*1195 The petitioner was organized under the general corporation laws of the State of Mississippi for the purpose of purchasing and operating a public cotton gin. Among its patrons were stockholders and nonstockholders and the charge for cotton ginned was the same to all patrons. After the ginning season was over and after the profits here in question had been earned, the stockholders adopted bylaws providing that the net profits of petitioner allocable to cotton ginned for the said stockholders should be divided between them in proportion to the number of bales of cotton ginned for each stockholder. Subsequently and within the taxable year such profits were paid or credited to the stockholders on that basis. Held, that the amount so distributed was a part of petitioner's earnings for the year and may not be excluded from gross income as a rebate or refund of a portion of the charges paid by its stockholders for the ginning of their cotton, and further, that the distribution of the amount in question constituted the payment of a dividend which is not deductible in determining net income.
*343 This proceeding involves deficiencies in income and excess profits taxes for the fiscal year ended July 31, 1934, in the respective amounts of $704.54 and $254.81. The sole question for determination is *344 whether amounts distributed by petitioner to its stockholders on the basis of the number of bales of cotton ginned for each such stockholder is to be excluded from petitioner's gross income as a rebate on the ginning charge or so-called patronage dividend, or whether the total of the amounts so distributed constituted a part of the corporate profits, the distribution thereof being a dividend not deductible in determining petitioner's net income.
FINDINGS OF FACT.
The petitioner is a Mississippi corporation, with its principal place of business at Lambert, Mississippi. It files its income tax returns on the basis of fiscal years ending July 31 of each year. It was originally chartered on July 27, 1933, with an authorized capital stock of $5,000 divided into 100 shares of common stock having a par value of $50 per share. It was organized by a group of men engaged in the production of cotton and for the purpose of*1197 purchasing and operating a public cotton gin. These purposes were declared by the charter of the corporation as follows: "To own and operate a public cotton gin; to own all necessary real estate for the proper operation of said business; to gin cotton, buy and sell cotton, cotton seed, corn, farm tools and farm machinery and implements, and to do all things necessary for or incident to said business. The rights and powers that may be exercised by this corporation, in addition to the foregoing are those governed by Chapter 100, of the Mississippi Code of 1930."
On August 9, 1933, a meeting of petitioner's incorporators was held and directors and officers were elected. At this meeting an allotment of 90 percent of its capital stock (90 shares) was made equally to J. S. Allen, C. M. McCullar, R. E. Chapman, J. E. Yeager, F. R. Wright and E. H. Anderson. Each of the men designated subscribed for the 15 shares allotted to him and made a cash payment of $200, leaving a balance due from each of $550. Provision was made for the allotment of the remaining 10 shares of stock to the manager of the gin. A motion was made and carried that the corporation should "pay 10 percent dividends" *1198 such dividends to be paid before any profits should "be prorated on a baleage basis."
During the first ginning season petitioner ginned 2,652 bales of cotton, of which 1,794 bales were ginned for stockholders and the remaining 858 bales for nonstockholders. Stockholders and nonstockholders were charged the same ginning fee per bale. On December 8, 1933, after the first ginning season was over, the stockholders held a meeting and adopted bylaws which, among other things, provided as follows:
*345 The Capital stock of the Corporation shall be divided into shares of $50.00 each, to be sold to persons actually engaged in the production of cotton. Division of Profits:
Each stockholder ginning cotton at the ginnery of the Corporation shall pay to the Corporation the ginning charge set by the Directors, and shall be paid at the gin of the current market price for cotton seed.
Each year, after the close of the ginning season, the net profit earned by the actual ginning operations, the net profit earned on cotton seed purchased by the gin, as well as all other net profits of the Corporation, after all necessary expenses have been paid, shall be divided between the stockholders*1199 in that proportion which the number of bales of cotton ginned by each stockholder at the ginnery of the corporation bears to the total number of bales ginned by the ginnery for that season.
The profits allocable to the cotton ginned for nonstockholding customers shall constitute company or corporate profits, and shall be divided either in proportion to the stock held by the stockholders, or credited to the surplus and undivided profits account.
As a result of its first season's operations, petitioner paid or credited to its stockholders dividends prorated upon the basis of the number of bales ginned for each stockholder, as follows:
| Stockholder | Bales ginned | Dividends |
| E. H. Anderson | 264 | $541.94 |
| J. S. Allen | 335 | 686.69 |
| R. E. Chapman | 382 | 785.16 |
| C. W. McCullar | 299 | 617.77 |
| F. R. Wright | 206 | $422.87 |
| J. F. Yeager | 308 | 630.27 |
| Total | 1,794 | 3,684.70 |
The above dividends were applied first as a credit against the $550 balance owing by each stockholder on his subscription to capital stock, and if there was a balance in the case of any stockholder, it was paid to him by check at the time of the stockholders' meeting on January 15, 1934. The above dividends*1200 were paid to the stockholders without regard to the number of shares owned by each. Nonstockholders who were customers of petitioner were not entitled to receive and did not receive any of the profits either in the form of dividends paid or credits on the books of the petitioner.
In order to carry out the agreement between the petitioner and the person from whom it purchased the ginning plant, $1 per bale was withheld or deducted from each seed ticket of each stockholder for the purpose of creating a reserve with which to pay off the indebtedness owing by the petitioner on the purchase price of the plant.
