Farmers Coop. Co. v. Comm'r of Internal Revenue
| Decision Date | 24 October 1985 |
| Docket Number | 5988-83.,Docket Nos. 15643-82 |
| Parties | FARMERS COOPERATIVE COMPANY (SUCCESSOR-IN-NAME TO FARMERS CO-OP OIL COMPANY), Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners were tax-exempt farmers' cooperatives that had been granted exempt status in 1929 and 1956. Each petitioner was audited for 2 years during the period 1977 through 1980. Respondent determined that both petitioners failed to meet the requirement of sec. 521, I.R.C. 1954, that substantially all of the capital stock be owned by producers who market products or purchase supplies and equipment through the cooperatives. Respondent's determination to revoke tax-exempt status was predicated upon an 85-percent minimum threshold for the ‘substantially all‘ requirement of sec. 521(b)(2), I.R.C. 1954.
HELD: The Eighth Circuit's approval of respondent's 85- percent test in West Central Cooperative v. United States, 758 F.2d 1269 (8th Cir. 1985), affg. per curiam an unreported District Court opinion, followed in this case. HELD FURTHER:
Although the facts of this case warrant application of the 85-percent test, that standard may not be appropriate in all factual contexts and may be too inflexible to fulfill congressional intent underlying the enactment of sec. 521, I.R.C. 1954. RICHARD S. WHEELER and STANLEY W. ROSENKRANZ, for the petitioners.
RUUD L. DuVALL, for the respondent.
*
In these consolidated cases, respondent determined deficiencies in petitioners' Federal income taxes as follows:
+-------------------------------------------------------+
¦Docket ¦ ¦ ¦ ¦
+--------+---------------------------+-------+----------¦
¦No. ¦Petitioner ¦Year ¦Deficiency¦
+--------+---------------------------+-------+----------¦
¦15643-82¦Farmers Cooperative Co. ¦1 1977¦$2,934.94 ¦
+--------+---------------------------+-------+----------¦
¦ ¦ ¦1978 ¦891.47 ¦
+--------+---------------------------+-------+----------¦
¦5988-83 ¦Farmers Cooperative Society¦2 1979¦12,638.23 ¦
+--------+---------------------------+-------+----------¦
¦ ¦ ¦1980 ¦10,695.18 ¦
+-------------------------------------------------------+
The issue for our consideration is whether petitioners are exempt cooperative associations under section 521 3 because ‘substantially all of the capital stock‘ of each petitioner ‘is owned by producers who market their products or purchase their supplies and equipment through‘ the respective petitioners as described in section 521(b)(2).
All of the facts have been stipulated and are found accordingly. The stipulation of facts, second stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioner, Farmers Cooperative Company (Company), is a cooperative incorporated under the laws of the State of Nebraska with its principal office in Platte Center, Nebraska. The Company's fiscal year ends on September 30 each year. Utilizing the accrual method of accounting, the Company filed Federal income tax returns for fiscal years ended September 30, 1977 and 1978, on Forms 990-C (Exempt Cooperative Association Income Tax Returns) with the Internal Revenue Service Center, Exempt Organizations Section, Cornwells Heights, Pennsylvania.
The Company is a farmers' association organized and operated on a cooperative basis. Its purpose is to market the products of its members or other producers and remit to them the proceeds of sales less necessary marketing expenses on the basis of either the quantity or the value of the products furnished by them. The principal products are corn, milo, wheat, soybeans, and oats. The cooperative also purchases supplies and equipment for resale to its members or other persons. Such supplies and equipment are sold at actual cost plus operating expenses. The supplies and equipment principally involve fertilizer, agricultural chemicals, fuel, oil, tires, and equipment such as sprayers, tillage equipment and grain wagons.
The Company is a capital stock company. During 1977 and 1978, the Company's authorized capital stock consisted of 40,000 shares of $12.50 par value common stock. Each shareholder was entitled to only one vote regardless of the number of shares owned.
In addition to its capital stock, the Company carried evidences of ownership interest known as certificates of participation and equity credits on its books. Such forms of ownership did not entitle the holder to vote or otherwise participate in the management of the Company's affairs.
