Greene County Rural Elec. Co-op. v. Nelson

• Decision Date: 08 February 1944
• Docket Number: 46409.
• Citation: 12 N.W.2d 886,234 Iowa 362
• Parties: GREENE COUNTY RURAL ELECTRIC COOPERATIVE et al. v. NELSON et al.
• Court: Iowa Supreme Court

12 N.W.2d 886

234 Iowa 362

GREENE COUNTY RURAL ELECTRIC COOPERATIVE et al. v. NELSON et al.

No. 46409.

Supreme Court of Iowa

February 8, 1944

John M. Rankin, Atty. Gen., and Jens Grothe, Asst. Atty. Gen., for appellants.

Wisdom & Wisdom and Stephens & Buckingham, all of Des Moines, for appellees.

Thompson & Weible, of Forest City, and Glenn D Kelly, of Davenport, for interveners-appellees.

MILLER Justice.

Plaintiffs' petition asserts that they are rural electric cooperatives organized under Chapter 390.1, Code 1939, engaged in operating electric transmission lines upon the cooperative plan and not for profit and that defendants are threatening to assess their lines under Chapter 340, Code 1939; that defendants are without right, jurisdiction or authority to so proceed; the prayer was for a permanent injunction. Two interveners adopted the allegations of the petition and asked for similar relief. Defendants' answer denied that plaintiffs were in law or in fact organized or operated on a non profit basis, asserted that Chapter 340 applies to plaintiffs and alleged further that, if plaintiffs are nonprofit associations, the exemption in their favor appearing in Section 7089, was repealed by implication by Chapter 248, Acts of the 49th G.A.

At the trial most of the evidence consisted of stipulations and exhibits. The facts are not disputed. The court determined that plaintiffs are in law and in fact organized and operated on a non profit basis, that Chapter 248, Acts of the 49th G.A. did not repeal the exemption contained in Section 7089, and, accordingly, enjoined defendants from assessing plaintiffs under Chapter 340 of the Code. The defendants appeal to this court, asserting five propositions for reversal.

I. The commission's first two propositions challenge the trial court's finding that plaintiffs are in law and in fact organized and operated on a non profit basis. They will be considered together.

Prior to 1935 cooperatives were organized under what is now known as Chapter 390, Code 1939. By Chapter 94, Acts of the 46th G.A. (1935), it was provided that cooperatives previously organized under Chapter 390 should continue to operate thereunder but any new cooperative should be organized under said Chapter 94, now codified as Chapter 390.1, Code 1939. Plaintiffs were organized in 1937 under said Chapter 390.1. This chapter permits the organization of cooperatives for profit as well as those not for profit.

Plaintiffs' articles of incorporation are in evidence. The parties stipulated regarding their operations as follows:

"It is further stipulated and agreed by the parties hereto that the facts are, which shall be considered as the evidence in this case, that in the operation of the business of the plaintiffs in this case, and cooperative associations similarly situated, each member holds one membership only, that is by a certificate of membership, has only one vote in the management of the business of the plaintiffs, and cooperative associations similarly situated; that all members are required to be patrons and business is done with the members only; that no dividends or interest has ever been paid by the plaintiffs or other cooperative associations similarly situated to members on the membership or the issuing price thereof; that the earnings or excess charges are distributable to the members only on a patronage basis in proportion to the business done by the members through the cooperative corporation and other corporations similarly situated."

The articles of incorporation are consistent with the method of operation above set forth. We are satisfied that plaintiffs are not organized or operated for profit. There is no return on capital invested and can be none. The membership fee of $2.50 is nominal and nothing more than a deposit to establish credit, such as many public utilities require of their patrons. The income is that received for business done with members. Only members are dealt with. Any net earnings are returned on the basis, not of membership or investment, but of business done. It is literally no more than a return of an overcharge originally assessed to provide a margin of safety in the operation of the business. Cooperative corporations and associations so organized and operated have been recognized repeatedly as being not operated for profit.

In Hanna on "The Law of Cooperative Marketing Associations", page 50, it is stated: "The essential idea in the term 'non-profit' is clearly that such corporations are not designed primarily to pay dividends on invested capital but to provide a system and method by which the member can effect the sale of his products."

In "The Law of Cooperative Marketing", by Evans and Stokdyk, page 3, it is stated: "The basic legal and economic principles of the cooperative scheme are limitation upon the voting power and restrictions upon alienation of voting stock or membership interests, thus preserving the dispersion of control and keeping the control within the class affected; limiting the use of proxies, thus fixing the responsibility upon the cooperators; the limitation of earnings upon invested capital, thus insuring the non-profit character of the scheme; and the distribution of earnings or savings upon a patronage basis, that is, according to the quantity or value of products marketed through the association by the respective members."

In 90 Univ. of Pa. Law Review, page 151, it is stated: "A fundamental principle applicable to all cooperatives is the avoidance in the organization of entrepreneur profit. Patronage refunds, therefore, are not to be considered as a division of the profits. They are rather a return of the over-charge."

In United States v. Rock Royal Cooperative, 307 U.S. 533, 564, 59 S.Ct. 993, 1008, 83 L.Ed. 1446, 1465, the court states: "The producer cooperative seeks to return to its members the largest possible portion of the dollar necessarily spent by the consumer for the product with deductions only for modest distribution costs, without profit to the membership cooperative and with limited profit to the stock cooperative. It is organized by producers for their mutual benefit."

As above stated, Chapter 390.1 permits the organization of two kinds of cooperatives, membership cooperatives operated without profit and stock cooperatives that may be operated for profit. Plaintiffs are membership cooperatives and are not operated for profit. The court was right in so holding.

II. The commission's third proposition is that Section 7089 must be strictly construed in favor of the state and against those claiming exemption from taxation and that the burden is on plaintiffs to clearly bring themselves fairly within the exemption from taxation. This is familiar doctrine. Plaintiffs meet its requirements.

Chapter 340, Code 1939, provides that the state tax commission shall determine the actual value, for the purposes of taxation, of all electric transmission lines of companies, defined by Section 7089 as those owning or operating such lines within the...