Farmers Cooperative Co. v. Birmingham, Civ. No. 537.

CourtUnited States District Courts. 8th Circuit. Northern District of Iowa
Writing for the CourtGRAVEN
Citation86 F. Supp. 201
Decision Date08 October 1949
Docket NumberCiv. No. 537.
PartiesFARMERS COOPERATIVE CO. v. BIRMINGHAM, Collector of Internal Revenue.

86 F. Supp. 201

FARMERS COOPERATIVE CO.
v.
BIRMINGHAM, Collector of Internal Revenue.

Civ. No. 537.

United States District Court N. D. Iowa, W. D.

September 19, 1949.

As Amended October 8, 1949.


86 F. Supp. 202
COPYRIGHT MATERIAL OMITTED
86 F. Supp. 203
Alan Loth (of Loth & Melton), Fort Dodge, Iowa, for plaintiff

Tobias E. Diamond, United States District Attorney, Wm. B. Danforth, Assistant United States District Attorney, Sioux City, Iowa, and Ruppert Bingham, Special Assistant to Attorney General, for defendant.

GRAVEN, District Judge.

Suit by a taxpayer for refund of federal income, excess profits and declared value excess profits taxes and interest thereon paid pursuant to a deficiency assessment by the defendant Collector against the taxpayer for the fiscal year of the taxpayer ending October 31st, 1944, involving the question of the exclusion of a patronage dividend from the taxable income of the taxpayer. This action was originally brought in the Southern District of Iowa. It was transferred to this District under the provisions of Section 1404(a) of the Revised Judicial Code, 28 U.S.C.A.

Plaintiff, hereinafter referred to as taxpayer, is a farmers cooperative association whose place of business is at Greenfield in Adair County, Iowa. The taxpayer was originally organized as a stock corporation under the chapter of the Iowa Code relating in general to the incorporation of organizations for pecuniary profit and it continued under that form of organization until February 8th, 1944. On February 8th, 1944, at a stockholders' meeting the taxpayer reorganized as a nonstock agricultural cooperative under Section 8512.43 of Chapter 390.1 of the Code of Iowa 1939, presently Chapter 499 of the Code of Iowa 1946, I.C.A. ž 499.43. The taxpayer was both an agricultural marketing and agricultural purchasing cooperative organization handling livestock, grain, farm supplies and equipment, and similar merchandise. At the time of its reorganization provision was made for the exchange of membership and interest certificates for all outstanding shares of stock. Prior to October 31st, 1944, this plan was carried out, so that on October 31st, 1944, the taxpayer had no capital stock outstanding, and there were on that date no obligations existing or claimed arising out of the reorganization, either to any stockholder or to any other person.

On November 3d, 1944, three days after the close of taxpayer's fiscal year, an accountant employed by the taxpayer completed his audit of taxpayer's books, and at a special directors' meeting held on that date the following motion was adopted: "Motion by Sieg seconded by Shirk that a deferred dividend be set up to the members at the rate of a cent a bushel on grain eight percent on merchandise and six-tenths of one percent on livestock. Motion carried." Though the taxpayer reports on the accrual basis no action had been taken by its directors prior to November 3d, 1944, with respect to the declaration or allocation of any dividends for taxpayer's fiscal year ending October 31st, 1944.

The deferred dividend provided by taxpayer's board of directors amounted to $5913.14 and was set up on taxpayer's books as "Patronage Dividend Payable." Each member's share was computed and credited to his individual account on the patronage ledger of the taxpayer as of November 4th, 1944. In computing the dividend of the members, they were given credit for the amount of business done with the taxpayer for the period from February 8th, 1944, to October 31st, 1944, which was the period during which the taxpayer was operating under the Iowa laws relating to cooperatives. In addition, they were given credit for the amount of business done with the taxpayer during the period from November 1st, 1943, to February 8th, 1944, when they were stockholders of the taxpayer while it was operating as a stock corporation. A portion of the taxpayer's profit for its fiscal year 1943-1944 came from transactions with nonmembers. It is the claim of the taxpayer that it withheld from the patronage dividend an amount equal to the profits made from transactions with nonmembers, so that no profits from business transacted with non-members was included in the dividend. The members were informed of the credits to their accounts at the annual membership meeting in February, 1945. Pursuant to appropriate resolutions of taxpayer's board

