Co-Operative Grain & Supply Co. v. CIR

• Citation: 407 F.2d 1158
• Decision Date: 27 February 1969
• Docket Number: No. 19267.,19267.
• Parties: CO-OPERATIVE GRAIN & SUPPLY CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

407 F.2d 1158 (1969)

CO-OPERATIVE GRAIN & SUPPLY CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 19267.

United States Court of Appeals Eighth Circuit.

February 27, 1969.

Robert C. Guenzel, Lincoln, Neb., for petitioner.

Karl Schmeidler, Atty., Dept. of Justice, Washington, D. C., for respondent, Mitchell Rogovin, Asst. Atty. Gen., and Lee A. Jackson, and Melva M. Graney, Attys., Dept. of Justice, Washington, D. C., on the brief.

L. James Harmanson, Jr., Washington, D. C., filed brief of amicus curiae, National Council of Farmer Cooperatives.

Before MATTHES, GIBSON and LAY, Circuit Judges.

MATTHES, Circuit Judge.

This case is before us on petition to review a decision of the Tax Court sustaining deficiencies and penalties assessed against Co-Operative Grain & Supply Co., (taxpayer) for income taxes for the years 1958, 1959, 1960 and 1961.

Taxpayer is a marketing and purchasing farmers' cooperative organization, having capital stock, dealing in grain and farm supplies. It is incorporated under Nebraska law and has its office and principal place of business at Roseland, Nebraska. During the years in question there were more than 300 producers owning stock issued by taxpayer. Taxpayer filed income tax returns on the accrual basis for 1958 through 1961. It applied to the district director for tax exemption under § 521 of the 1954 Internal Revenue Code, 26 U.S.C. § 521, on September 2, 1960. Following an examination of taxpayer's records the director advised it on November 3, 1961, that it did not qualify for exempt status.

The Commissioner determined deficiencies on the ground that the taxpayer did not qualify as an exempt farmers' cooperative because: (1) it did not operate on a cooperative basis in the manner required by § 521(b) of the 1954 Code; (2) it had failed to establish that substantially all of its capital stock was owned by producers who marketed their products or purchased their supplies and equipment through the association, as required by § 521(b) (2), and the applicable regulations. Other grounds relied upon by the Commissioner are not in issue here.

After a hearing, the Tax Court, Judge Fay, found that substantially all, if not all, of taxpayer's shareholders were producers (i.e., farmers, fruit growers, livestock growers, and dairymen), as required by § 521(b) (2) in order for a farmers' cooperative which has capital stock to qualify for exempt status. The Tax Court held, however, that substantially all of the shareholder-producers must market their products or purchase their supplies and equipment through the association. As to this phase of the case the court found:

"Petitioner, however, went no further than to argue that substantially all of its shareholders were producers. It made no attempt to argue that its shareholder-producers were active patrons of the association during the years in issue. Nor did petitioner offer any evidence with the purpose of proving this point. Consequently, although we find that substantially all, if not all, of petitioner\'s shareholders were producers during the years in issue, we cannot find that substantially all of petitioner\'s shareholders were active producers, that is — producers who marketed their products or purchased their supplies and equipment through the association."

Based upon its holding the Tax Court determined deficiencies for the years 1958 through 1961 of $69,352.78 and $7,608 in penalties for late filing of its returns for the years 1959 and 1960, pursuant to Section 6651(a) of the 1954 Code, 26 U.S.C. § 6651(a). The penalties for late filings are properly assessed only if taxpayer is not an exempt farmers' cooperative under § 521 (b) (2).

The issues on appeal are whether: (1) the stockholders of taxpayer must be current patrons as well as producers for taxpayer to be given exempt status under § 521(b) (2); (2) petitioner's motion for a further hearing should have been granted; (3) the penalties for untimely filing of the tax returns were properly assessed.

In pertinent part, § 521(b) (2) provides:

"Exemption shall not be denied any such association because it has capital stock, * * * if substantially all such stock * * * is owned by producers who market their products or purchase their supplies and equipment through the association." (Emphasis added.)

