Pacific Supply Co-op. v. Ellis

• Decision Date: 09 November 1960
• Citation: 224 Or. 556,356 P.2d 939
• Parties: PACIFIC SUPPLY COOPERATIVE, a corporation, Respondent, v. Dean ELLIS, Charles H. Mack and Frederick H. W. Hoefke, as Commissioners of the State Tax Commission of the State of Oregon, Appellants.
• Court: Oregon Supreme Court

Page 939

356 P.2d 939

224 Or. 556

PACIFIC SUPPLY COOPERATIVE, a corporation, Respondent, v. Dean ELLIS, Charles H. Mack and Frederick H. W. Hoefke, as Commissioners of the State Tax Commission of the State of Oregon, Appellants.

Supreme Court of Oregon, Department 1.

Argued and Submitted Oct. 6, 1960.

Decided Nov. 9, 1960.

Gerald F. Bartz, Asst. Atty. Gen., argued the cause for appellants. With him on the briefs were Robert Y. Thornton, Atty. Gen., and Carlisle B. Roberts, Asst. Atty. Gen.

Gerson F. Goldsmith, Portland, argued the cause for respondent. With him on the briefs were Goldsmith, Siegel & Goldsmith, Portland, and Cameron Sherwood, Walla Walla, Wash.

Before McALLISTER, C. J., and ROSSMAN, PERRY, GOODWIN and KING, JJ.

GOODWIN, Justice.

The Oregon State Tax Commission appeals from a decree of the circuit court which held Pacific Supply Cooperative exempt from corporation excise taxes under ORS 317.080(9).

Pacific sued for a refund of taxes paid for the years ending June 30, 1954, 1955, 1956, and 1957. The commission filed a demurrer, which was overruled. The commission having declined to plead further, decree was entered for Pacific.

Prior to the tax year ending June 30, 1954, Pacific had done business in Oregon since 1933 as an exempt corporation under tax laws administered by both state and federal authorities. Pacific is a cooperative corporation, the shares of which are owned by 122 local farmers' cooperatives in Oregon, Washington, and Idaho. About one half of the 70,000 farmers who are members of the constituent cooperatives of Pacific reside in Oregon. Pacific purchases petroleum, fertilizer, farm machinery and related products in large quantities for distribution to its member organizations, which in turn sell directly to individual farmers.

It is conceded that Pacific is qualified under § 521, Internal Revenue Code of 1954, 26 U.S.C.A. § 521, and existing federal regulations as an exempt cooperative. Federal exemption was first granted October 4, 1935, and was reconfirmed in December, 1945, after an audit.

Exemption from the state tax was apparently taken for granted until 1958, when the commission notified Pacific of a proposed assessment for the four previous years. After administrative proceedings were concluded in the commission's favor, this appeal was taken to court.

The commission takes the position that Pacific is not a 'producer' as that word is employed in the exemption statute:

'[ORS] 317.080 Exempt Corporations. The following corporations are exempt from the taxes imposed by this chapter:

* * *

* * *

'(9) Farmers' and fruit growers' associations, organized and operated on a cooperative basis (a) for the purpose of marketing the products of members or other producers and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (b) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. Exemption shall not be denied any such association because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the state of incorporation or eight percent per year, whichever is greater, on the value of the consideration for which the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment through the association. Exemption shall not be denied any such association because there is accumulated and maintained by it a reserve required by state law or a reasonable reserve for any necessary purpose. Such an association may market the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, and may purchase supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the purchase made for persons who are neither members nor producers does not exceed 15 percent of the value of all its purchases. * * *.'

The quoted statute first appears in substantially its present form in Oregon Laws 1939, ch. 489, § 5. A similar section of the then current federal Internal Revenue Act (§ 101(12)) 26 U.S.C.A. § 101(12) remained substantially unchanged from its original form in the Act of 1921. The Internal Revenue Service for many years prior [224 Or. 560] to 1935 had granted exemptions to federated cooperatives which otherwise qualified under the statute. 6 Mertens, Law of Federal Income Taxation 148, § 34.38.

It is obvious from a comparison of ORS 317.080(9) with § 521, Internal Revenue Code, 1954, that Oregon had borrowed the wording of the federal act practically verbatim. This court has said that where an Oregon statute has been copied from federal law we will adopt the interpretation given the federal act by the federal courts. State v. Burke et al., 126 Or. 651, 269 P. 869, 270 P. 756.

While this court has not had occasion to extend the same effect to the administrative interpretation of a borrowed federal statute, other courts have found administrative interpretation to be instructive in the absence of judicial construction. Services, Inc. v. Neill, 73 Idaho 330, 252 P.2d 190; Commonwealth Life & Accident Ins. Co. v. Bd. of Review, 414 Ill. 475, 111 N.E.2d 345; American National Ins. Co. v. Keitel, 353 Mo. 1107, 186 S.W.2d 447; Industrial Comm. v. Woodlawn Cemetery Ass'n, 232 Wis. 527, 287 N.W. 750.

In the absence of judicial construction, administrative construction is informative, and unless clearly at variance with the express terms of the statute, is entitled to respect. The commission agrees with this proposition, but urges that its own administrative construction of ORS 317.080(9) should be the beneficiary of the rule. We hold that the long history of administrative interpretation of the federal statute prior to its adoption in Oregon justifies an inference that the Oregon legislature intended to give the same statute the same effect in this state as it was then being given by the federal government.

It is settled in state and federal jurisprudence that provisions granting tax exemptions are to be strictly construed. Commissioner of Internal Revenue v. Jacobson 336 U.S. 28, 69 S.Ct. 358, 93 L.Ed. 477, 7 A.L.R.2d 857; United States v. Stewart, 311 U.S. 60, 61 S.Ct. 102, 85 L.Ed. 40; 1 Mertens, Law of Federal Income Taxation 14, § 3.07.

The most recent decision of this court which applied the rule of strict but reasonable construction to a tax-exemption statute is Multnomah School of the Bible v. Multnomah County et al., 218 Or. 19, 343 P.2d 893. We adhere to that rule.

The question is not whether to follow strict construction or liberal construction, but whether an express legislative intent to confer a tax advantage upon farmers is to be limited to benefit those farmers who organize one and only one qualified cooperative.

Operating under the rule of strict construction of exemption provisions, the Internal Revenue Service, since the first enactment of the cooperative exemption, has construed the federal act in favor of federated cooperatives of the type involved here. See S.M. 2288, III-2 Cum.Bull. 233 and S.M. 2286, III-2 Cum.Bull. 236 (1924), where federated...