86 F. Supp. 204
of directors dated January 5th, 1946, and November 6th, 1946, 60 percent of the deferred dividend was paid to the members on January 31st, 1946, and the balance was paid on February 17th, 1947

The taxpayer's earnings before taxes for the year ending October 31st, 1944, amounted to $16,372.53. On January 16th, 1945, the taxpayer paid corporation income, excess profits and declared value excess profits taxes on its taxable income for its fiscal year ending October 31st, 1944, in the amount $2619.21. In computing its taxable income the taxpayer excluded therefrom the dividend credited to its members on November 4th, 1944, in the sum of $5913.14. The Commissioner disallowed this exclusion and on January 2d, 1947, imposed a deficiency assessment against the taxpayer in the amount of $4627.25. The taxpayer paid the deficiency. On November 20th, 1947, the taxpayer filed a claim for refund with the Commissioner. No action was taken by the Commissioner during the ensuing six months' period. On June 18th, 1948, the taxpayer brought this action to recover $4324.96. The difference between the amount of the deficiency assessment and the amount sought to be recovered is occasioned by adjustment of minor items. All of the $4324.96 sought to be recovered by the taxpayer in this action arises from additional taxes assessed by the Commissioner because of the denial by him of the taxpayer's claim for exclusion from its income of the patronage dividend in question.

Since taxpayer transacted business with both members and nonmembers but only allocated patronage dividends to member patrons, it was not entitled to and does not claim the statutory exemption accorded some farmer cooperatives by Section 101 (12) of the Internal Revenue Code, 26 U.S. C.A. ž 101(12). The controversy between the defendant Collector and the taxpayer is as to whether the taxpayer could exclude from its taxable income the amount allocated and subsequently paid as a patronage dividend. The said patronage dividend was derived from the earnings of the taxpayer for the period from November 1st, 1943, to October 31st, 1944.

The defendant Collector contends that the taxpayer could not legally include in the patronage dividend any amount derived from business transacted with the present members prior to February 8th, 1944. In support of this position the Collector points out that merely being a stockholder in the original stock corporation does not confer on that stockholder, who subsequently becomes a member of the reorganized successor, cooperative corporation, the status of a member toward the income earned by the organization while it was a stock corporation. In other words, it is the claim of the defendant Collector that membership in the cooperative has no retroactive effect for any period prior to the time such membership was obtained and so far as the present members are concerned the income of the stock corporation for the period November 1st, 1943, to February 8th, 1944, was derived from transactions with nonmembers. The Collector further argues that during the period the taxpayer functioned as a stock corporation it was under no obligation either by statute or its articles of incorporation to pay any of its stockholders any patronage dividends.

The taxpayer and the Collector are also in disagreement as to the exclusion of that amount of the dividend credited to the members based upon business transacted by the members during the period the taxpayer functioned as a cooperative from February 8th, 1944, to the end of its fiscal year on October 31st, 1944.

It has been heretofore noted that the corporate action of the taxpayer relating to the declaration of the patronage dividend in question was not taken until after the end of the taxpayer's fiscal year and that the patronage dividend was not credited to the member patrons until after the end of such fiscal year. It is the contention of the taxpayer that no corporate action formally declaring such patronage dividend was necessary to make it excludable for federal income tax purposes since under the applicable Iowa statute and its own articles of incorporation the taxpayer was obligated to allocate patronage dividends to its member patrons.

86 F. Supp. 205

The Collector's position on this point is that neither the applicable state statutes nor taxpayer's articles of incorporation created an obligation on the part of the tax-payer to pay or to allocate to its member patrons the patronage dividend in question and that until the board of directors acted there was neither an obligation on the part of the taxpayer to allocate a patronage dividend nor a right in its member patrons to receive such a dividend. In addition, the Collector claims that the statutes and articles vested such discretion in the taxpayer's board of directors that they had the right to declare or not to declare distributions of earnings to members, as they saw fit, thus further negativing any pre-existing obligation to allocate its earnings to member patrons which taxpayer might claim to have.

The determination of the questions involved in the present case would seem to require a study of considerable of the history and background of farmer cooperatives and the numerous statutory provisions relating to them.

