*1227 1. The Farmers Educational and Cooperative State Union of Nebraska, a cooperative organization under the laws of Nebraska, having no capital stock; its members being members of local cooperative groups who, except for a negligible number, were working farmers; its income being principally from fees and dues of its members; its purposes being to instruct and educate the agricultural classes in scientific farming, classification of crops, domestic economy, and processes of marketing, to systematize the methods of production and distribution, and to assist its members in cooperative buying and selling, held exempt from tax under the Revenue Acts of 1916, 1918, and 1921.
2. Since, under the Revenue Acts of 1916 and 1918, a cooperative association which acts as purchasing agent for its members is not an exempt corporation, the Farmers Union State Exchange, a cooperative association, acting as selling agent and purchasing agent for its members, is not an exempt corporation. Held, such association is not entitled to any deduction for patronage dividends, since no such dividends were declared or paid.
3. Where the taxpayer filed an income tax return for 1918 on June 16, 1919, and*1228 under date of June 9, 1924, executed a waiver extending the period for the assessment and collection of 1918 taxes one year after the expiration of the statutory period of limitation as extended by any waivers already on file with the Bureau, such waiver superseded a previously executed unlimited waiver so that a deficiency notice mailed on May 4, 1926, was too late. Ethel D. Co.,27 B.T.A. 25">27 B.T.A. 25; affd., Helvering v. Ethel D. Co., 70 Fed.(2d) 761.
*1052 These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income and excess profits taxes asserted by the respondent as follows:
| Petitioner | Docket No. | Year or period | Deficiency |
| Farmers Union State Exchange | 18105 | 1917 | 1 $13,720.33 |
| Do | 18105 | 1918 | 37,980.76 |
| Farmers Educational and Co- | |||
| operative State Union of | |||
| Nebraska. | 31748 | Jan. 1 to June 30, 1919 | 1,165.16 |
| Do | 31748 | July 1 to Dec. 31, 1919 | 11,081.24 |
| 12,246.40 | |||
| Do | 27194 | 1920 | 2,115.78 |
| Do | 10596 | 1921 | 118.51 |
| Do | 27194 | 1922 | 520.61 |
| Do | 27194 | 1923 | 1,668.34 |
The petition in Docket No. 18105 was captioned "Farmers Educational and Cooperative State Union of Nebraska and Farmers Union State Exchange, petitioners." As no deficiency for 1917 and 1918 was asserted by respondent against the Farmers Educational and Cooperative State Union of Nebraska in the notice of deficiency from which the appeal was taken, the proceeding for 1917 and 1918, in so far as it purports to be by the Farmers Educational and Cooperative State Union, is dismissed and the proceeding will hereafter be captioned and known as "Farmers Union State Exchange." The issues for determination in Docket No. 18105 are: (1) Whether the Farmers Union State Exchange is an exempt corporation, and, if not, (2) whether the amounts representing the accumulated savings of farmer patrons are taxable income to the Farmers Union State Exchange; (3) whether respondent has correctly computed the accumulated savings of farmer patrons for 1917; (4) whether the deficiency of 1918 is barred by the statute of limitations; and (5) whether certain other items representing fees, dues, and certain livestock commissions returned to the*1230 income of the Farmers Educational and Cooperative State Union, but reflected in the deficiency asserted against the Farmers Union State Exchange, should be taxed to the Exchange.
The major issue in Docket Nos. 10596, 27194, and 31748 is whether the Farmers Educational and Cooperative State Union is exempt from tax for the years 1919 to 1923, inclusive, under the provisions of section 231 of the Revenue Acts of 1918 and 1921. For the year 1919 it is alleged that respondent erred in including in income of the Farmers Educational and Cooperative State Union the accumulated *1053 savings of farmer patrons of the Farmers Union State Exchange. It is further alleged that for each year respondent erred in including in income of the Farmers Educational and Cooperative State Union fees and dues received from its members and in including the excess of the livestock commissions and other income received by the Farmers Union Livestock Commissions over the total expenditures plus patronage dividends actually paid by the commissions to patrons thereof.
