West Cent. Co-op. v. U.S., 84-1289

CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)
Citation758 F.2d 1269
Docket NumberNo. 84-1289,84-1289
Parties-1169, 85-1 USTC P 9292 WEST CENTRAL COOPERATIVE, Appellant, v. UNITED STATES, Appellee.
Decision Date16 May 1985

John A. Gerken, Jefferson, Iowa, for appellant.

Kenneth Greene, Tax Div., Justice Dept., Washington, D.C., for appellee.

Before LAY, Chief Judge, and ROSS and McMILLIAN, Circuit Judges.

PER CURIAM.

West Central Cooperative (taxpayer) appeals from a final judgment entered in the District Court 1 for the Northern District of Iowa denying taxpayer's petition seeking a refund of additional taxes assessed because of the withdrawal of taxpayer's exemption as a farmers' cooperative pursuant to 26 U.S.C. Sec. 521(b)(2) (1982). For reversal taxpayer argues that the district court erred in (1) holding that the percentage of taxpayer's voting stock held by producers did not constitute "substantially all" within the meaning of 26 U.S.C. Sec. 521(b)(2), (2) imposing an annual patronage test in determining whether substantially all voting stock was owned by participating producers, (3) not including as participating members those who merely stored grain in taxpayer's storage facilities, and (4) approving retroactive revocation of taxpayer's exemption. For the reasons discussed below, we affirm.

The basic facts in the present case are not in dispute. Taxpayer is a capital stock marketing and purchasing farmers' cooperative organization with its principal place of business in Ralston, Carroll County, Iowa. Taxpayer purchases grain from its members and sells it to grain buyers on the open market. Taxpayer also purchases farm supplies such as livestock feed, fertilizer, pesticides, and seed to resell to its members. In addition, taxpayer owns and operates grain storage facilities as a federally licensed warehouse.

Taxpayer issued voting common stock limited to one share per member. Shareholders could earn patronage dividends based on the quantity of goods that the shareholder sells through or purchases from the cooperative in a given year. Dividends are not distributed on the basis of the collective success of the cooperative and only participating members who market their products through or purchase supplies from the cooperative in a year are entitled to a dividend. As of January 31, 1974, the last day of taxpayer's fiscal year, taxpayer had 2,887 shares of voting common stock outstanding. According to taxpayer's records, 83.75% of the stockholders were producers who marketed some of their products through or purchased supplies from taxpayer and thus were eligible to receive patronage dividends.

In May 1958 the Internal Revenue Service (IRS) issued a letter recognizing that taxpayer was an exempt farmers' cooperative pursuant to 26 U.S.C. Sec. 521. After an audit of taxpayer's 1974 fiscal year, the IRS determined that substantially all of taxpayer's common stock was not owned by producers who marketed through and purchased from the taxpayer. Therefore, on January 23, 1978, the IRS withdrew taxpayer's tax exemption ruling, effective for its 1974 fiscal year and all subsequent years. Taxpayer was assessed $57,459.00 for additional income taxes, including interest and penalty, all of which taxpayer has paid. Taxpayer's claim for a refund was denied by the Commissioner; thereupon taxpayer instituted this refund suit against the government.

In pertinent part 26 U.S.C. Sec. 521(b)(2) provides that an "[e]xemption shall not be denied any such association because it has capital stock ... if substantially all such stock ... is owned by producers who market their products or purchase their supplies and equipment through the association." The district court correctly noted that special tax exemptions are to be strictly construed against the taxpayer. West Central Cooperative v. United States, 607 F.Supp. 1, 2, (N.D.Iowa 1983), citing Helvering v. Northwest Steel Rolling Mills, Inc., 311 U.S. 46, 61 S.Ct. 109, 85 L.Ed. 29 (1940). Accord Land O'Lakes, Inc. v. United States, 514 F.2d 134, 139 (8th Cir.) cert. denied, 423 U.S. 926, 96 S.Ct. 271, 46 L.Ed.2d 253 (1975).

Taxpayer argues that the district court erred in holding that substantially all of taxpayer's stock was not owned by producers who marketed or purchased through the cooperative. Rev.Rul. 73-248, 1973-2 C.B. 295 requires that at least 85% of capital stock must be held by producers before the "substantially all" test of 26 U.S.C. Sec. 521(b)(2) can be satisfied. The district court held that "Rev.Rul. 73-248, 1973-2 C.B. 295 ... is reasonable and in keeping with the congressional mandate embodied in the language of Sec. 521(b)(2)." West Central Cooperative v. United States, slip op. at 5 (footnote omitted). We agree with the district court's conclusion that Rev.Rul. 73-248 reasonably interprets the "substantially all" requirement and therefore, based on the 85% test,...

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3 cases
  • Farmers Coop. Co. v. Comm'r of Internal Revenue
    • United States
    • United States Tax Court
    • October 24, 1985
    ...of sec. 521(b)(2), I.R.C. 1954. HELD: The Eighth Circuit's approval of respondent's 85- percent test in West Central Cooperative v. United States, 758 F.2d 1269 (8th Cir. 1985), affg. per curiam an unreported District Court opinion, followed in this case. HELD FURTHER: Although the facts of......
  • Farmers Co-op. Co. v. C.I.R., 86-1831
    • United States
    • United States Courts of Appeals. United States Court of Appeals (8th Circuit)
    • July 1, 1987
    ...the 85% test as a reasonable interpretation of the "substantially all" requirement of section 521. See West Central Cooperative v. United States, 758 F.2d 1269, 1271 (8th Cir.1985). In this case, we do not understand Farmers to challenge the 85% test in the revenue ruling. Instead, Farmers ......
  • Farmers Coop. Co.  v. Comm'r of Internal Revenue, Docket No. 15643-82
    • United States
    • United States Tax Court
    • September 29, 1987
    ...section 521 as published by respondent in Rev. Rul. 73-248, 1973-1 C.B. 295, and approved in West Central Cooperative v. United States, 758 F.2d 1269, 1271 (8th Cir. 1985); also see discussion in Farmers I, 85 T.C. at 612 to 617. In applying this petitioner's facts to the ‘85-percent test,‘......

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