The growth of farmer cooperatives throughout the United States has been very rapid, and it is estimated that today from one-third to one-half of the nation's farmers are cooperative members. Voorhis, Recent Trends in Urban Cooperative Development, 13 Law and Contemporary Problems 458, Duke...

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37 practice notes
  • Union Equity Coop. Exch. v. Comm'r of Internal Revenue , Docket No. 439-70.
    • United States
    • United States Tax Court
    • May 31, 1972
    ...(C.A. 8, 1961); Linnton Plywood Association v. United States, 236 F.Supp. 227, 228 (D. Ore. 1964); Farmers Cooperative Co. v. Birmingham, 86 F.Supp. 201, 230 (N.D. Iowa 1949). In the taxable year 1963 petitioner had net earnings of $1,519,884.69 of which 57.18 percent (or $869,070.07) had b......
  • Farmar v. United States, No. 15-80T
    • United States
    • Court of Federal Claims
    • January 10, 1983
    ...are not binding but have some authority as an indication of administrative practice. See Farmers Cooperative Co. v. Birmingham, 86 F.Supp. 201, 229 (N.D.Iowa VI Primarily on the basis of the language of § 613A, but with minor help from the legislative history and the consistent administrati......
  • Buckeye Countrymark, Inc. v. Comm'r of Internal Revenue, No. 29412–87.
    • United States
    • United States Tax Court
    • November 9, 1994
    ...Independent Co-op Milk Producers Association v. Commissioner, 76 T.C. 1001, 1012–1014 (1981); Farmers Co-op Co. v. Birmingham, 86 F.Supp. 201 (N.D.Iowa 1949). Subchapter T applies to exempt farmers' cooperatives described in section 521 and “any corporation operating on a cooperative basis”......
  • Geer v. Birmingham, Civ. No. 423.
    • United States
    • United States District Courts. 8th Circuit. Northern District of Iowa
    • January 10, 1950
    ...largely upon long-continued and consistent administrative rulings and practice. See Farmers Cooperative Co. v. Birmingham, D.C.Iowa 1949, 86 F.Supp. 201, 206, 212. Under the record in this case the defendant Collector could not very well claim and he does not claim that the administrative r......
  • Request a trial to view additional results
37 cases
  • Union Equity Coop. Exch. v. Comm'r of Internal Revenue , Docket No. 439-70.
    • United States
    • United States Tax Court
    • May 31, 1972
    ...(C.A. 8, 1961); Linnton Plywood Association v. United States, 236 F.Supp. 227, 228 (D. Ore. 1964); Farmers Cooperative Co. v. Birmingham, 86 F.Supp. 201, 230 (N.D. Iowa 1949). In the taxable year 1963 petitioner had net earnings of $1,519,884.69 of which 57.18 percent (or $869,070.07) had b......
  • Farmar v. United States, No. 15-80T
    • United States
    • Court of Federal Claims
    • January 10, 1983
    ...are not binding but have some authority as an indication of administrative practice. See Farmers Cooperative Co. v. Birmingham, 86 F.Supp. 201, 229 (N.D.Iowa VI Primarily on the basis of the language of § 613A, but with minor help from the legislative history and the consistent administrati......
  • Buckeye Countrymark, Inc. v. Comm'r of Internal Revenue, No. 29412–87.
    • United States
    • United States Tax Court
    • November 9, 1994
    ...Independent Co-op Milk Producers Association v. Commissioner, 76 T.C. 1001, 1012–1014 (1981); Farmers Co-op Co. v. Birmingham, 86 F.Supp. 201 (N.D.Iowa 1949). Subchapter T applies to exempt farmers' cooperatives described in section 521 and “any corporation operating on a cooperative basis”......
  • Geer v. Birmingham, Civ. No. 423.
    • United States
    • United States District Courts. 8th Circuit. Northern District of Iowa
    • January 10, 1950
    ...largely upon long-continued and consistent administrative rulings and practice. See Farmers Cooperative Co. v. Birmingham, D.C.Iowa 1949, 86 F.Supp. 201, 206, 212. Under the record in this case the defendant Collector could not very well claim and he does not claim that the administrative r......
  • Request a trial to view additional results

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