FINDINGS OF FACT.
By December 1913 there were a sufficient number of farmer members of local farmers' cooperative groups in Nebraska*1231 to organize a state organization. From the sixth to the tenth of December 1913 representatives from these local groups met in Fremont, Nebraska, and organized themselves into a society called "The Farmers Educational and Cooperative State Union of Nebraska", elected officers, adopted a constitution and bylaws, and applied for a charter for Nebraska under the above name from the Farmers Educational and Cooperative Union of America, a duly organized society which was incorporated under the laws of the State of Texas. A charter was issued by the national organization to the officers of the Nebraska State Union on December 16, 1913. A copy of this charter and of the constitution and bylaws adopted at the organization meeting were received and filed for record on July 13, 1914, with the Secretary of State of the State of Nebraska, in recognition and acceptance of the laws of Nebraska governing such organizations.
The preamble of the constitution and bylaws of the Farmers Educational and Cooperative State Union of Nebraska, hereinafter referred to as the State Union or the Union, adopted at the time of organization, states that the State Union has been organized "in order to obtain*1232 a between and more direct market for all products of the farm and to eliminate all unnecessary expense in buying our supplies." The purposes were stated as follows:
To secure equality, establish justice and apply the Golden Rule.
To discourage the credit and mortgage system.
To assist our members in buying and selling.
To educate to agricultural classes in scientific farming.
To teach the farmer the classification of crops, domestic economy and the process of marketing.
To systematize methods of production and distribution.
To eliminate gambling in farm products by board of trade and other speculators.
To bring farming up to the standard of other industries and business enterprises.
To secure and maintain uniform prices for grain, live stock and other products of the farm.
*1054 The constitution and bylaws provided that any person above 16 years of age, of industrious habits and of good moral character, who was a farmer, country mechanic, school teacher, physician, or minister of the gospel, might become a member of the State Union if not engaged in any of the following occupations: banking, merchandising, practicing law, or belonging to any trust*1233 or combine engaged in any kind of speculation; but it was provided that the ownership of bank stock should not be construed to mean banking. The state organization was to be composed of the members of the local cooperative groups, these being represented by one delegate from each chartered local. Such delegates were empowered to elect three directors and the state officers, consisting of a president, a vice president, a secretary-treasurer, and a state organizer; and these officers and directors were to constitute the executive board. The duties of the executive board were to formulate plans and assist members in establishing cooperative enterprises and to supervise the office of the exchange at Omaha when such office should be established. A membership fee of $2 and quarterly dues of 50 cents per member, to be paid in advance, were to be charged by the locals and a portion of these fees and dues remitted to the State Union.
Annual meetings of the State Union were to be held in January and an annual meeting of the executive board was to be held immediately after the annual meeting of the State Union. The executive board was also to have regular quarterly meetings at stated*1234 places in Nebraska. Special meetings of the executive board were authorized to be called upon notice. The constitution and bylaws could be amended by a majority vote at any annual meeting.
At the regular annual meeting held in January 1917 amendments to that part of the articles of incorporation designated "Constitution and By-laws" were adopted which changed the form in which the constitution and bylaws had theretofore been written and made certain changes in the provisions. Only such changes or additions to the provisions of the original constitution and bylaws as are pertinent are referred to herein.
Article 3 of the constitution and bylaws, as amended, provided:
The general nature of the business of this corporation shall be to organize and establish local and county branches of this organization in this state; to publish and circulate a newspaper or magazine, to be known as the NEBRASKA UNION FARMER; to own and hold stock in corporations organized primarily for the benefit of members of this organization; and to develop public sentiment and encourage the passage of laws favorable to the organization of co-operative societies and the general social, economic and political*1235 interests of the farmers of Nebraska; to purchase, acquire, own, lease, rent, mortgage, sell and convey, such real and personal property as may be necessary or suitable to carry on the business of this corporation; and to do all other *1055 things necessary, incident, or suitable to accomplish and to carry out the purposes and intent of the charter and Articles of Incorporation of the Farmers' Educational and Co-operative State Union of Nebraska.
