Buckeye Countrymark, Inc. v. Comm'r of Internal Revenue

• Decision Date: 09 November 1994
• Docket Number: No. 29412–87.,29412–87.
• Citation: 103 T.C. No. 32,103 T.C. 547
• Parties: BUCKEYE COUNTRYMARK, INC., Successor to Fayette Landmark, Inc., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

103 T.C. 547

103 T.C. No. 32

BUCKEYE COUNTRYMARK, INC., Successor to Fayette Landmark, Inc., Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 29412–87.

United States Tax Court.

Nov. 9, 1994.

Arthur E. Bryan, Jr., George W. Benson, and David J. Duez, Chicago, IL, for petitioner.

James E. Kagy, Paulding, OH, for respondent.

P, a nonexempt cooperative subject to subchapter T, realized a loss in 1980 from transactions with its shareholders and treated the loss as a net operating loss carryback to 1977 pursuant to sec. 172(b)(1)(A), I.R.C. R determined that P is a “membership organization” under sec. 277, I.R.C. and further determined that the subject loss cannot be carried back as a net operating loss but can only be carried over and deducted in subsequent years.

Held: In as much as P is a nonexempt cooperative subject to subchapter T, it cannot be a “membership organization” within the meaning of sec. 277(a), I.R.C., and, thus, it is eligible to treat the loss realized from transactions with its shareholders as a net operating loss carryback under section 172(b)(1)(A), I.R.C.

WHALEN, Judge:

Respondent determined a deficiency of $26,272 in the Federal income tax of Fayette Landmark, Inc., for its fiscal year ending August 31, 1977. The sole issue for decision is whether section 277 applies to Fayette, a nonexempt cooperative subject to the provisions of subchapter T of the Internal Revenue Code (sections 1381–1388), and prohibits it from carrying back to fiscal year 1977 losses realized during fiscal year 1980 from transactions with its stockholders. (Unless otherwise indicated, all section references are to the Internal Revenue Code as amended.)

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The Stipulations of Facts filed by the parties and the exhibits attached thereto are incorporated herein by this reference.

Petitioner was formed after the years at issue, on September 3, 1986, as a result of the consolidation of Fayette, the taxpayer, with another cooperative, Green Landmark, Inc. Petitioner is Fayette's legal successor. At the time petitioner filed the subject petition, its principal place of business was Xenia, Ohio.

Fayette was incorporated on February 3, 1934, as a farmers' marketing and purchasing cooperative under sections 1729.01 to 1979.28, inclusive, of the Ohio Revised Code (Anderson 1992). It was organized principally to supply petroleum products to farmers in Fayette County, Ohio. For Federal tax purposes, it qualified as an exempt farmers' cooperative under section 521 and its predecessors.

In June 1975, Fayette's Articles of Incorporation and Code of By–Laws were amended to restrict the payment of patronage refunds to patrons owning shares of Class A or Class C common stock. By taking this action, Fayette voluntarily relinquished its status as an exempt section 521 cooperative for Federal tax purposes and became a so-called nonexempt cooperative. It took this action to avoid the record keeping necessary to pay patronage dividends to all patrons, as required of an exempt cooperative, rather than just to shareholders.

During the period at issue, September 1, 1976, through August 31, 1980, Fayette's stated purpose according to its Amended Articles of Incorporation was “to engage on a non-profit cooperative basis for the mutual benefit of its members in any activity in connection with the conducting of a general agricultural, marketing and purchasing business in any and all of its phases”. In furtherance of this purpose, Fayette engaged in the grain and agricultural supplies businesses, described below. It operated primarily in Fayette County, Ohio, and its principal office was located in Washington Court House, the largest town in that county. It competed directly with a number of noncooperative or commercial companies, and it operated in a manner similar to those competitors.

Under its Amended Articles of Incorporation and Amended Code of By–Laws, adopted in June of 1975, Fayette was authorized to issue three classes of common stock, Classes A, B, and C, and one class of preferred stock. Class A common stock was Fayette's only class of voting stock. Ownership of Class A common stock was limited to “persons engaged in the production of agricultural products for the market, including the lessees and tenants of land used for the production of such products, and any lessors and landlords who receive as rent, all or any part, of the crops raised on the leased premises” and certain producer-owned cooperative agricultural associations. No other persons were eligible to hold Class A common stock and such shares were not transferable, except with the consent of the Board of Directors. Each holder of Class A common stock was entitled to only one vote irrespective of the number of shares owned. Class A common shareholders are referred to as “members” in Fayette's Amended Code of By–Laws. There were 1,989.4 shares of Class A common stock outstanding as of August 31, 1977, and 1,691.5 shares outstanding as of August 31, 1980.

