*1140 The petitioner is a share capital cooperative corporation under the laws of Wisconsin. Its capital stock is owned by local cooperative organizations of producers and consumers. It sells to all its members and to a limited extent it sells the farm products consigned to it by members. Held, in the facts established by the record, that it is not an organization of producers and that it fails to satisfy the conditions prescribed for exempt corporations in section 231(12) of the Revenue Act of 1926 and section 103(12) of the Revenue Act of 1928.
*17 The respondent asserts deficiencies for the years 1925, 1926, 1927, 1928 and 1929 in the respective amounts of $142.30, $198.36, $362.80, $433.17 and $499.65. The only issues involved are (1) whether dividends on the share capital of a cooperative society are deductible as interest, and (2) whether the petitioner is an exempt corporation under the provisions of section 231(12) of the Revenue Act of 1926 and section 103(12) of the Revenue Act of 1928. The issue pleaded at each docket number being identical, *1141 the two proceedings were consolidated for hearing.
FINDINGS OF FACT.
The petitioner is a cooperative wholesale society incorporated under sections 185.01 to 185.22, inclusive, of the Wisconsin statutes. Its authorized capital stock is $250,000, divided into 2,500 shares of the par value of $100 each. At December 31, 1927, its member stockholders consisted of 54 farmers' cooperatives, 5 cooperatives in which a majority of the stockholders were farmers, 2 city consumers' cooperative organizations, 11 city cooperative organizations in which a majority of the members were consumers, 1 cooperative boarding house, 2 cooperative publishing houses and one cooperative bank. In all the years involved the stockholders were substantially as set out above. None of the petitioner's shares are owned by individuals.
The by-laws of the petitioner contain the following provisions:
ARTICLE II.
Purpose and Field of Activity.
SEC. 1. The purpose of this society is: to obtain and furnish commodities or necessities of life for societies affiliated with it by arranging and providing for *18 joint purchases in accordance with orders furnished by the affiliated societies; to*1142 manufacture and sell all kinds of bakery products primarily for and to the affiliated societies; to establish a wholesale and warehouses or depots needed in connection with it, as well as productive establishments, as the need may be; to buy, sell and job at prevailing market prices agricultural products, particularly when offered for sale by or through the affiliated societies; also to provide or furnish implements and supplies needed in agriculture and other branches of production, such as agricultural machinery, tools, seed, pure-bred stock, etc., to co-operate with other American co-operative wholesale societies and co-operative establishments of production and to enter into agreements with them or through them concerning the supplying of goods or the selling of products.
It is among the duties of the Co-operative Central Exchange also to supervise the internal development of societies affiliated with it, to enlarge their field of activity and to help them in every manner. Similarly also to organize and to carry on co-operative propaganda and advisory work in general; this work to be taken care of and to be supervised by a special educational department in accordance with the*1143 decisions of the general meetings and the Board of Directors.
* * *
ARTICLE V.
Distribution of Surplus Savings.
SEC. 1. From the net surplus savings shown by the balance sheet for the fiscal year, at least 10% shall be placed in the surplus fund until the surplus fund is 30% of the paid-in capital; from the remainder, 5% shall be placed in the educational fund; 6% interest shall be paid on paid-in capital stock; and the balance remaining to be used according to the recommendation of the board of directors and approved by the annual meeting.
The petitioner sells to both members and nonmembers. In the taxable years the percentages of its sales to members were: 1925, 82.29; 1926, 91.81; 1927, 91.33; 1928, 94.22; 1929, 94.41. In each of these years the sales to nonmembers were made to two groups, viz., cooperative societies owning no stock, but eligible to membership, and individuals and/or buying clubs not eligible to become stockholders.
In each of the years under review rebates based on sale prices were given to all purchasers from the petitioner and the gross sales reported on its income tax returns for each of such years was the gross sale price less the total*1144 rebates to patrons.
In each year involved the operations of the petitioner resulted in profits or savings in excess of rebates. Such savings were distributed in conformity with article 5 of petitioner's by-laws, as set out above. At the end of the several taxable years in question the petitioner had undistributed surplus as follows: 1925, $8,806.57; 1926, $10,498.17; 1927, $12,553.59; 1928, $15,323.22; 1929, $18,360.72.
OPINION.
LANSDON: In its brief the petitioner abandons the contention that the 6 per cent dividend which it paid to each of its shareholders in *19 the several taxable years is deductible from income as interest. This issue, therefore, is determined in favor of the respondent. ; ; .
The second contention of the petitioner is that, under the provisions of section 231(12) of the Revenue Act of 1926 and section 103(12) of the Revenue Act of 1928, it is an exempt corporation. The statutory provision relied on by petitioner in the Acts of 1926 and 1928 is as follows:
*1145 Farmers', fruit growers', or like associations organized and operated on a cooperative basis (a) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (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 value of the consideration for which the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment*1146 through the association; nor shall exemption be denied any such association because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose. Such an association may market the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, and 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 purchases made for persons who are neither members nor producers does not exceed 15 per centum of the value of all its purchases.
The language of the statutes and of the interpretive regulations indicates very clearly that Congress intended to exempt cooperative associations organized to act as marketing and/or purchasing agents for producers. Consumers' cooperative associations may be highly beneficial to their members, but certainly are not included in the provisions of the law upon which the petitioner relies. It follows, therefore, that the 13 members of the petitioner function as distributive cooperations for city consumers and*1147 must be eliminated for consideration here, and this applies also to the two cooperative publishing houses, the cooperative store and the cooperative bank, all of which we think have the status of nonproducers. The law and the regulations are generously elastic, but can not be stretched to cover business activities with such a large number of patrons who are not *20 within the categories which are to be exempt from the burdens of taxation, even though they are members of the cooperative agency claiming exemption. There is nothing in the record to show that the petitioner's sales to such patrons were less than 15 per cent of its total sales in the several taxable years. It follows, therefore, that in this respect the petitioner has failed to establish its claim for exemption. ; affd., 50 Fed.(2) 742; ; affd., .
The remaining members of the petitioner are farmers' cooperatives, but the evidence fails to disclose that such associations come within the provisions of the exempting statute. We are not advised whether*1148 these concerns are marketing or purchasing agents or whether all or any of them combine both functions. Certainly there is no evidence that all the members of each of such organizations are producers of commodities that are marketed through the petitioner as their agent. Even if all the individual members of the farmers' cooperatives which enjoyed membership in the petitioner are producers, it does not follow that the organizations themselves are producers, or even agents of producers. Unless it is shown that title to the farm products marketed through the petitioner remained in the producers thereof until sales were effected by it, we think the conditions contemplated by Congress and prescribed by the statutes are not satisfied. If the member cooperatives bought commodities from its producing members and resold them to petitioner for further sale to the public, it could hardly be argued that petitioner acts as agent for producers. In our opinion the petitioner has failed to prove that any of the members are producers or producers' marketing agents within the meaning of the statutory provisions granting tax exemption to farmers' cooperatives.
The petitioner is a wholesale concern. *1149 It does not buy farm supplies as the agent of producers, or even of the component corporate members. It buys its merchandise on the open markets, and out of stocks to which it holds title by purchase it fills orders from its members and others. In these circumstances it is no more the agent of producers than is any other wholesale merchant engaged in selling supplies that are ultimately consumed by producers. In our opinion it is too far removed from producers to be regarded as their agent for selling products or purchasing supplies.
Decision will be entered for the respondent.