It was also provided that the corporation should have no capital stock, and that "Membership in this organization is secured by membership in organized and chartered branches of this organization to be known as 'locals.'" It was further provided that the general management of the organization, with all its activities except the field work, should be vested in a board of three directors to be elected at the annual convention, one for one year, one for two years, and one for three years; and annually thereafter one for a term of three years. The president was to preside at all meetings of the board of directors and was to have power to advise, but could vote only in case of a tie.
The voting members at the annual convention were*1236 to consist of one delegate from each chartered local in the State of Nebraska and one representative from each county organization made up of two or more locals.
The only pertinent change made in the constitution and bylaws at the annual meeting held in January 1918 was to increase the number of directors to seven.
From the date of its organization and during all the taxable years herein involved, the State Union was actively engaged in promoting farmers' cooperative buying and selling organizations throughout the State of Nebraska and in carrying on the educational activities referred to in its purposes. During this period there were organized about 250 Farmers Union cooperative stores, about 200 cooperative elevators, and also many cooperative livestock commissions, shipping associations, cream stations, and creameries. These local cooperative stores, elevators, commissions, creameries, and cream stations were operated on a true cooperative basis, the farmer patron receiving in the case of the stores any savings made during the year on the basis of his purchases through the store, and in the case of the other cooperatives any savings made on the basis of the produce sold*1237 through such cooperatives.
Soon after the organization of the State Union its secretary began to receive group orders from various cooperative locals, whose members were thereby members of the State Union, for supplies which were available in the larger market in Omaha. The purchasing of supplies through the secretary in Omaha began in a small way and was handled in the same manner as the locals handled the purchasing of supplies. Any savings at the end of the year resulting from overestimating the expenses incident to the purchasing of the supplies were considered to belong to the farmer patrons in proportion to the *1056 amount of business each farmer patron had done through the secretary's office. A little later the secretary began to sell the produce of the farmer patrons and deducted from the amount received an estimated amount for expenses. Any savings at the end of the year resulting from overestimating the expenses incident to the selling of the produce were considered to belong to and were held for the benefit of the farmer patrons, who sold their produce through the secretary's office, in proportion to the amount sold. The purchases of the secretary were on*1238 such a narrow margin that the savings resulting in 1915 on a total business of $324,160 were only $4,052.48, or 1 1/4 percent.
As the buying and selling activities of the secretary's office increased, the secretary used the accumulated savings of farmer patrons to buy and keep in stock larger quantities of the supplies most in demand by the farmer patrons. By the latter part of 1916, the buying and selling activities of the secretary of the State Union had grown to such an extent that it was decided by the membership of the State Union that a cooperative buying and selling association should be organized under the name of the Farmers Union State Exchange, with the purpose of continuing the buying of supplies and the selling of produce for farmer members of the State Union. Consequently, at the annual meeting in January 1917, the State Union amended its constitution and bylaws, as set forth above, so as to permit it to own and hold stock in corporations organized primarily for the benefit of members of the State Union; and the Farmers Union State Exchange, the petitioner in Docket No. 18105, hereinafter referred to as the Farmers Exchange or the Exchange, was organized under the*1239 laws of Nebraska, the articles of incorporation being filed with the Secretary of State of Nebraska on March 14, 1917.
The preamble of the articles of incorporation provided:
We, whose names are subscribed hereto, as representatives of and trustees for the members of the Farmers' Educational and Cooperative State Union of Nebraska, do hereby associate ourselves into a body corporate under the laws of the State of Nebraska, and do hereby adopt the following articles of incorporation:
Article III provided:
The general nature of the business to be transacted by this corporation shall be the buying, selling, shipping, manufacturing and handling of all kinds of farm products, grains, seeds, hay, poultry, cattle, sheep, horses, mules, milk, and dairy products, coal, lumber, building material, farm machinery, automobiles, twine, tile, fence, cement, lime, plaster, brick, concrete, pottery, books, dry goods, musical instruments, clothing, rubber goods, cream separators, sewing machines, salt, leather, hides, harness, trees, plants, shrubs, cereals, meats, groceries and all kinds of food supplies, and all such other articles as may be handled to the interests of the members of the*1240 Farmers' Educational and Cooperative *1057 State Union of Nebraska; and the doing of any and all things incident to the general conduct and transaction of the character of business hereinbefore enumerated, and to own, lease, and sell such personal and real property as may be needed for the transaction of the business and the accomplishment of the purpose of this organization.
