United States v. Mississippi Chemical Company

• Decision Date: 09 January 1964
• Docket Number: No. 19418.,19418.
• Parties: UNITED STATES of America, Appellant, v. MISSISSIPPI CHEMICAL COMPANY, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

326 F.2d 569 (1964)

UNITED STATES of America, Appellant, v. MISSISSIPPI CHEMICAL COMPANY, Appellee.

No. 19418.

United States Court of Appeals Fifth Circuit.

January 9, 1964.

Melva M. Graney, Atty., Dept. of Justice, John B. Jones, Jr., Acting Asst. Atty. Gen., Meyer Rothwacks, Atty., Dept. of Justice, Washington, D. C., Robert E. Hauberg, U. S. Atty., Jackson, Miss., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Benjamin M. Parker, Attys., Dept. of Justice, Washington, D.C., Edwin R. Holmes, Jr., Asst. U. S. Atty., of counsel, for appellant.

John C. Satterfield, Satterfield, Shell, Williams & Buford, Yazoo City, Miss., Harry C. Griffith, Hollaman M. Raney, Yazoo City, Miss., of counsel, for appellee.

Before HUTCHESON and GEWIN, Circuit Judges, and HOOPER, District Judge.

HUTCHESON, Circuit Judge.

This is an appeal from a judgment for the taxpayer entered in the United States District Court for the Southern District of Mississippi. The nature, background, and right of the controversy are set out in the district court's findings and conclusions, reported in 197 F.Supp. 490.

The claims and pretensions of both parties, as set out in their briefs, are prolix and detailed, and both briefs seem designed to make the issues seem greatly involved and highly difficult of solution.

The basic contention of the appellant, which was decided against it in the district court, is that the sole method of computation of the patronage dividends claimed in this case is that prescribed in the formulas laid down in Bureau rulings, decisions, and memorandums, and that no other method may be used.

On the other hand, the appellee insists: that these rulings, etc., have no legal force because not prescribed or supported by any statute so providing; that the undisputed facts stipulated and proved in the case fully support the district judge's decision; and that, though no specific statute prescribing a formula for use in this case exists, there is ample legislative and judicial support for the findings and conclusions, and the judgment in taxpayer's favor.

We agree that this is so, and, so agreeing, we affirm the judgment.

The basic principles of law governing the taxation of non-exempt cooperatives may be thus summarized:

When a legally enforceable obligation exists to refund to qualified purchasers (stockholder-patrons) their proportionate share of gross receipts above costs and operating expenses based upon their respective purchases, such receipts are income of the patron and not income of the cooperative and consequently are to be excluded in the computation of the cooperative's gross income. San Joaquin Valley Poultry Producers' Ass'n. v. Commissioner, 9 Cir., 136 F.2d 382; Producers Gin, Inc. v. Commissioner, 18 T.C.M. 369; Southwest Hardware Co. v. Commissioner, 24 T.C. 75; Otsego County Cooperative Association v. Commissioner, 11 T.C.M. 818; Colony Farms Cooperative Dairy, Inc. v. Commissioner, 17 T.C. 688.

This exclusion is enforced by the courts on the grounds that (1) under the pre-existing legal obligation the margins never become the property of the cooperative and are not a part of its income, (2) money received by one in a business transaction which he has no right to retain but must account for to another cannot be said to be a gain or profit to him, (3) patronage refunds are distributions of money belonging to the patrons rather than distribution of income of the cooperative, (4) while held by the cooperative the funds are in its hands as agent or trustee for its patrons to whom it is legally obligated to repay the same, and (5) patronage refunds are in reality discounts or rebates paid under a pre-existing legal obligation and are just as allowable as any other discount upon the purchase price of any commodity. Commissioner v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752; Saenger v. Commissioner, 5th Cir., 69 F.2d 633; Uniform Printing & Supply Co. v. Commissioner, 7 Cir., 88 F.2d 75; Farmers Cooperative Co. v. Birmingham, N.D. Iowa, 86 F.Supp. 201; State of Mississippi v. Morgan Gin Co., 186 Miss. 66, 189 So. 817.

