RIVERDALE CO-OP. CREAMERY ASS'N v. Commissioner of Int. Rev.

• Decision Date: 06 April 1931
• Docket Number: No. 6242.,6242.
• Citation: 48 F.2d 711
• Parties: RIVERDALE CO-OPERATIVE CREAMERY ASS'N v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

48 F.2d 711 (1931)

RIVERDALE CO-OPERATIVE CREAMERY ASS'N v. COMMISSIONER OF INTERNAL REVENUE.

No. 6242.

Circuit Court of Appeals, Ninth Circuit.

April 6, 1931.

Thomas R. Dempsey and A. Calder Mackay, both of Los Angeles, Cal., for petitioner.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, Helen Carloss, and Hayner N. Larson, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, and Frank M. Thompson, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

Before RUDKIN, WILBUR, and SAWTELLE, Circuit Judges.

RUDKIN, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals determining deficiencies in income and profit taxes for the years 1920 and 1921, and denying a claim for exemptions under section 231 (11) of the Revenue Act of 1918 (40 Stat. 1076) and section 231 (11) of the Revenue Act of 1921 (42 Stat. 253), which provide, in identical language, that the following organizations shall be exempt from taxation:

"(11) Farmers', fruit growers', or like associations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them."

The facts as found by the Board, so far as deemed material, are as follows: The petitioner was organized as a co-operative association under the laws of the State of California by dairymen living in the vicinity of Riverdale, many of whom assisted in hauling machinery and material for the construction of the plant or dairy. The capital stock of the association was fixed at $10,000, represented by membership certificates for the sum of $100 each; no member being entitled to hold more than one of such certificates. The association commenced operations in January, 1911. In June of that year it borrowed the sum of $8,000 to meet contractual obligations and to enable it to carry on its business. In 1918 it borrowed the further sum of $40,000 on promissory notes guaranteed by members, for the purpose of enlarging its plant. During the years here in question, and in prior years, it gathered milk and cream from producers within an area of approximately ten square miles. In 1920 the average number of its patrons was 310, of which number 74 were members. The total income for that year was approximately $700,000; the amount paid to patrons approximately $520,000; operating expenses approximately $170,000; and the amount of indebtedness paid off $13,000. In 1921 the average number of patrons was 351, of which number 79 were members. The total income for that year was approximately $600,000; the amount paid to patrons approximately $407,000; operating expenses approximately $168,000, and the amount of indebtedness paid off $17,000. About 52 per cent. of the business transacted by the association during these years was for members and the balance for nonmembers. In carrying out the objects and purposes of the association, members and nonmembers were treated alike, aside from the fact that a dividend was paid to members, equal to 8 per cent. of the amount of their investments. But the operating expenses deducted from the proceeds of sales of products of both members and nonmembers included, not only necessary selling expenses, as provided by the statute, but also a reserve or sinking fund sufficient to pay the indebtedness of the association, with interest accruing thereon, the cost of the plant and equipment, and improvements and additions thereto, in which nonmembers had no interest. The respondent contends that the petitioner is not entitled to the exemptions claimed, for three reasons: First, because petitioner was not organized for the purposes specified in the statute; second, because the products marketed by the petitioner were not those of members only; and, third, because the entire proceeds of sales were not turned back to purchasers less the necessary selling expenses.

The purposes for which the petitioner was organized, as disclosed by its articles of incorporation, were quite general, and included the transaction of almost every kind of lawful business, but no reference was made to any such sales agencies as are defined in the revenue acts. However, if the petitioner confined its activities within the narrow sphere defined by the revenue acts, the claim of exemption should perhaps not be denied simply because of the generality of its powers in other respects. But it would seem that the exemption is necessarily limited to such associations as market the products of members only, and to such as return the proceeds of sales to their members, less the necessary selling expenses.

In construing the statutory exemption, we are confronted by two well-established rules. One is, that the province of construction lies wholly within the domain of ambiguity, that rules of statutory construction are permissible to solve doubts, not to create them, and that it is not allowable to interpret what has no need of interpretation. Ruggles v. Illinois, 108 U. S. 526, 534, 2 S. Ct. 832, 27 L. Ed. 812; Hamilton v. Rathbone, 175 U. S. 414, 421, 20 S. Ct. 155, 44 L. Ed. 219; Wisconsin R. R. Com. v. C. B. & Q. R. R. Co., 257 U. S. 563, 589, 42 S. Ct. 232, 66 L. Ed. 371, 22 A. L. R. 1086. The other is, that exemptions from taxation are not favored, and that in construing statutes granting such exemptions nothing is to be taken by inference or implication. Hoge v. Railroad Co., 99 U. S. 348, 355, 25 L. Ed. 303; Bank v. Tennessee, 104 U. S. 493, 495, 26 L. Ed. 810; Bank of Commerce v. Tennessee, 161 U. S. 134, 146, 16 S. Ct. 456, 40 L. Ed. 645.

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