Article IV provided for an authorized capital stock of $50,000, divided into 500 shares of the par value of $100 each.
Article VII provided that the business and prudential affairs of the corporation were to be managed by a board of three or more directors elected by the stockholders at their annual meeting out that during the time the Farmers Educational and Cooperative State Union of Nebraska owned stock in the corporation, the directors, and president of such State Union, as its representatives, should be the directors and president of the Farmers Exchange.
Article VIII provided:
The stockholders shall have authority to enact by-laws suitable for the conduct and management of the corporation business. The by-laws shall provide for the distribution of the earnings of this corporation in part, *1241 or wholly, on the basis of, or in proportion to the amount of property bought from or sold to members of the Farmers' Educational and Co-operative State Union of Nebraska, or of labor performed, or other service rendered to this corporation, it being intended that this corporation shall not be conducted for profit but for the benefit of the members of the Farmers' Educational and Cooperative State Union of Nebraska.
The persons signing the articles of incorporation were the president and directors of the State Union, who became president and directors of the Farmers Exchange.
Two hundred shares of stock were issued to "The president and board of directors of the Farmers' Educational and Cooperative State Union of Nebraska" for $20,000 cash, which amount was advanced by the State Union out of a fund which it had accumulated from that portion of the fees and dues allocated by the locals to the state organization.
After the incorporation of the Farmers Exchange it continued the same cooperative practices and policies used by the secretary of the State Union and continued in business in the premises of the State Union.
The farmer patron members of the State Union would place*1242 their orders for supplies with the Farmers Exchange and the supplies would be furnished on the basis of the cost of such supplies, plus the estimated expense of doing business; and the farmer patron members would send their produce to the Farmers Exchange, which would sell the produce at the best price obtainable, from which the estimated expense of the transaction would be deducted and the balance remitted to the farmer. Any savings in either buying or selling *1058 resulting at the end of the year constituted the fund out of which patronage dividends were to be paid.
Increasing business and war conditions made it necessary for the Farmers Exchange to carry larger stocks of supplies and the accumulated savings resulting from the buying and selling activities of the Exchange were invested in merchandise. It was necessary to place orders a long time in advance. This was especially true in buying agricultural implements, since the manufacturers of such implements were required to go to the appropriate war board in order to get their raw material requirements. Whenever possible, supplies were handled upon consignment.
This increase in business made it necessary, early*1243 in 1918, for the Exchange to secure additional funds. From that time until January 1919 the State Union at different times made advances to the Exchange in the total amount of $40,200, on which the Exchange paid interest to the State Union. This sum was obtained by the State Union from its members in small amounts, many being $10 or multiples thereof, and the State Union paid the interest which it received to the members.
Some business was transacted with nonmembers, but it was very small because such business was not solicited. Nonmember patrons were entitled to participate in savings except that a nonmember was not entitled to receive patronage dividends until he had become a member of the State Union.
Although the payment of patronage dividends was discussed, no patronage dividends were paid in 1917 or 1918. The Exchange operated largely on credit. At no time during the period involved did it have cash out of which the patronage dividends could have been paid. All of the savings were invested in the stock of supplies which it was necessary to carry on account of increased business and war conditions. The records were kept so that the savings could be definitely allocated*1244 and paid to the patrons who were entitled to patronage dividends. No patronage dividends were paid in later years for 1917 and 1918, because the question of the tax liability of the Exchange had arisen and was pending.
