*919 A corporation was organized by farmers under state cooperative laws. Its business operations consisted of buying petroleum products and selling them to such members and other persons as desired to purchase from it. Sales in large amounts were made to a limited number of members and nonmembers on a nonprofit basis. All other sales were made at prevailing retail prices and were not based on cost plus necessary expenses. Profits were realized from sales at such retail prices. Stock dividends were paid to all shareholders. Patronage dividends were paid to member patrons only. Nonmember patrons of petitioner were debarred from receiving payment of patronage dividends so long as they remained nonmembers. Held, that the business of the corporation was not operated on a cooperative basis and that the corporation is not exempt from paying income tax.
*65 This is a proceeding for redetermination of deficiencies in income and excess profits tax for the calendar year 1933 in the respective amounts of $302.54 and $73.70, plus delinquency penalties thereon*920 in the respective amounts of $75.64 and $18.42 for failure to file income tax returns. The petitioner claims exemption from income tax as a purchasing cooperative and assigns error in determining the deficiencies and penalties solely on the ground of the claimed exemption.
FINDINGS OF FACT.
Petitioner is a corporation, organized in 1927 under the cooperative laws of Nebraska. The articles of incorporation of petitioner provided in part:
ARTICLE III
Nature of Business.
The general nature of the business to be transacted by this association shall be storing, buying, selling at wholesale or retail, or handling for shareholders or shareholders and other patrons, merchandise of all kinds, including gasoline, kerosene, lubricating oils, petroleum products, building materials, and such other merchandise as the association may see fit to handle. * * *
* * *
ARTICLE V
Shareholders
Shareholders in this association shall be of three classes: First, persons who are members in good standing of the Farmers Educational and Co-Operative Union; second, Farmers Union co-operative associations, and third, Farmers Union locals holding a charter from the Farmers Educational and*921 Co-Operative Union of any state. * * *
* * *
ARTICLE VII
Distribution and Earnings
Interest on the share capital of this association shall not exceed Eight per cent per annum. Of the earnings or savings of the association over and above *66 all expenses and interest on shares, not less than five per cent (5%) shall be set aside to a surplus fund each year until such surplus fund equals at least twenty per cent (20%) of the paid-up share capital. After setting aside such sums as the board of directors may deem necessary or desirable for reserves, improvements, extension of the business, or for educational work, the remaining net earnings or savings shall be prorated among the patrons of the association in proportion to the amount or value of commodities bought from or sold to the association, or handled for them as provided in the by-laws.
The bylaws include the following provisions:
ARTICLE VIII
Distribution of Savings
Section 1. Out of the earnings of this association shall first be paid all expenses. From the remaining earnings, interest not to exceed Eight per cent (8%) per annum may be paid on shares. Not less than five per cent (5%) of the remaining*922 balance each year shall be set aside to a surplus fund until such surplus fund equals at least twenty per cent (20%) of the paid-up share capital. Provided, however, that the board of directors may set aside from time to time such sums as in their judgment they shall deem necessary or desirable for reserves, improvements, extension of the business, or for educational work, and provided further that the board shall not be obliged to pay interest on shares unless such disbursement is warranted by the financial condition of the association.
Sec. 2. The net earnings or savings of the association after making the distribution provided for in Section 1 of this Article shall be distributed as patronage dividends to patrons on the basis of or in proportion to the amount or value of commodities bought from or sold to the association, or handled by the association for said patrons. Provided:
(a) That shareholders shall not receive patronage dividends unless they are members in good standing of the Farmers Educational and Co-Operative Union.
(b) That the patronage dividends of nonshareholder patrons eligible to become shareholders shall not be paid in cash or commodities, but shall*923 be credited to them on the books of the association. When the credit of any such patron equals or exceeds the par value of a share, the board of directors shall issue to such patron a share in the association if such patron is then a member of the Farmers Educational and Co-Operative Union.
All the shareholders, and only shareholders, of petitioner are members. All of such shareholders are farmers or farm cooperatives. The majority in value of its sales in the taxable year were made to members.
The business operated by the petitioner in the taxable year consisted of buying gasoline and other petroleum products and selling them to its members, nonmembers, producers and nonproducers, indiscriminately, at prevailing retail prices, except as hereinbelow stated. It had no agreement with or order from its members or others for specific purchases of supplies or equipment for their use, to be turned over to them at cost plus necessary expenses, and petitioner *67 made no such purchases. It made no specific purchase for, or for the use of, any particular patron. In the taxable year petitioner purchased for itself, for sale to all persons desiring to purchase, the following*924 supplies:
| Gasoline | $10,803.47 |
| Kerosene | 1,583.88 |
| Oil and Grease | 2,326.47 |
| Merchandise | 1,739.96 |
| Total purchases | 16,453.78 |
Petitioner's principal place of business was Nelson, Nebraska, where it owned and operated a filling station on the main highway and had a warehouse for the storage of its bulk commodities. Nelson is a town of about six or seven hundred people. There were two other filling stations there and petitioner sold gasoline and other petroleum products at its station to the public indiscriminately in competition with the other filling stations and at the same price at which they sold such products.
