec. 897 et seq.; Laws 1934, chap. 120, sec. 7, as amended by Laws 1936, chap. 151).
APPEAL from the chancery court of Hinds county; HON. V.J. STRICKER, Chancellor.
J.A. Lauderdale, Assistant Attorney-General, for appellants.
The tax in question was assessed by the Commission under the provisions of chapter 120, Laws of 1934, and amendments thereto. Section 3 of the act levies the tax. Section 6 defines "net income." Section 7, as amended by section 1, chapter 151, Laws of 1936, defines "gross income." Section 8, as amended by section 2, chapter 151, Laws of 1936, prescribes the deductions that are allowed from gross income.
The only contention made by appellee's bill of complaint is that "patronage dividends" in the sum of $15,662.10 were deductible from its income as "ordinary and necessary expenses paid or incurred during the taxable year in carrying on its trade or business." The appellant contends that the sum of $15,662.10 was a part of appellee's net income and that it was, therefore, liable for tax on said amount in addition to the amount that it returned and paid.
Whether deduction from gross income shall be allowed in ascertaining income subject to income tax depends upon legislative grace, and only as there is provision therefor can any particular deduction be allowed.
New Colonial Ice Co. v. Helvering, 78 L.Ed. 1348; Charles Ilfeld Co. v. Hernandez, 78 L.Ed. 1127; Helvering v. Inter-Mountain L. Ins. Co., 79 L.Ed. 1227.
Facts tending to establish non-liability for tax will never be presumed and the burden is upon the claimant to show that the provisions of the act are not applicable to it.
Jackson Fertilizer Co. v. Stone, 173 Miss. 183; Barnes v. Jones, 139 Miss. 675.
It is presumed that a statute is valid, and the burden rests upon the person claiming the contrary to clearly establish such contention.
Dantzler Lbr. Co. v. State, 97 Miss. 355.
The so-called "patronage dividends" are not "ordinary and necessary expenses" and said item is not deductible from the gross income of appellee. Said item, therefore, represents a part of the net income of appellee for said year.
In Lloyd v. Commissioner of Internal Revenue, 55 F.2d 842, the Circuit Court of Appeals, Seventh Circuit, held that in order to deduct expenses from gross income "they must be both an ordinary expense and a necessary expense."
Heflin v. U.S., 58 F.2d 482; Uniform Printing Supply Co. v. Commissioner of Internal Revenue, 33 F.2d 445.
An agreement to pay income to a certain person, or persons, does not in any way affect the taxability of such income.
Lucas v. Earl, 74 L.Ed. 731; Burnet v. Leininger, 76 L.Ed. 665.
The pleadings do not show that appellee claims it is exempt from income tax. However, in the argument in the court below it contended that it was a cooperative association and exempt from the tax. Under the provisions of section 14, chapter 120, Laws of 1934, a cooperative association can only be exempt from the tax "when organized and operated for public purposes and when no part of the income inures to the benefit of any private stockholder or member." It is clear that under the allegations of the bill a part of the income of said corporation did inure to the benefit of the stockholders. Said corporation certainly cannot claim exemption under the provisions of said act.
Section 4125, Code of 1930, as amended by chapter 328, Laws of 1936, exempts certain co-operative associations organized under chapter 99 of the code from income tax, but it is clear that this corporation was not organized under the provisions of said chapter 99. It was organized under what is now chapter 100, Code of 1930.
Nelson E. Taylor and O.L. Kimbrough, both of Greenwood, for appellee.
The federal courts have had the question of whether patronage dividends are allowable deductions from gross income, repeatedly before them, and have affirmed the formula and methods for their computation. In Prentice-Hall Income tax service for 1936, section 13,036, will be found the method of computation of patronage dividends as used by the Commissioner of Internal Revenue, and as affirmed and approved by the United States Board of Tax Appeals, and the Federal courts.
Prentice Hall Income Tax Service for 1935, section 11,313.
Chapter 120 of the Laws of 1934, is the law of the State of Mississippi applicable to the controversy here presented. Its inclusions and exclusions for tax purposes and its definitions of taxable and non taxable income are copied from the Federal Revenue Act of 1921.
Attention is respectfully directed to Article 522, page 175, of Regulations 62 of the Treasury Department in connection with the Revenue Act of 1921, dealing with cooperative associations.
