Union Equity Coop. Exch. v. Comm'r of Internal Revenue
| Decision Date | 31 May 1972 |
| Docket Number | Docket No. 439-70. |
| Citation | 58 T.C. 397 |
| Parties | UNION EQUITY COOPERATIVE EXCHANGE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Frank Carter, for the petitioner.
Thomas J. Miller, for the respondent.
Petitioner was a nonexempt cooperative in its taxable year 1963 and an exempt cooperative in its taxable year 1964. In each year petitioner distributed a patronage dividend to its patrons and a dividend on capital stock to its stockholder. Held: (1) In its taxable year 1963 petitioner could not charge the dividend on capital stock solely to nonmember earnings, but had to charge such dividend to net earnings realized from member business and to net earnings realized from nonmember business in proportion to the business transacted with members and nonmembers respectively. (2) Respondent was not estopped from determining a deficiency for the taxable year 1963 simply because in prior years he had failed to make such determination with respect to petitioner's method of accounting for dividends on capital stock. (3) In the taxable year 1964 petitioner did not sustain a net operating loss which could be carried back to the taxable year 1961. Petitioner's claimed patronage dividend deduction for 1964 was overstated because petitioner had reduced net earnings by the dividend declared on capital stock (instead of by the dividend actually paid on capital stock) before computing its patronage dividend. Furthermore, respondent's approval of a tentative carryback adjustment of petitioner's 1961 tax did not preclude his later determination, by way of a deficiency notice in the usual manner, that the adjustment should not have been allowed.
Respondent has determined deficiencies in petitioner's income tax of $81,267.77 and $138,164.30 for the taxable years 1961 and 1963, respectively. Petitioner does not contest certain of the adjustments which respondent has made in petitioner's taxable income for the taxable year 1963. The questions we must resolve are: (1) Whether for the taxable year 1963 petitioner may charge dividends on its capital stock solely to net earnings arising from its nonmember business; (2) whether because of his inaction with respect to prior taxable years, respondent is now equitably estopped from attacking petitioner's method of accounting for such dividends; and (3) whether for the taxable year 1964 petitioner is entitled to a net operating loss which would have the effect of reducing its income tax liability for the taxable year 1961.
All of the facts have been stipulated and are so found. The stipulation and attached exhibits are incorporated herein by this reference.
Petitioner is an Oklahoma cooperative marketing association incorporated and doing business pursuant to the Oklahoma Cooperative Marketing Association Act, Okla. Stat. Ann., tit. 2, sec. 361 et seq. (West 1964), and the Capper-Volstead Act, 7 U.S.C. 291-292 (1970). At the time of the filing of the petition herein petitioner's principal office was in Enid, Okla. Petitioner filed Federal income tax returns for its taxable years 1961 and 1963 with the district director of internal revenue in Oklahoma City, Okla.
For all taxable years relevant to this case petitioner's taxable year ended on March 31.
Petitioner was authorized to issue $20 million of capital stock consisting of 40,000 shares having a par value of $500 each and such stock could not be sold for less than its par value. According to its bylaws, any local farmers' cooperative elevator association which was eligible for membership in petitioner and which owned one or more shares of petitioner's capital stock was deemed to be a member of petitioner, eligibility for membership and for ownership of stock in petitioner were restricted as follows:
Any local farmers' cooperative elevator association organized and operating in conformity with the provisions of the Capper-Volstead Act and located in any territory served by this Association, may become a member of this Association upon written application accepted by the Board of Directors, by agreeing to comply with, and become subject to, all the requirements and provisions of these By-Laws and by purchasing at least one share of its capital stock. Only such local farmers' cooperative elevator associations shall be or remain eligible to hold stock or participate in the affairs and management of this Association.
