*3 Decision will be entered under Rule 50.
Petitioner, a non-tax-exempt farmers' cooperative association, is in the business of ginning cotton for its members and patrons. Under its bylaws, nonmember patrons are to participate in patronage dividends on the same basis as member patrons. A substantial portion of the cotton ginned was grown by sharecroppers under an arrangement whereby the cotton belonged to the landlord and sharecropper jointly. The landlord delivered the cotton to petitioner's gin, and, in doing so, disclosed the joint ownership to petitioner. The petitioner listed the names of the landlord and the tenant as owners on its ginning tickets which reflected the amount of cotton ginned, the weight of the bales of lint cotton and the seed resulting, the ginning charges, the proceeds from the sales of seed, and the net amounts due the owners. Similarly, the patronage dividends and rebates were computed separately for each lot of cotton belonging to the landlord and the particular tenant. Although the seed proceeds and patronage dividends were generally paid to the landlord, petitioner supplied him with a record of the amounts due to him and the particular tenant in*4 respect of each lot of cotton. In a formal contract executed by the landlord with petitioner for the ginning of the cotton and the handling of the cottonseed, the landlord declared himself to be agent for his tenants. Held, that with respect to the jointly owned cotton, the landlord acted not only for himself but as agent for his tenants, and that the dividends and rebates qualified for exclusion from petitioner's gross income as true patronage dividends even though not paid directly to the tenants.
*609 The respondent determined deficiencies in income tax against the petitioner as a follows:
| Year ended | Deficiency |
| Feb. 29, 1952 | $ 1,883.43 |
| Feb. 28, 1953 | 1,900.61 |
| Feb. 28, 1954 | 3,296.10 |
| Feb. 28, 1955 | 1,124.01 |
The issue for decision is whether the petitioner, a non-tax-exempt farmers' cooperative association, is entitled to exclude from its gross income, as patronage dividends, amounts paid to landlord patrons on business done for their tenants.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
Petitioner is a Mississippi corporation, with its principal place of business in Money, Mississippi. It filed its income tax returns for the fiscal years ended February 29, 1952, February 28, 1953, February 28, 1954, and February 28, 1955, with the district director of internal revenue for Mississippi. It keeps its books and files its returns on an accrual basis of accounting and by fiscal years ending the last day of February.
*6 Petitioner was organized on August 16, 1940, and since its organization has been engaged in the business of ginning cotton and marketing cottonseed.
*610 During the taxable year involved, petitioner was organized and operated as a cooperative association with capital stock under the provisions of chapter 99, article 1, of the Mississippi Code of 1930. Petitioner's bylaws provided that business transacted with nonmembers may not exceed business transacted with members, but that nonmembers shall participate in the distribution of net income on the same basis as members. At the close of each ginning season, petitioner's net income was required to be allocated to patronage dividends, 1 after deduction of amounts set aside as a general reserve and as preferred stock dividends.
Patronage rebates on ginning were based on the ratio of the weight of each patron's cotton ginned to the total weight of all cotton ginned for all*7 patrons during the year; and the patronage rebates on savings on cottonseed were based on the ratio of the weight of each patron's cottonseed sold to the total weight of all cottonseed sold by the petitioner for all patrons during the year.
For the fiscal years ending in 1952, 1953, 1954, and 1955, patronage rebates were made both in cash and in the form of certificates of indebtedness payable to patrons, according to their respective agreements. The following rebates were paid during those years:
| Fiscal year | Cash | Certificate of | Total rebate |
| indebtedness | |||
| 1952 | $ 16,600.81 | $ 16,600.81 | |
| 1953 | 6,761.72 | $ 6,761.72 | 13,523.44 |
| 1954 | 13,589.48 | 13,589.48 | 27,178.96 |
| 1955 | 4,027.58 | 1,726.10 | 5,753.68 |
Under a sharecropper arrangement, the landlord would obligate himself to provide the tenant with a designated acreage of farmland, living quarters, tools, seed, and credit for necessary living expenses. The tenant obligated himself to raise and harvest the crop and, after picking the cotton, to deliver it to the gin. In return, the tenant was entitled to one-half of the crop or the proceeds thereof. In actual practice, the tenants did not have the equipment necessary*8 for transporting the cotton to the gin, and as a consequence the hauling would be done by the landlord, the cost of such hauling being charged against the tenants' interest in the crop. The landlord would park a truck-trailer in the field for use in loading the cotton. When the trailer was loaded, the landlord would have the trailer pulled to the gin. At the gin the trailer would be detached and parked, leaving petitioner to pull it in place for the ginning of the cotton.