Section 14 of chapter 120 of the Laws of 1934, was taken from section 231 of the Federal Revenue Act of 1921, insofar as the granting of exemptions to labor, agricultural, horticultural and other like associations organized for the mutual benefits to its stockholders and members, and while the appellee has never claimed a tax exemption status either as to state or federal income taxes, counsel for appellee are strongly persuaded that appellee is entitled to such exempt status, upon submission of the evidence of facts as alleged in its bill of complaint in this cause and admitted by appellant by his general demurrer. Appellee, Morgan Gin Company, has not claimed an exemption status for income tax purposes. It filed its income tax return, and paid the tax on its taxable income, but it deducted the patronage dividends paid by it, from its gross income, in arriving at its taxable income.
It is characteristic of a dividend that all stockholders of the same class share in it in proportion to the respective amounts of stock which they hold; and if the transaction lacks this characteristic, it may be held not a dividend. For example, where the stockholders of a corporation are also its customers, a distribution made to them in proportion to business done with the corporation is regarded not as a dividend, although made from net earnings, but as a rebate or refund.
13 Am. Jur. 639, sec. 645; Uniform Printing Supply Co. v. Comr. of Internal Revenue, 88 F.2d 75, 109 A.L.R. 966; Anderson-Clayton Securities Corp. v. Comr. of Internal Revenue, 35 B.T.A. 796, 802 and 803.
When patronage dividends that have been paid to the patrons in proportion to the respective volume of business contributed by each, are treated in accordance with the decisions of the courts in the Uniform Printing Supply Company case, 88 F.2d 75, and the case of Anderson Clayton Co., supra, (reported in 35 B.T.A. 796, 802 and 803) as a part of the cost of the goods sold, then such patronage dividends are due to be deducted from the gross income before the net profit to be distributed to the stockholders either as a dividend upon their stock or as a residue to be embraced in "all other profits shall be distributed to stockholders in proportion to the number of pounds of seed cotton ginned with and cotton seed sold to this corporation." In the instant case the corporation had no other income, excepting the sum of $987.86 which it passed to surplus and used in paying out the 8% dividend upon its capital stock, outstanding in the amount of $20,000, and upon which said sum of $987.86 it paid the income tax for that year.
The only question presented in the case at bar, is the right of the gin company by virtue of its contract with its stockholders through its charter and by-laws and through contracts with patrons who are not stockholders, to gin their cotton at cost and to make supplemental payments for seed and to refund part of the gin tolls to the respective patrons, upon the basis of the volume of cotton furnished to the gin for ginning to each patron respectively, in proportion to the total amount of cotton furnished and gin tolls exacted of its patrons, and whether such refunds constitute allowable reductions of gross income, for income tax purposes. Appellee contends that, where there was such a liability on the part of the corporation to rebate and refund the supplemental payments to its patrons, such amounts never became a part of the gross income of the corporation, for those sums belonged to the patrons in the first instance, and as the court in another case said in passing on such items, at the time of furnishing the seed and exacting the gin tolls, "while such sums were unknown, they were not unknowable," and suit could have been maintained in equity to recover from the corporation.
Brown v. Helvering, 291 U.S. 193, 54 S.Ct. 356; Uniform Printing Supply Co. case, 88 F.2d 75.
If the corporation had the right to contract with producers of cotton to gin their cotton and handle their seed upon the co-operative basis, then certainly any contractual liability incurred by the corporation flowing from the contract to rebate or refund or pay back to the producers in the form of patronage dividends, sums based solely upon the volume of business supplied to the corporation by the respective patrons, in proportion to the total volume of business furnished by all of the patrons and necessary to effectuate the cooperative provisions of its charter and by-laws, such payments of rebates or patronage dividends would constitute an ordinary and necessary business expense, in that they were supplemental payments for seed purchased from its patrons, or refunds of gin tolls exacted from its patrons at the time the cotton was ginned, and therefore constitute an allowable reduction or deduction from its gross income.
Appellee respectively shows that it has met every burden of proof and law imposed upon it to sustain its contentions, that distributions made by a corporation to its patrons based upon the volume of business supplied to the corporation by the respective patrons in proportion to the whole volume of business are rebates, and in the instant case such patronage dividends are a part of the cost of the seed sold or deductions from the gross income from gin charges exacted from its patrons, and in either event, are deductions from its gross income for income tax purposes. Appellee, therefore, respectfully shows that the decree in this cause heretofore rendered, vacating and setting aside the said erroneous assessment by the court below should be sustained.
Argued orally by J.A. Lauderdale, for appellants, and by O.L. Kimbrough, for appellee.