According to Fayette's Amended Articles of Incorporation, Class B common stock could be issued only to members (i.e., Class A shareholders) in payment of, or in satisfaction of patronage refunds to which such member was entitled. During fiscal years 1977 and 1980, no shares of Class B common stock were outstanding.

Class C common stock was identical in all other respects to Class A common stock, but its holders were not entitled to vote, except as otherwise provided by State law. Persons not meeting the eligibility standards to hold Class A common stock, as set out in the articles, were permitted to purchase Class C common stock. Thus, Class C common stock was held by patrons of Fayette, other than producers of agricultural products. Fayette's Amended Code of By–Laws referred to Class C stockholders as “associate members”. Fayette had 24 holders of Class C common stock as of August 31, 1977, and 27 holders as of August 31, 1980.

Fayette's preferred stock was nonvoting and was the only class of stock with shares outstanding upon which “dividends” could be paid. Dividends on shares of preferred stock could not exceed 8 percent of its par value in any year. Fayette had $324,125 of preferred stock outstanding at August 31, 1977, and $283,925 outstanding at August 31, 1980.

Holders of Class A and C common stock were entitled to receive patronage refunds. Under Fayette's amended articles and bylaws, patronage refunds were to be paid annually in an amount equal to Fayette's patronage earnings (“net savings or margins” arising out of the business transacted with patrons who hold Class A common and Class C common) remaining after payment of dividends on preferred stock and provision for necessary reserves. Fayette accounted for the earnings from its grain business and its supplies business separately, and paid patronage refunds to patrons of each business who were shareholders. In the case of the grain business, patronage refunds were based upon the bushels of grain purchased from each shareholder. In the case of the supplies business, patronage refunds were based upon the dollar amount of supply sales made to each shareholder.

Patronage refunds were required to be paid after the close of each fiscal year, either in cash or in written notices of allocation. Fayette used qualified written notices of allocation in the form of certificates of ownership and letters of advice which informed the recipient how much had been allocated to the recipient on Fayette's books as the noncash portion of the refund. Holders of the notices had consented, within the meaning of section 1388(c), to include patronage refunds paid in the form of written notices of allocation in income at their stated dollar amount. They were not entitled to interest or dividends on such amount. Payments with respect to such notices were made in accordance with the provisions of Fayette's articles and bylaws. The aggregate stated dollar amount of Fayette's outstanding letters of advice as of August 31, 1977, was $728,670. As of August 31, 1980, it was $743,511.

Upon liquidation, dissolution, or winding up of the affairs of Fayette, any residual assets, after the payment of all debts and the retirement of stock and letters of advice, at par or stated dollar value, were to be shared on a patronage basis.

Fayette's grain business involved the purchase, storage, handling, and sale of grains, principally corn and soybeans. It operated two grain elevators for storage of the grains it purchased.

Fayette purchased grains from producers at competitive market prices. All sellers were offered the same terms and conditions, whether or not they were shareholders of Fayette, except that sellers who were shareholders were entitled to patronage refunds at the close of the fiscal year. Most of the grain purchased by Fayette was from producers who owned Class A or C common stock. Shareholders were, however, under no obligation to sell grain to Fayette; they were free to sell to other companies and most would do so if they could obtain a better price from other companies. For fiscal year 1977, 99.2 percent of the total value of the grain purchased by Fayette was purchased from shareholders. For fiscal year 1980, it was 90.5 percent.

Fayette's supplies business involved the sale of agricultural supplies, principally fertilizer, petroleum products, feed, seed, herbicides, and pesticides, to producers on a cooperative basis. Fayette operated three feed mills, three fertilizer plants, a bulk petroleum facility, and two small farm supply stores. The three fertilizer plants stored and blended fertilizer products to the specifications required by the producers. Fayette tested soil for its patrons and would assist them in determining the best mineral and fertilizer blends for their fields. It owned and rented to customers implements used to spread fertilizer. The bulk petroleum facility in ...