With respect to landlord-tenant cotton, the landlord dealt with petitioner both for himself and for his tenants, petitioner being *611 advised in all cases as to the tenant who was coowner of a particular lot of cotton. When a trailer was parked at the gin, the names of the plantation owner and the tenant were put on the corner of the trailer. When the cotton was ginned, the petitioner would make out a gin ticket in the names of both the landlord and the tenant. The gin ticket would show the weight of the bale of lint cotton and cottonseed by weight, the ginning charges, and if the seed had been sold, the amount of proceeds therefrom, and finally the net balance due the owners of the cotton.
The ginning*9 was done pursuant to a contract termed a patronage agreement, which was signed by petitioner and the landlord only, but in which the landlord declared himself to be agent for his tenants. The contract provision in question was as follows:
5. The Patron hereby gives notice to the Association that he is agent for his tenants and for any and all others having a financial interest in the cotton furnished to the Association by the Patron; and the Patron authorizes and directs the Association to pay to him all sums representing seed settlements, rebates, or other distributions accruing in favor of all cotton or seed furnished to the Association by the Patron; and the Patron hereby relieves the Association from liability for any claims arising against the Association as a result of failure of the Patron to properly account for any amounts received by him as agent. The Patron agrees to pay all ginning and other proper service charges assessed against cotton or seed furnished by him to the Association, regardless of whether such cotton or seed may be owned by him alone, or by others for whom the Patron acts as agent. The Association agrees to furnish to the Patron such information as to*10 margin or loss distribution factors as will enable the Patron to make proper settlements of cotton and seed accounts he may have with others for whom he acts as agent in negotiations with the Association.
When at the end of the season the rebates were computed the landlord, as a general rule, received payment of the rebates on the cotton both for himself and for his tenants. Upon such payment, the petitioner would supply the landlord with a full statement showing the amount of rebate or dividend attributable to each lot of jointly owned cotton which had been ginned, giving in each instance the name of the tenant. In some instances and upon notice from the landlord, the check covering the tenant's share of cottonseed proceeds or patronage rebate would be delivered to the tenant directly.
In his determination of deficiencies herein, respondent reduced the amounts of the rebates claimed to be excludible by the percentages of cotton owned by the tenants, as follows:
| Fiscal years | ||||
| 1952 | 1953 | 1954 | 1955 | |
| Rebates claimed | $ 16,600.81 | $ 13,523.44 | $ 27,178.96 | $ 5,753.68 |
| Percentage owned by tenants | 30.93 | 33.16 | 31.40 | 34.70 |
| Rebates disallowed | 5,134.63 | 4,484.37 | 8,534.19 | 1,996.53 |
*11 *612 In delivering the cotton to petitioner, in accepting payment for the cottonseed sold, and in receiving the rebates on the business done on the landlord-tenant cotton, the landlord acted not only for himself, but as agent for his tenants.
OPINION.
Petitioner does not contend that it is entitled to exemption from Federal income tax under section 101(12) of the 1939 Code or section 521 of the 1954 Code, granting limited exemption to certain farmers' cooperative associations which allocate patronage dividends, refunds, or rebates for the benefit of all their patrons, including both members and nonmembers. Instead, it seeks to exclude from its gross income, as patronage dividends paid, amounts paid to landlord patrons on business done for their tenants.