With respect to the bylaws adopted on December 8, 1933, more specifically the portion dealing with the division or determination of profits, the minutes of the meeting of the stockholders on May 5, 1934, show the adoption of the following resolution:
It is therefore resolved that the by-laws on page seven (7) be changed to read: Each year, after the close of the ginning season, before the net profits of *346 the gin are declared that each and every stockholder be reimbursed any amount that he has paid into the gin in excess of actual cost of ginning his cotton. In*1201 other words that all stockholders cotton be ginned at actual cost.
In its income tax return filed for the fiscal year ended July 31, 1934, petitioner claimed as an expense deduction an item in the amount of $3,684.70, described as "patronage and dividends." In the notice of deficiency the respondent disallowed the deduction on the ground that it represented ordinary dividends paid to its stockholders and did not constitute an allowable deduction under section 23 of the Revenue Act of 1932. After restoring that item to income and after making several other adjustments which are not here involved, the respondent determined that petitioner had a net taxable income in the sum of $5,721.24.
OPINION.
TURNER: The petitioner is not a cooperative association exempt from Federal income tax within the meaning of section 103 of the Revenue Act of 1932 and section 101 of the Revenue Act of 1934. Producers Creamery Co. v. Commissioner, 55 Fed.(2d) 104; Farmers Union Cooperative Co.,33 B.T.A. 225">33 B.T.A. 225; affd., *1202 90 Fed.(2d) 488. Furthermore it was organized under the laws of the State of Mississippi as a general business corporation for the purpose of carrying on a public ginning business. Its charter shows that it was organized under the provisions of Chapter 100 of the Mississippi Code of 1930, which deals generally with the organization of business corporations, rather than chapter 99 of the code, which provides for the organization of cooperative organizations.
It is now argued that the bylaws of petitioner fixed the price for ginning the cotton of petitioner's stockholders at actual cost and that the distribution in question constituted a rebate or refund of the excess of the amount paid by each stockholder over such cost and never at any time belonged to or became the profits of petitioner. In support of this contention, the petitioner relies particularly on Uniform Printing & Supply Co. v. Commissioner, 88 Fed.(2d) 75; and cites also Trego County Cooperative Association,6 B.T.A. 1275">6 B.T.A. 1275; *1203 Home Builders Shipping Association,8 B.T.A. 903">8 B.T.A. 903; Anamosa Farmers Creamery Co.,13 B.T.A. 907">13 B.T.A. 907; Farmers' Union Co-operative Association,13 B.T.A. 969">13 B.T.A. 969; and Fruit Growers Supply Co. v. Commissioner, 56 Fed.(2d) 901, affirming 21 B.T.A. 315">21 B.T.A. 315.
As we have observed, the petitioner was organized under the provisions of the Mississippi law dealing with the organization of general business corporations, and, more particularly, as shown by its charter, its purpose was to own and operate a public cotton gin. During the ginning season which gave rise to the amount here in dispute the petitioner dealt with its stockholders as it did with any *347 other patron of its gin. They were all charged the same price per bale for the ginning of their cotton. There was nothing in the by-laws giving the individual stockholders any right to have their cotton ginned at a price less than the price required of other patrons, and the only suggestion that there might have been some such thought in the minds of the organizers of the corporation is to be found at the conclusion of a resolution adopted immediately after organization*1204 of the petitioner to the effect that the petitioner should pay dividends on its stock of 10 percent and that the 10 percent dividend should be paid before any profits should be prorated on a baleage basis. The 10 percent dividend so provided for was never paid. After the ginning season, however, and after the profits here in question had been earned, the stockholders, at a meeting held on December 8, 1933, adopted bylaws to the effect that after the close of the ginning season the net profit earned by actual ginning operations and the profit on cotton seed purchases, together with other net profits of the corporation, should after necessary expenses had been paid be divided among the stockholders in proportion to the number of bales of cotton ginned by each, and, further, that the profits allocable to cotton ginned for nonstockholders should constitute company or corporate profits. Subsequently, at a stockholders' meeting held on May 5, 1934, a resolution was adopted apparently for the purpose of declaring and fixing more specifically the nature of the proceeds from cotton ginning, or, to state it differently, the price to be charged the stockholders for ginning their cotton. The*1205 substance of that resolution was that after the close of each ginning season and before the declaration of net profits, each and every stockholder should be reimbursed any amount paid by him to the gin in excess of the actual cost of ginning his cotton so that all stockholders' cotton should be ginned at actual cost.
We are not here called upon to determine the rights of the petitioner or its stockholders to the excess over cost of the amount paid by such stockholders for the ginning of cotton after the adoption of the bylaws in question or the nature of such excess in the hands of the petitioner before its distribution or refund to its stockholders, for at the time of the ginning operations which resulted in the profits here in question there were no such bylaws and the stockholders had no right to the return of any excess of the amount paid by them over the actual cost of ginning their cotton. They were dealt with by petitioner as it dealt with its other patrons. Their rights to the amount here in dispute resulted from subsequent action of the stockholders directing a distribution by petitioner to its stockholders out of its earnings during the year. Such a distribution constitutes*1206 the payment of a dividend and is not deductible in determining the petitioner's net income. The fact that the profits were distributed to stockholders on some basis other than the stock held by each stockholder *348 does not make the distribution any the less a dividend. Lincoln National Bank v. Burnet, 63 Fed.(2d) 131; Kate Hudson,34 B.T.A. 155">34 B.T.A. 155; affd., 99 Fed.(2d) 630; certiorari denied, 306 U.S. 644">306 U.S. 644; Joseph Goodnow & Co.,5 B.T.A. 1154">5 B.T.A. 1154. Clearly for the year before us the cases relied on by petitioner are not in point.
Decision will be entered under Rule 50.