It is immaterial whether the co-operative is organized under a special cooperative statute or under the general corporation law, the test is the existence of a legally enforceable obligation to pay patronage refunds which existed during the period when such refunds were earned. The obligation may be created by the charter and by-laws or by a separate contract. Uniform Printing & Supply Co. v. Commissioner, supra; United Cooperatives, Inc., 4 T.C. 93.

If the board of directors of such a non-exempt cooperative has the discretion under the contract to utilize a limited portion of such margins for the payment of common stock dividends or other purposes, the amount which may be thus diverted within the fixed limits will not be excluded. It is held that the legally enforceable obligation to pay patronage refunds is destroyed to the extent that discretion to divert exists. United Cooperatives, Inc., 4 T.C. 93, supra.

Such non-exempt cooperative is required to pay regular corporate income taxes upon net margins or profits derived from sales to non-member patrons when such persons are not entitled to patronage refunds upon their purchases. Pomeroy Cooperative Grain Co. v. Commissioner, 31 T.C. 674.

Within this broad picture of the legal principles involved in the taxation of non-exempt cooperatives lies the question of what portion of the funds handled by a cooperative is actually its income taxable to it, and what portion is actually income to the member-patrons taxable to them. As is stated in Helvering v. Edison Brothers Stores, 8 Cir., 133 F.2d 575: "The Treasury Department cannot, by interpretative regulations, make income of that which is not income within the meaning of the revenue acts of Congress." Compare the statement of the Supreme Court in Blatt Co. v. United States, 305 U.S. 267, 59 S.Ct. 69, 83 L.Ed. 366: "Treasury Regulations can add nothing to income as defined by Congress". Treasury Regulations and Treasury Decisions, however, are not involved in the issue for decision here. The taxpayer's position is that the Commissioner cannot, by solicitor's memoranda, departmental committee recommendations, or rulings, or by his own private rulings in this case make taxable income to the cooperative of that which is taxable income to the patron. The entire amount here involved was paid to the patrons in cash in accordance with a legally enforceable obligation and tax has been paid by the patrons upon the income thus received.

The Court of Appeals of the Ninth Circuit in San Joaquin Valley Poultry Producers' Ass'n v. Commissioner, 136 F.2d 382, was considering margins on patronage business which had been placed by the petitioner cooperative in reserves and held for the benefit of the patrons. In defining the nature thereof the Court said:

"The sums so placed in these reserves * * * never became the property of petitioner, but were and are property of the members (cit.) * * *. The fact that the sums were not payable to the members on demand, or at any fixed time, does not alter the fact that they were their property and not petitioner\'s. Petitioner held them, not as owner, but as agent or trustee for the members (cit.). Since none of the sums ever belonged to petitioner, they could not be, they were not, income of petitioner."

In its brief the appellant states that, "We are concerned solely with the effect of the provisions of the charter from a federal income tax standpoint and, accordingly, the federal income tax laws are controlling". We are in complete accord with this statement. It was the tax effect of the charter of the San Joaquin Valley Poultry Producers' Association which was determined in the above case.

The tax effects of charter-contracts have been considered repeatedly by the Tax Court. Such a provision was before the Tax Court in Colony Farms Cooperative Dairy, Inc. v. Commissioner, 17 T.C. 688, in which the court held:

"This problem is not new, and has often been before the courts. The accepted rule is that if the cooperative receives these earnings under an existing legal obligation to distribute them to its members, such earnings are not income of the cooperative and consequently are to be excluded in the computation of its gross income."

A recent case decided by the Tax Court, in determining for tax purposes what was income to the cooperative, is Producers Gin, Inc. v. Commissioner, 18 T.C.M., 369. There the court held as follows:

"So construed, the agreement would meet the requirements for a non-taxable cooperative to the extent of member sales of cottonseed. Pomeroy Cooperative Grain Co., 31 T.C. 684. There was a pre-existing legal obligation; the members\' cotton never became the property of the cooperative; and no non-member business accrued to the advantage of the members. And that the corporation was not organized as a cooperative is not fatal. Eugene Fruit Growers Association, supra; United Cooperatives, Inc., 4 T.C. 93. The profits in question

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