The appellee reported its income for taxation, admitting an income of $987.86 subject thereto. The State Tax Commission declined to approve a deduction of $15,662.10 made by the appellee from what the Commission said was its gross income, and added that amount to the $987.86, and assessed the appellee accordingly. The appellee instituted this suit, under section 5057, Code of 1930, for the cancellation of the additional assessment. A demurrer to the appellee's petition was overruled, and a decree was rendered in accordance with its prayer.
The petition and its exhibits disclose the following: The appellee is a corporation, organized in 1928 under chapter 24, Code of 1906, and is engaged in the business of ginning cotton for the public and in buying seed from cotton ginned by it. Its charter provides that: "This corporation shall be conducted on a cooperative basis. A dividend when profits are made not in excess of 10% of the paid in capital stock, may be declared by the directors payable to the holders of the stock thereof, and all other profits shall be distributed to stockholders in proportion to the number of pounds of seed cotton ginned with and cotton seed sold to this corporation."
In order to meet the competition of other gins operating on a cooperative basis, the appellee agreed with its patrons "that equitable price adjustments would be made with its patrons whereby its gin charges would be decreased or its allowances for cotton seed would be increased, and the credits to its patrons resulting from such adjustments would be refunded, said refunds to be based wholly upon the volume of business contributed by its respective patrons in the number of bales of cotton ginned and the pounds of seed furnished to the gin, and wholly without any regard to stock ownership in the corporation."
At the close of its fiscal year, ending July 31st, 1937, the appellee, from the net proceeds of its business, distributed to its stockholders a dividend of eight per cent, and paid the remainder thereof, amounting to $15,662.10, to its patrons, irrespective of ownership by them of stock in the corporation, in accordance with this agreement. In reporting its income for taxation, the appellee did not include this $15,662.10 therein.
One of the questions presented is: Was this $15,662.10 a part of the appellee's gross income? A negative answer thereto will affirm the decree of the court below.
The tax imposed by chapter 120, Laws of 1934, as amended by chapter 151, Laws of 1936, is not on the gross receipts of a business, less permitted deduction therefrom, but on the gross income therefrom, less the permitted deductions. What then is gross income? As defined by the statute, the gross income of a taxpayer from a business includes "gains, profits, and income derived" therefrom. Money received by one in a business transaction which he has no right to retain, but, under the stipulations of the transaction, must return to the one from whom it was received, could hardly be said to be a gain or profit to him. The word income is broad enough to include all that comes in, but its specific meaning must be determined by the intent of the party or parties employing it to be determined by the context, the subject being dealt with, and the character of the person or persons employing it. 31 C.J. 397. In taxing statutes, as usually construed, it "imports an actual gain; . . . indicates increase of wealth in hand." Bingham v. Long, 249 Mass. 79, 144 N.E. 77, 33 A.L.R. 809. When so interpreted, it must here be held not to include things received by the taxpayer in a business transaction which he has no right to retain, but must return to the one from whom it was received. When one receives money in a business transaction which he has no right to retain but must return, his income from the business is neither increased nor diminished thereby; it remains as it would have been had he not received the money at all.
Did the appellee receive this $15,662.10 under such an agreement with its patrons as obligated it to return it to them?
The appellee's offer to its patrons was, in effect, that if they would pay its charges for ginning their cotton, and accept payment for their cottonseed at the prices offered by it therefor, it would thereafter make an equitable adjustment of these prices and charges, and refund to them a portion of the money paid by them for ginning their cotton, and pay them additional money for the cottonseed purchased from them. This offer, as it appears in the petition, seems to be incomplete in that it does not set forth a method for ascertaining the amount of money to be proportionately distributed to its patrons. It was construed, however, by both the appellee and its patrons as an offer to do for all the appellee's patrons what under its charter the appellee was required to do for its patrons who owned its corporate stock. It thus appears that the appellee had received from some of its patrons and withheld from others money which, under its agreement with them, it was obligated to return to or pay them. When it was so returned or paid pursuant to this obligation, what would have been the appellee's gross income, without its return or payment, was thereby diminished. We conclude therefore that this money was not a part of the appellee's gross income.
Refunds or payments to the patrons of a business of the character here in question, generally designated as "patrons dividends," are not unusual, and, in Uniform Printing Supply Co. v. Commissioner of Internal Revenue, 7 Cir., 88 F.2d 75, 109 A.L.R. 966, the only case cited by counsel bearing directly hereon, were held not to be included in the taxable income of the corporation making them.
No error was committed in overruling the demurrer.
Affirmed.