Except as set forth below, petitioner made no distinction in prices to its patrons, whether members or nonmembers, producers or nonproducers, and its prices were not based on cost plus necessary expenses.
Petitioner hired two trucks to deliver products to certain of its patrons at a cost to it of 2 cents a gallon. In the taxable year products were delivered and sold at cost plus 2 cents a gallon to the following named patrons in the following respective total amounts:
| Nora Elevator | $395.05 |
| Farmers Elevator, abdul | 755.42 |
| Farmers Union Creamery | 2,423.54 |
| Farmers Union, Hardy | 59.78 |
| State of Nebraska | 218.00 |
| Nuckolls County, Neb | 75.50 |
| Self Serve Pump | 506.82 |
| Total | 4,434.11 |
*925 The first three of the patrons above named were farmers' cooperatives and members of petitioner. The total sales to them amounted to $3,574.01. Farmers Union, Hardy, was a farmers' cooperative, not a member of petitioner but eligible for membership. The other three patrons above named were not members of petitioner and were neither eligible for such membership nor producers. The Self Serve Pump was established by certain persons at Nelson to aid the support of a needy retired farmer. The sales to the above listed patrons will be referred to hereinafter as nonprofit sales. The prices at which *68 such sales were made to the above named patrons include no part of the necessary expenses of petitioner during the taxable year other than the 2 cents a gallon for truckage of the products sold to the patrons named.
The necessary expenses of petitioner in operating its business during the taxable year, other than the cost of such truckage, consisted of the following items:
| Auditing | $118.50 |
| Advertising | 47.20 |
| Insurance | 188.54 |
| Rents | 36.20 |
| Inspection | 54.25 |
| Lights and power | 149.04 |
| Repairs | 62.88 |
| Office supplies | 36.82 |
| Salaries and commission | 3,859.46 |
| Telephone | 57.37 |
| General expense | 104.73 |
| Taxes | 92.05 |
| Fuel | 20.18 |
| Total | 4,827.22 |
*926 Petitioner's total sales during the taxable year amounted to $28,243.42. The total amount of sales to members was $17,253.86. The total amount of sales to nonmembers was $10,989.56, of which sales to the amount of $8,938.40 were recorded in the names of the purchasers on petitioner's books. Sales to nonmembers in the amount of $2,051.16 were not so recorded.
The number of member patrons in the taxable year was 189 and the number of recorded nonmember patrons was 553. In addition to the number of recorded nonmember patrons there was an unascertainable number of unrecorded and unknown nonmember patrons to whom sales totaled $2,051.16. In such sales the amounts thereof were merely "rung in" as cash. Less than 15 percent of the value of the total sales was made to nonproducers.
In the taxable year there were issued and outstanding 581 shares of petitioner's capital stock, of the par value of $10 per share, out of 2,500 authorized shares. The adjusted declared value of such capital stock was $5,810.
In the taxable year petitioner paid capital stock dividends totaling $469.70 on $5,810 paid in for capital stock, and declared a 10 percent patronage dividend for that year. *927 The patronage dividends were to be paid to member patrons and credited but not paid to recorded nonmember patrons, individually, on the basis of total sales during the year to each of such patrons, except those to whom nonprofit sales were made.
| Patronage dividends of $1,266.50 were paid to member patrons on sales totaling | $13,679.85 |
| Patronage dividends were not paid to member patrons on nonprofit sales totaling | 3,574.01 |
| Patronage dividends of $881.16 were credited, but not paid, to recorded nonmember patrons on sales totaling | 8,078.30 |
| Patronage dividends were not credited to recorded nonmember patrons on nonprofit sales totaling | 860.10 |
| Patronage dividends were neither paid nor credited to unrecorded and unknown nonmember patrons on sales totaling | 2,051.16 |
| Total sales | 28,243.42 |
*69 Patronage dividends credited to nonmember patrons were to be paid only, if, as, and when they should qualify as members of petitioner and should become shareholders thereof. Petitioner sold its capital stock at $10 a share. The amount of the credit in the case of nonmember patrons eligible for membership was to be applied first to the purchase of a share of petitioner's*928 capital stock. Only farmers or farmers' cooperative organizations could become shareholders. Nonmember patrons who were not eligible for membership could never receive payment of patronage dividends or otherwise participate in the profits of petitioner, regardless of whether or not they were credited with such dividends on petitioner's books. There was an unascertainable number of such patrons. A nonmember patron who was eligible for membership could not participate in such profits so long as he remained a nonmember. In 1933 only seven nonmember patrons became shareholders of petitioner and received payment of patronage dividends credited to them. In that year there were 541 nonmember patrons of record whose total individual purchases ranged from a minimum of 19 cents to a maximum less than $100.