Petitioner declared and paid dividends on its capital stock as follows:
+----------------------------------+
¦Amount ¦Declared ¦Paid ¦
+-----------+-------------+--------¦
¦ ¦ ¦ ¦
+-----------+-------------+--------¦
¦$439,674.44¦March 1962 ¦May 1962¦
+-----------+-------------+--------¦
¦476,410.65 ¦March 1963 ¦May 1963¦
+-----------+-------------+--------¦
¦245,112.50 ¦February 1964¦May 1964¦
+-----------+-------------+--------¦
¦249,275.00 ¦March 1965 ¦May 1965¦
+----------------------------------+
From 1950 through its taxable year 1963, petitioner was a non-exempt farmers' cooperative. On May 8, 1962, petitioner adopted bylaws which were in effect for the taxable year 1963 and which provided in pertinent part as follows:
Section 1. The Directors, subject to revision by the members at the regular or special meeting lawfully called, shall apportion the net earnings at least once in each year.
Section 2. The net earnings accrued on business transacted with or for non-members shall be apportioned as follows:
(A) For payment of income taxes on the amount of such net earnings.
(B) The remaining net earnings or any portion thereof may be used to pay dividends on the membership capital or stock at a rate not to exceed five percent (5%) per annum.
(C) The remainder of the net earnings may be transferred to the Surplus Reserve Fund for the purpose of building the Surplus Reserve Fund to meet the requirements of state law and/or liquidate incurred indebtedness or provide needed working capital, or to provide such additional reserves as may be reasonable and necessary; or
(D) The remainder of the net earnings may be apportioned and distributed ratably on the basis of patronage, and in the same media, as provided for in Section 3 of this Article.
Section 3. The net earnings accrued on business transacted with or for members of cooperative organizations who are eligible and approved for membership, shall be apportioned as follows:
(A) If the portion of the net earnings on non-member business which was transferred to the Surplus Reserve Fund, as provided for in Section 2 of this Article, does not equal ten percent (10%) of the total net earnings for the fiscal year, then an amount equal to the difference between the amount so transferred from earnings on non-member business, and ten percent (10%) of the total net earnings for the fiscal year, shall be set aside in the Surplus Reserve Fund until such reserve fund shall equal the amount of the paid-up Capital Stock.
(B) If the net earnings on non-member business is not sufficient to pay dividends on the membership Capital, or Stock, as provided for in Section 2 of this Article, then dividends at a rate not to exceed five percent (5%) per annum may be paid from the net earnings accrued on business done with or for members or cooperative organizations who are eligible and approved for membership.
(C) If the net earnings on non-member business is not sufficient to pay the income tax for the fiscal year by reason of apportionment of member earnings as provided under (A) and/or (B) above, the balance of the income tax shall be paid from the net earnings accrued on business done with or for members or cooperative organizations who are eligible and approved for membership.
(D) The remainder of the total net earnings shall be apportioned and distributed ratably upon amounts charged for services and upon the value or volume of the products sold to, or handled through, the Association and/or the value or volume of the purchases from, or through, the Association, to all members and cooperative organizations, who are eligible and approved for membership, on the same basis and same percentage. Such earnings shall be distributed either in cash, capital stock, allocated or Special Reserves, provided that amounts prorated to cooperative organizations who are not members but are eligible and have been approved for membership shall be distributed to them in credits on Capital Stock until such accumulated credits are sufficient to cause a share of stock to be issued as provided for in Article I, Section 2, of these By-Laws.
(E) An amount not less than thirty-five percent (35%) of each members (sic) patronage apportioned under this Section shall be credited to the purchase of additional Capital Stock until such member owns fifty (50) fully paid shares.
During a meeting of petitioner's directors on March 18-19, 1963, a motion was made and carried approving the distribution of petitioner's net earnings for the taxable year 1963 as follows:
1. Net Earnings derived from member business be distributed on the basis of patronage— 65% shall be payable in Cash and 35% shall be in Capital Stock.
2. Net Earnings from non-member business be transferred to surplus, and
3. 5% Dividend on outstanding stock be paid out of surplus.
For the taxable year 1963 petitioner's total net earnings before adjustments for patronage dividends and dividends on capital stock were $1,519,884.69. In that taxable year petitioner's member business constituted 57.18 percent of the total business it conducted. In calculating the distribution of its net earnings for the taxable year 1963 petitioner first determined that its members had generated $869,070.07 (57.18 percent of $1,519,884.69) of its net earnings. From this sum it made certain reductions and distributed as patronage dividends to its members $559,254.53 in cash and $302,541.30 in capital stock. It paid income tax from...
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