During and after the two tax years in issue, the Company's Board of Directors limited the ownership of its common stock to eligible persons 4 and regularly took action to purge non-patronizing stockholders from its list of active, voting members. For example, the Company's bylaws provided a procedure for recalling stock from persons who had ceased to be eligible shareholders because (1) they moved from the Company's trade territory, (2) they failed to patronize the Company for a one-year period, (3) they had died, or (4) they voluntarily withdrew from membership. The Company does not require its patrons or shareholders to enter into membership agreements which require them to transact any particular annual quantity of their marketing or purchasing business with the Company.
As of September 30, 1977, 670 producers held at least one share of the Company's voting stock of whom 568 (or 84.78 percent of the total) transacted business with the Company during that year, by either marketing agricultural products through the Company, purchasing agricultural supplies and equipment from the Company, or a combination of the two. In addition, 32 producers began patronizing the Company during its 1977 fiscal year and, during the course of that year, met all the qualifications to become shareholders of the Company. The Company's Board of Directors caused 31 of these 32 new members to receive one share of the Company's stock issued on January 31, 1978, the day of the Company's annual shareholders' meeting for its 1977 fiscal year.
Of the Company's 102 voting shareholders who did not transact any business with the Company during its 1977 fiscal year, only one shareholder had his stock either converted to nonvoting status or redeemed within 12 months after the end of the Company's 1977 fiscal year. Cumulatively, the Company either converted or redeemed two shareholders' stock within 18 months, 67 shareholders' stock within 24 months, and 75 shareholders' stock within 36 months, after the end of the Company's 1977 fiscal year.
During the tax years in issue the Company owned and operated a facility for the receipt, handling, drying and storage of grain produced by its patrons. This facility was licensed by the State of Nebraska as a grain storage warehouse having a capacity of 963,000 bushels. The total amount of grain handled by the Company in any given year depended upon a number of variables. Accordingly, its storage facility did not always have sufficient capacity to handle all the grain produced by all its patrons in any given year.
The Company's patrons delivered their grain to the Company's elevator facility, at which time the grain was weighed, dried (if necessary) and placed in storage. Unless the patron had made a prior contractual arrangement with the Company to deliver his grain for immediate sale, the patron had a period of time after the date of delivery to decide whether to sell the grain to the Company or leave the grain in ‘open storage.‘ A patron was not credited with patronage on the date he delivered the grain to the Company but, rather, on the date the grain was sold. If on delivery the patron placed the grain in open storage, the Company accrued storage fees on its books, which it collected from the patron at the time the grain was sold. Only shareholders or those in the process of becoming shareholders were permitted to deliver grain to the Company for storage. During its 1977 fiscal year the Company received grain storage fees in the amount of $66,643.80, which it classified as patronage-sourced income on its 1977 tax return. These grain storage fees were paid to the Company by its member-patrons (i.e., not by nonmembers) and only such member-patrons (not the Company) held title to the grain stored.
As of September 30, 1978, 698 producers held at least one share of the Company's voting stock. Of this number, 576 (or 82.52 percent of the total) transacted business with the Company during that year by either marketing agricultural products through the Company, purchasing agricultural supplies and equipment from the Company, or a combination of the two. In addition, 33 producers began patronizing the Company during its 1978 fiscal year and, during the course of that year, met all the qualifications to become shareholders of the Company. The Company's Board of Directors caused one share of the Company's stock to be issued to 31 of the 33 new members as follows:
(1) One on March 14, 1979; (2) 29 on March 15, 1979; and (3) one on September 18, 1981.
Of the Company's 122 voting shareholders who did not transact any business with the Company during its 1978 fiscal year, four had their stock either converted to nonvoting status or redeemed within six months after the end of the Company's 1978 fiscal year. Cumulatively, the Company either converted or redeemed 93 shareholders' stock within 12 months, 95 shareholders's stock within 18 months, 102 shareholders' stock within 24 months, and 117 shareholders' stock within 36 months after the end of the Company's 1978 fiscal year.
During its 1978 fiscal year, the Company received grain storage fees in the amount of $70,751.50 which it classified as patronage- sourced income on its 1978 tax return. Of these grain storage fees, $68,998.61 was...
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