SAN JOAQUIN VP PRODUCERS'ASS'N v. Com'r of Int. Rev.

• Decision Date: 05 June 1943
• Docket Number: No. 10246.,10246.
• Citation: 136 F.2d 382
• Parties: SAN JOAQUIN VALLEY POULTRY PRODUCERS' ASS'N v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

136 F.2d 382 (1943)

SAN JOAQUIN VALLEY POULTRY PRODUCERS' ASS'N v. COMMISSIONER OF INTERNAL REVENUE.

No. 10246.

Circuit Court of Appeals, Ninth Circuit.

June 5, 1943.

Milton D. Sapiro, of San Francisco, Cal., for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, A. F. Prescott, N. Barr Miller, and Loring W. Post, Sp. Assts. to Atty. Gen., and W. Glenn Harmon, J. Edward Johnson, and William H. Henderson, all of San Francisco, Cal., for Wayne E. Mayhew and Herman G. Brissman, certified public accountants, amicus curiae.

Eugene L. Hensel, of Columbus, Ohio, for National Council of Farmer Cooperatives, amicus curiae.

Before MATHEWS, HANEY, and HEALY, Circuit Judges.

MATHEWS, Circuit Judge.

Here for review is a decision of the Board of Tax Appeals¹ which sustained a determination by respondent, the Commissioner of Internal Revenue, that there were deficiencies in respect of petitioner's income taxes for 1936 and 1937. The determination resulted from respondent's inclusion of three sums ($1,683.56, $2,215.29 and $5,722.72) in computing petitioner's net income for 1936 and his inclusion of two sums ($2,601.90 and $5,358.46) in computing petitioner's net income for 1937. The question is whether or not these sums — the $1,683.56, the $2,215.29, the $5,722.72, the $2,601.90 and the $5,358.46 — were income of petitioner.

Petitioner is a nonprofit cooperative association. It was organized (incorporated) in 1925 under title 23 (§§ 653aa-653yy) of part 4 of division 1 of the Civil Code of California. Sections 653bb, 653cc and 653ff-653yy of the Civil Code were repealed in 1933 and were superseded by chapter 4 (§§ 1191-1221) of the Agricultural Code of California.² Section 1217 of the Agricultural Code provides: "Any corporation or association organized as petitioner was under previously existing statutes for the purpose of cooperatively marketing products as defined in this chapter³ shall be deemed organized and existing under and by virtue of the terms of this chapter, and all of the provisions of the terms of this chapter, and any of the restrictions and benefits thereof shall apply in all of their terms to such corporation."

Section 1192 of the Agricultural Code provides: "Associations organized under chapter 4 shall be deemed `nonprofit,' inasmuch as they are not organized to make profit for themselves, as such, or for their members, as such, but only for their members as producers."

Section 1194 provides that each association organized under chapter 4 may engage in any activity in connection with the marketing, selling, preserving, harvesting, drying, processing, manufacturing, canning, packing, grading, storing, handling or utilization of any products produced or delivered to it by its members or any activity in connection with the purchase, hiring or use by its members of supplies, machinery or equipment; act as the agent or representative of any member or members in any of the above mentioned activities; borrow money; establish reserves; levy assessments; and use or employ any of its facilities for any purpose, "provided the proceeds arising from such use and employment shall go to reduce the cost of operation for its members; and provided, further, that the products of nonmembers shall not be dealt in to an amount greater in value than such as are handled by it for its members."

Petitioner's articles of incorporation⁴ state that it is formed to engage in any activity in connection with the marketing, selling, packing, grading, storing, handling or utilization of any poultry eggs or other agricultural products produced or delivered to it by its members, or any activity in connection with the purchase, hiring or use by its members of supplies, machinery or equipment. The articles provide that petitioner "shall conduct and carry on its business without profit to itself."

Petitioner's by-laws⁵ state that its purpose "is to provide for its members a collective system of marketing poultry, poultry products and other agricultural products, to furnish to them any feed, seed or supplies and, to the end of lessening the cost of such service, to do the same things for those who are not members;" that it "is organized as a nonprofit cooperative organization;" and that "The `net proceeds' resulting from the operation of the business, if any, shall belong to the members." The by-laws provide: "The Association petitioner does and shall consist of poultrymen and other agricultural producers who shall have been duly elected and shall have paid the membership fee of Ten ($10.00) Dollars. * * * The membership fee * * * must be paid in cash at the time application for membership is made. * * * All moneys received from membership fees shall constitute the membership fund, which fund shall not be reduced except when returned to members upon withdrawal or loss of membership as provided in these by-laws; it may, however, be invested in lands, buildings or equipment necessary for the operation of the business of the Association, or it may be used as working capital of the Association * * *."

Petitioner's directors⁶ were authorized to establish reserves⁷ and did establish three — one called reserve for overpayment,⁸ one called reserve for security of the membership fund⁹ and one called reserve for zoning hazard.¹⁰ All moneys placed in these reserves were taken from, and constituted part of, the "net proceeds" resulting from the operation of petitioner's business.

Petitioner engaged in the business of marketing eggs for its members and selling supplies to its members and others. It did not pay its members the entire net proceeds of the eggs which it marketed for them in 1936, but retained $1,683.56 thereof — the $1,683.56 hereinabove mentioned — and placed this sum in its reserve for overpayments. It did not sell supplies to its members or other customers at cost, but sold them at prices which included cost, plus "overcharges" sufficient to cover expenses and leave a balance which the by-laws speak of as "net proceeds."¹¹ It refunded part of the "net proceeds" to its customers (members and nonmembers) and retained the balance. The balance so retained in 1936 included the $2,215.29 and the $5,722.72 hereinabove mentioned. The balance so retained in 1937 included the $2,601.90 and the $5,358.46 hereinabove mentioned. Petitioner placed the $2,215.29 and the $2,601.90 in its reserve for security of the membership fund and placed the $5,722.72 and the $5,358.46 in its reserve for zoning hazard.

The sums so placed in these reserves — the $1,683.56, the $2,215.29, the $5,722.72, the $2,601.90 and the $5,358.46 — never became the property of petitioner, but were and are the property of the members. Bogardus v. Santa Ana Walnut Growers Ass'n, 41 Cal.App.2d 939, 946-949, 108 P.2d 52, 56-58. See, also, Mountain View Walnut Growers Ass'n v. California Walnut Growers Ass'n, ...