We regard it as settled law that a patronage dividend paid by a nonexempt cooperative may, in proper cases, be excluded from its gross income despite the lack of a specific statutory provision, on the theory that the patronage dividend is merely a yearend discount based on the volume of the customer's annual business. Pomeroy Cooperative Grain Co., 31 T.C. 674">31 T.C. 674; Clover Farm Stores Corporation, 17 T.C. 1265">17 T.C. 1265;*12 Dr. P. Phillips Cooperative, 17 T.C. 1002">17 T.C. 1002; United Cooperatives, Inc., 4 T.C. 93">4 T.C. 93; Uniform Printing & Supply Co. v. Commissioner, 88 F.2d 75">88 F. 2d 75. To qualify for exclusion, however, the allocation of earnings must have been made pursuant to a preexisting legal obligation. Furthermore, the distribution must have been made out of profits or income realized from transactions with the particular patrons for whose benefit the allocation was made, rather than from transactions with other persons or organizations not entitled to participate in the allocation. Thus, the patron receiving the rebate should be the one whose patronage created the particular type of profit distributed to him.
It is the contention of the respondent that where the tenant's portion of the rebates on landlord-tenant cotton is not paid directly to the tenant, such portion of the rebate does not qualify for exclusion from petitioner's income as a true patronage dividend. It is the position of the petitioner, on the other hand, that the payment of the rebate as made to the landlord was for both the landlord and the tenant; that*13 the landlord was the acknowledged and accepted agent of the tenant; and that the rebate received by him in that capacity was, for the purposes here, a receipt thereof by the tenant.
According to the record, the landlord both under the contract with petitioner and in his acts at all times represented and declared himself as agent for his tenants in connection with the ginning of the *613 cotton jointly held with the tenant and in the sale of the cottonseed therefrom. At each step in the operation, the joint ownership of the cotton was declared and acknowledged. It was delivered to the gin as the cotton of the landlord and the particular tenant, and it continued to be so designated through the ginning operation, the making out of the ginning ticket, the payment of the net proceeds from the sale of cottonseed, and the payment of the patronage rebates or dividends at the end of the season. In some instances, the landlord would advise petitioner that the checks for the net proceeds from cottonseed and for the patronage rebates or dividends to the extent of the tenant's share, would be picked up by the tenants themselves, and when that occurred petitioner would deliver the check*14 directly to the tenant. Otherwise the rebate would be paid to the landlord for the tenant.
According to the record, the arrangement appears to have been a practical one. The tenants had no facilities for transporting the cotton to the gin as required by the sharecropping agreement. The landlord acted as their agent for the purpose of delivering the cotton to the gin, paying the ginning costs, and receiving the net proceeds from the cottonseed sales and the dividends or rebates. He maintained at all times a record of the ownership and interest of each individual tenant in the cotton. As an agent in possession of commodities which he had the authority to sell, the landlord had implied authority to receive and collect payment for these goods. Restatement, Agency, sec. 71.
The next question presented is whether payment of the patronage dividend to an agent of the patron entitled to the allocation satisfies the requirements for exclusion. Neither petitioner nor respondent discussed this problem, apparently assuming that if the landlords were held to be agents of the tenants, petitioner should prevail. We agree. In determining the year in which income must be reported, the receipt*15 of income by an agent is considered equivalent to receipt by the principal. Maryland Casualty Co. v. United States, 251 U.S. 342">251 U.S. 342; United States v. Pfister, 205 F.2d 538">205 F. 2d 538. Moreover, under section 39.27 (b)-2 (a)(3) of Regulations 118, payment of a dividend to a stockholder's agent will be deemed payment to the stockholder at such time. Consequently, by analogy, payment of the rebate to an agent of the patron should support exclusion of the rebate from petitioner's gross income.
Decision will be entered under Rule 50.
Footnotes
1. Patronage dividends are also commonly referred to as patronage rebates or patronage refunds.↩