Taxpayer contends that the above quoted provision imposes no requirement that the stockholder-producers currently market any of their products or currently purchase any of their supplies through the cooperative. It argues that the legislative history of the section granting tax exempt status to farmers' cooperatives does not indicate or discuss the current patronage requirement. Rather, taxpayer submits the emphasis in the legislative history is on the requirement that substantially all of the stockholders be producers. As added support, taxpayer asserts that the Internal Revenue Service historically has not imposed a current patronage requirement. It bases this contention on the fact that neither the exemption application (Form 1028) nor the Exempt Cooperative Association Income Tax Return (Form 990-C) requests any information as to current patronage by shareholder-producers. Finally, taxpayer suggests that no regulations, no ruling, and no published Internal Revenue Service enforcement document or manual imposing such a requirement is known to exist.

On the other hand, the Commissioner takes the position that the language of § 521(b) (2) clearly "reflects a Congressional intent to restrict ownership and control of a cooperative to farmers who are directly (and therefore currently) involved in the association's activities." Moreover, the Commissioner points out that the exemption for farm cooperatives was initially quite narrow, and that treasury regulations have consistently required a close relationship between the cooperative and its shareholder-producers.¹

Additionally, the Commissioner submits that the reason for granting tax exemption to true farm cooperatives rests upon Congressional intent to benefit the members of these associations. We are told that Congress "did not contemplate the situation where cooperatives competed against each other, and it did not intend to confer benefits to a certain cooperative if its members did not market their products through the cooperative but transacted their business elsewhere." In conjunction with this reasoning the Commissioner states that the taxpayer has shown no valid reason for restricting ownership of voting stock to producers if the latter are not required to transact business with the cooperative, and that if a producer owns stock in the cooperative but does not transact business through it, then he is no different from a nonproducing investor.

Although § 521(b) (2) has, as presently constructed, been in effect since 1926, the parties agree there is no case law dealing with the precise problem before us.² This is so despite the fact that we are informed by amicus curiae National Council of Farmer Cooperatives³ that the latest available figures reveal approximately 65 percent of the more than 8,000 farmers' marketing and purchasing associations in the United States are exempt farmers' cooperatives under § 521.⁴

In the absence of any direct authority we resort to established rules relating to the construction of statutes generally, and of federal taxing statutes in particular.

In the recent case of Community Blood Bank v. Federal Trade Commission, 405 F.2d 1011 (8th Cir., January, 1969), we recognized that a general rule of statutory construction requires the courts to ascertain the intent of legislation from the language used. "The legislative will must be ascertained from the statute if it is clear and plain and the whole act is internally cohesive," citing 62 Cases, More or Less, Each Containing Six Jars of Jam v. United States, 340 U.S. 593, 596, 71 S.Ct. 515, 95 L.Ed. 566 (1951), 405 F.2d at 1015. We also observed that "the plain, obvious and rational meaning of a statute is to be preferred to `any curious, narrow, hidden sense that nothing but the exigency of a hard case and the ingenuity and study of an acute and powerful intellect would discover.' Lynch v. Alworth-Stephens Co., 294 F. 190, 194 (8th Cir.1923), aff'd. 267 U. S. 364, 45 S.Ct. 274, 69 L.Ed. 660 (1925)." Id. at 1015. Finally, we stated "common words are to be taken in their ordinary significance in the absence of an indication of a contrary intent. Westerlund v. Black Bear Mining Co., 203 F. 599 (8th Cir.1913)." Id. at 1015.

The meaning of taxing statutes have been the subject of controversy, and courts have with consistency applied the foregoing and other rules of construction. Malat v. Riddell, 383 U.S. 569, 571, 86 S.Ct. 1030, 1032, 16 L.Ed.2d 102 (1966) announces:

"As we have often said, `the words of statutes — including revenue acts — should be interpreted where possible in their ordinary, everyday senses.\' (Citing authorities.) Departure from a literal reading of statutory language may, on occasion, be indicated by relevant internal evidence of the statute itself and necessary in order to effect the legislative purpose."

Judge Blackmun reviewed at some length the principles to be applied in interpreting revenue statutes in Cherry-Burrell Corp. v. United States, 367 F.2d 669, 674 (8th Cir.1966) and appropriately observed:

"These cases say, we think, that exemption depends upon legislative grace; that it is not present where there is doubt or ambiguity as to the meaning of the statute; that it does not come about by implication; and that legislative purpose is significant." Id. at 674.

The Supreme Court has also unequivocally held that provisions of a taxing statute granting special exemptions are to be strictly construed against the taxpayer. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U.S. 46, 61 S.Ct. 109, 85 L.Ed. 29 (1940). See also Luehrmann's Estate v. Commissioner of Internal Revenue, 287 F.2d 10 (...