Petitioner was not operated in the taxable year for the purpose of purchasing supplies and equipment for the use of its members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses.
Petitioner was not operated in the taxable year on a cooperative basis.
OPINION.
HILL: The sole question presented for determination is*929 whether petitioner is exempt from the payment of income tax in the taxable year involved. The petitioner claims such exemption under the Revenue Act of 1932, section 103(12)(b), which in pertinent part is as follows:
(12) Farmers', fruit growers', or like associations organized and operated on a co-operative basis * * *
*70 (b) For the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. Exemption shall not be denied any such association because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 per centum per annum, whichever is greater, on the balue of the consideration for which the stock was issued, and if substantially all such stock * * * is owned by producers who * * * purchase their supplies and equipment through the association; * * * Such an association may * * * purchase supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the*930 purchases made for persons who are neither members nor producers does not exceed 15 per centum of the value of all its purchases.
To constitute such exempt status for petitioner all of the following facts must be established:
1. That it is a farmers', fruit growers', or like association organized and operated on a cooperative basis.
2. That it was organized and operated for the purpose of purchasing supplies and equipment for the use of its members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses.
3. That its stock dividend rate is fixed at not to exceed the legal rate of interest in the state of incorporation or 8 per centum per annum, whichever is greater, on the value of the consideration for which the stock was issued.
4. That substantially all of the stock of petitioner was owned by producers who purchase their supplies and equipment through petitioner.
5. That the supplies and equipment purchased for nonmembers do not exceed in value the value of like purchases for members.
6. That the value of the purchases made for persons who are neither members nor producers does not exceed 15 percent*931 of the value of all its purchases.
Our discussion of whether such requisite facts have been established will follow the numerical order of their statement.
1. The evidence shows that petitioner was a corporation organized by farmers under the cooperative laws of Nebraska and that its business operations consisted solely in buying petroleum products and selling them to any one desiring to purchase from it, whether members or nonmembers. To three of its sharesholders sales of gasoline and other petroleum products were made on a nonprofit basis. These three shareholders were farmers' cooperative organizations and sales were made to them at actual cost plus only 2 cents a gallon to cover expense of hauling such products from petitioner's station or warehouse at Nelson to the purchasers. The sale prices to such patrons included *71 none of the general necessary expenses of petitioner totaling $4,827.22. To four nonmember patrons sales were made on the same basis. These nonprofit sales totaled $4,434.11. To all other patrons, members and nonmembers alike, sales totaling $23,809.31 were made at regular commercial retail prices determined without regard to actual cost plus*932 necessary expenses. These latter prices were intended to, and did, include a profit above actual cost plus necessary expenses.
Patronage dividends were paid or credited only to patrons of record to whom sales were made at regular retail prices, but only members received payment of such dividends. Nonmembers, even though credited therewith, did not receive payment of patronage dividends. A nonmember had to qualify for membership and pay $10 for a share of petitioner's capital stock before he could receive payment of a patronage dividend credited to him. Moreover, it affirmatively appears that there were a number of nonmember patrons to whom patronage dividends were credited who could never qualify as members and, therefore, could never under any condition receive payment of such dividends. It also affirmatively appears that there was a considerable though unascertainable number of unknown nonmember patrons to whom patronage dividends were not, and could not be, credited or paid.
It therefore appears that three member and four nonmember patrons were preferred over all other patrons. The sales to them were at actual cost without adding thereto any amount to cover necessary*933 expenses (except truckage), stock dividends, or reserves. All other member and recorded nonmember patrons purchased at competitive retail prices, fixed without regard to actual cost plus necessary expenses, and received payment and credit, respectively, of patronage dividends out of profits remaining after actual costs, necessary expenses, stock dividends, and statutory reserves had been deducted from gross sales. All unrecorded patrons purchased at competitive retail prices and received neither payment nor credit of patronage dividends.
The preferred group of patrons realized a saving which was tantamount to a bonus on their purchases, measured by the proportionate share of the necessary general expenses of petitioner which they would have been required to pay had they purchased on a basis of actual cost plus necessary expenses. Their share of the necessary expenses was paid by the other patrons. Not only did this preferred group contribute nothing to petitioner's profits or to defray its necessary expenses, but the three shareholders in that group received stock dividends out of petitioner's profits from sales to other patrons at regular retail prices. The evidence negatives*934 the fact that petitioner *72 was operated on a cooperative basis, either as among its members alone, or as between its members and nonmembers.
