Cooperative Grain and Supply Co. v. Commissioner

• Decision Date: 24 July 1973
• Docket Number: Docket No. 6132-64.
• Parties: Cooperative Grain and Supply Co. v. Commissioner.
• Court: U.S. Tax Court

32 TCM (CCH) 795

1973 TC Memo 164

T.C. Memo. 1973-164.

Cooperative Grain and Supply Co. v. Commissioner.

Docket No. 6132-64.

United States Tax Court.

Filed July 24, 1973. Tried in Omaha, Nebraska.

Robert C. Guenzel, Lincoln Benefit Bldg., 134 So. 13th St., Lincoln, Neb., for the petitioner. Ivan L. Onnen, for the respondent.

Supplemental Memorandum Findings of Fact and Opinion

FAY, Judge:

This case is before the Court on an order of remand by the Court of Appeals for the Eighth Circuit pursuant to its opinion in Co-Operative Grain & Supply Co.v. Commissioner, 69-1 USTC ¶ 9247 407 F. 2d 1158 (C.A. 8, 1969). In that opinion, the Court of Appeals modified our decision (Dec. 28,506(M) T.C. Memo. 1967-132). The court affirmed our legal conclusion that for the petitioner to qualify for tax-exempt status under section 521(b)¹ substantially all of the petitioner's shareholder-producers are required to market their products and purchase their supplies through the petitioner on a current basis. However, the appellate court went on to order that the petitioner be granted a further hearing in order to present additional evidence on the question of whether its "substantially all" requirement had been met.

Pursuant to that mandate, an additional stipulation of facts, exhibits, and depositions upon oral examination of five witnesses produced on behalf of the petitioner were introduced to supplement the record of this case.

Pursuant to the orders of the Court of Appeals, we find the following supplementary facts and hold according to these facts for respondent.

Findings of Fact

We find that during the years 1958, 1959, 1960, and 1961 the following percentages of petitioner's shareholders currently transacted some business with the petitioner:

                                Percentage of Participating
                                        Shareholders
                Year           (To the nearest whole percent)
                1958                         78
                1959                         71
                1960                         71
                1961                         65
                

These figures were arrived at by taking into account the following factors:

(1) The effect of the death of certain shareholder-producers on that shareholder-producer's ability to transact business with the petitioner;

(2) The effect of incorrect recording of shareholder-producer participation due to mistaken identities of certain shareholder-producers; and

(3) The effect of the cooperative's failure to credit as current participants all shareholders who farmed on share tenancies or in partnership or as husband and wife.

Ultimate Finding of Fact

In none of the years in question did substantially all of the petitioner's shareholder-producers currently transact some business with the petitioner.

Opinion

During the years at issue, farmers' cooperatives which met the requirements of section 521² were permitted sweeping deductions which were not shared by cooperatives that did not meet said requirements. In Dec. 28,506(M) T.C. Memo. 1967-132, we determined that one of the requirements of section 521 was that the petitioner prove that substantially all of the cooperative's shareholders currently transacted business with the cooperative. We determined that the petitioner had failed to meet this vital requirement of the statute in that it failed to show that a substantial number of its shareholders currently transacted some business with the petitioner.

"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." Co-Operative Grain & Supply Co.v. Commissioner, supra at 1159

The Court of Appeals for the Eighth Circuit upheld our conclusion that qualification for section 521 benefits required a showing that substantially all of the cooperative's shareholders transacted some business with the cooperative on a current basis. "Substantially all of the shareholder-producers are required to market their products and purchase their supplies through the taxpayer on a current basis. That is our holding." Co-Operative Grain & Supply Co., supra at 1164.

The Court of Appeals, however, remanded our initial opinion so that the petitioner could introduce additional evidence on the question of whether the petitioner had met this "substantially all" requirement. Pursuant to this remand, the parties filed a stipulation of facts which revealed that for the years in question the following percentages reflected the petitioner's shareholders' current participation in the cooperative.³

                     Year               Percentage
                     1958 .............  61.9
                     1959 .............  56.3
                     1960 .............  56.7
                     1961 .............  51.6
                

In addition to the stipulation of facts, the petitioner proceeded to submit a series of oral depositions. The purpose of this testimony was to show that for a number of reasons the percentage of participants as found in the stipulation did not adequately reflect whether substantially all of the petitioner's shareholders participated as required. The petitioner with this additional testimony in essence urged us to reject many of the stipulated facts and formulate a new more realistic equation as to the percentage of petitioner's shareholders who currently transacted some business with the petitioner.

The testimony in almost all of the depositions leaves much to be desired. However, for purposes of this case only, we have determined to accept almost all of the evidence in petitioner's witnesses' depositions as true and relevant and we have formulated a new equation to determine whether the "substantially all" requirement has been met. Even after ruling for petitioner on many questionable evidentiary points, we hold that the requirements of section 521 have not been met.

Section 521 does not define the term "substantially all" and in addition there is not a plethora of case law which supplies a sufficient definition or guideline. Inferentially, it has been established that a 91 percent current participation rate is sufficient, see Farmers Co-Operative Creamery Dec. 6471, 21 B.T.A. 265 (1930), and specifically this Court has held that 72 percent is not sufficient. See Petaluma Co-Operative Creamery Dec. 29,620, 52 T.C. 457 (1969). Our holding in the Petaluma case is determinative of petitioner's non-qualification for exempt status in the years 1959 (71 percent), 1960 (71 percent), and 1961 (65 percent). Furthermore, without deciding exactly what percentage is sufficient for purposes of section 521, we think that under the facts and circumstances of this particular case wherein we have resolved even the most questionable items in petitioner's favor, the petitioner's shareholders' degree of participation for 1958 (78 percent) is also insufficient.⁴

In reaching our conclusions as to the new equations of percentages of yearly current participation, we have considered the following theories proposed by the petitioner:

(1) Petitioner contends that many of the stockholders of the corporation who did not appear as active patrons in the years in question were deceased. Since as to these parties there was an impossibility of participation, petitioner asks us to eliminate such stockholders in determining the percentage of current participation. We believe petitioner's argument is well taken and for the most part we have accepted this approach. However, when the deceased shareholder has had no record of significant participation in the years prior to his year of death and such decedent died in the latter part of the year in question, we have not eliminated the year decedent died for purposes of our calculation.

(2) Petitioner contends that shareholders who have moved from the area of the cooperative must be eliminated from the equation. It claims that only those shareholder-producers who could readily transact business with the cooperative should be looked to in determining what percentage of shareholder-producers did transact some business with the cooperative. We think petitioner's position is untenable. On brief, it admits that the cooperative was powerless to act and redeem a shareholder's interest simply because he moved away. The Internal Revenue Code makes no distinction between shareholders with ready access to a cooperative's facilities and those not so accessible. The absent shareholders at all times had the power to command their rights and this remains the determining factor of ability to participate. There was no impossibility of participation as in the case of deceased shareholders.

The Court of Appeals which remanded the case at bar recognized that the requirements of section 521 were to be strictly interpreted. To adopt petitioner's position in the present case would be to subvert the appellate court's interpretation.

(3) Petitioner in its third contention attempts to revitalize arguments which have already been rejected by this Court and the Court of Appeals. Petitioner contends that as long as there has been something resembling a continuing business relationship between the shareholders and the cooperative the shareholders should qualify as current patrons. Relying on this argument, petitioner would have us ignore a year in which a shareholder failed to transact business with the cooperative if that shareholder had transacted business in prior and subsequent years.

We think that the mandate of the Court of Appeals is quite specific in this area and petitioner's contention is not well taken. That court studied...