2. We have found as a fact that petitioner was not operated in the taxable year for the purpose of purchasing supplies and equipment for the use of its members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. Our discussion in paragraph 1 next above is sufficient to show the correctness of our finding of fact referred to and reiterated in this paragraph.
3. Petitioner meets the requirements of statute as to the rate of stock dividends fixed.
4. All of the stock of petitioner was owned by producers, but the evidence fails to show that all of its shareholders purchased their supplies and equipment through petitioner.
5 and 6. The evidence shows that no specific purchases of supplies and equipment were made by petitioner either for members or nonmembers. The evidence merely shows that the value of supplies and equipment sold by petitioner to nonmembers was less than the value of such sales to members and that the value of such sales to persons who were neither*935 members nor producers did not exceed 15 percent of the value of all its purchases.
We, therefore, conclude and hold that petitioner was not exempt from payment of income tax in the taxable year herein involved. The following cases support in principle our conclusion: Fruit Growers' Supply Co.,21 B.T.A. 315">21 B.T.A. 315; Central Co-operative Oil Association,32 B.T.A. 359">32 B.T.A. 359; Farmers Co-Operative Co. of Wahoo, Neb. v. United States, (Ct. Cls.), 23 Fed.Supp. 123.
In Fruit Growers Supply Co. and Central Co-Operative Co., supra, the deficiencies determined by the Commissioner were based only on that part of petitioner's income which represented profits on sales to nonmembers and was not distributed to them. The Board in both cases upheld the Commissioner's determination, but the question of whether an association claiming exemption from income tax as a farmers' cooperative association could under the statute be partially exempt and partially not exempt was not presented to the Board in either of the cases. The decision in Fruit Growers' Supply Co. was cited as authority for the holding in Central Co-Operative Oil Association.*936 In the report in the first case we said:
What the Commissioner did was first to determine the petitioner's net income for each year in a manner similar to that which would be followed in the case of any taxable corporation. Since we have held that the petitioner is not an exempt corporation, his initial step in such a determination would seem to be a proper one. From the total net income as thus determined the Commissioner then allowed a further deduction of all patronage dividends which were applicable to the respective years and considered the difference between the total income and the patronage dividends as taxable income. And if *73 we understand clearly the amounts which have been allowed in this latter deduction, the effect was to give the petitioner the benefit as a deduction of all patronage dividends declared or paid during the years with which we are concerned. The essence of what the petitioner asks is to say that all surplus earnings for a given year which have not been paid out as such dividends by the end of such year automatically became patronage dividends accrued, without any action on the part of the petitioner declaring them as dividends, and that*937 they are therefore deductible under its accrual system of accounting * * * We are unable to agree with the foregoing contention. In the first place, we find nothing in the governing statute which provides for a partial exemption from taxation of corporations of the character of the petitioner.
In Eugene Fruit Growers' Association,37 B.T.A. 993">37 B.T.A. 993, petitioner was a cooperative marketing association and had marketing agreements only with fruit growers who were members of the association. Nonmembers did not participate in such operation. The only issue before the Board in that case was whether the cooperative operations were exempt. No claim of exemption as a cooperative purchasing association was made in that case. In the opinion therein the Board said:
For all that appears they (fruit supplies) were handled at cost and although such articles were admittedly supplied to some extent to nonmembers, no attempt was made by respondent to elicit further details.
Compare, also, as supporting the principle of our holding in the instant case, *938 Producers' Creamery Co. v. United States (C.C.A., 5th Cir.), 55 Fed.(2d) 104, in which the court held that the appellant in that case was not a cooperative association as contemplated in the act and said:
It is a universal rule that one who would claim the benefits of a statute must bring himself, at least substantially, within its terms. Especially is this true of claimants under statutes purporting to exempt from taxation.
Reviewed by the Board.
Decision will be entered for the respondent.
SMITH, dissenting: The findings of fact in this case are to the effect that "less than 15 percent of the value of the total sales was made to nonproducers." This, I think, is tantamount to holding that the value of purchases made for persons who were neither members nor producers does not exceed 15 percent of the value of all its purchases. The evidence in the case clearly supposrts such finding.
In Producers' Creamery Co. v. United States (C.C.A., 5th Cir.), 55 Fed.(2d) 104, the rule is laid down that a corporation is not exempt from income tax unless it proves that it is "substantially" within the terms of the statute. *939 I think that the petitioner has shown that it is substantially within the terms of the statute. To its members who were other cooperatives it made sales of gasoline at cost. *74 In such case there was, of course, no necessity for crediting them with any part of the patronage dividends. The fact that those sales did not bear any part of the overhead cost seems to me to be de minimis. I think that the petitioner qualifies as a cooperative exempt from income tax.
MELLOTT agrees with this dissent.