In its return for 1917 the Farmers Exchange reported:
| Gross sales | $1,775,996.36 |
| Cost of goods sold | 1,685,360.20 |
| Gross profit | 90,636.16 |
| Expenses | 59,734.11 |
| Net profits | 30,902.05 |
The above represents the result of the operations of the Exchange for the calendar year 1917. Respondent determined the net income of the Exchange from the date of organization, April 1 to December *1059 31, 1917, to be $37,032.74, by adding to the net income from the operations of the Exchange for the full year, $30,859, the amount of $6,173.74, which he determined to be a loss from the operations for the period January 1 to March 31. The correct income from operations for the period April 1 to December 31 is $38,924.21.
In its return for 1918 the Exchange reported:
| Gross sales | $2,720,895.48 |
| Cost of goods sold | 2,598,115.12 |
| Gross profit | 122,780.36 |
| Expenses | 98,703.97 |
| Net income | 24,076.39 |
Respondent determined the net income for*1245 1918 to be $69,238.92. The closing inventory of merchandise on hand December 31, 1918, was $374,388.72.
The savings in 1917 and 1918, as determined by respondent, were only 2 1/5 and 2 1/2 percent, respectively, of the gross sales of each year.
The continued need for more capital with which to carry larger supplies resulted in the reorganization of the Farmers Exchange on July 1, 1919. Its stock was thereafter owned and held by individual members of the State Union. Its activities after that date have no bearing on the issues presented in these proceedings. The 200 shares of stock which had been issued to the State Union were redeemed for cash in the amount of $20,000, and the $40,200 which had been borrowed was repaid.
When the Farmers Exchange was organized in 1917 there was turned over to it by the secretary of the State Union the accumulated savings of $11,211.22 on his operations for the members to that date. Upon its reorganization the accumulated savings amounted to $94,717.75, which included the $11,211.22, all of which was invested in the inventory of merchandise on hand. A note covering this amount was given to the State Union, which is still held by it. The*1246 State Union has agreed to pay any taxes which may be found to be due from the Farmers Exchange for the years 1917 and 1918.
The respondent held that the State Union and the Farmers Exchange were affiliated until the Exchange was reorganized on July 1, 1919. He has included in the income taxable to the Exchange the fees and dues received by the State Union during the years 1917 and 1918, and also certain income of the livestock commissions operated by the Union. For the period January 1 to July 1, 1919, the respondent included in the income of the State Union the accumulated savings of the Exchange for this period.
On April 29, 1918, the Farmers Exchange filed an income tax return for the period March 14 to December 31, 1917, reporting a tax of $1,854.12. On April 20, 1923, the Farmers Exchange filed *1060 a claim for abatement of additional taxes assessed for 1917 in the amount of $20,108.09. This claim for abatement was allowed by the respondent in the amount of $6,387.76 and the balance of $13,720.33 was rejected in the notice of deficiency dated May 4, 1926, from which the instant appeal is taken with respect to taxes for 1917.
On June 16, 1919, the Farmers Exchange*1247 filed an income and profits tax return for the year 1918, reporting a tax of $2,649.17. Under date of January 15, 1923, the Farmers Exchange executed an unlimited waiver consenting to the determination, assessment, and collection of taxes for the years 1917 and 1918, "irrespective of any period of limitations." On June 9, 1924, an income and profits tax waiver was executed by the Farmers Exchange which related to taxes for 1918 and which recites: "This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned." The notice of deficiency for 1918 was mailed on May 4, 1926.
One of the important activities carried on by the State Union for the benefit of its members was the operation of cooperative livestock commission houses. Although they were operated for the purpose of assisting the members of the State Union to market their livestock and to save some of the cost of selling on the regular markets*1248 through the old line commission houses these commission houses also marketed livestock and received commissions from some nonmembers during some of the years in question.
The first livestock commission house operated by the State Union was opened at the Omaha stockyards in April 1917, and in August 1918 commission houses were opened also at St. Joseph, Missouri, and Sioux City, Iowa. This activity was not incorporated, but was under the control of the board of directors of the State Union and was financed by the State Union. The Union was paid for its services. The agents of the State Union throughout the state were instrumental in having members market their stock through the commissions. Separate records were kept at the various stockyard offices. Each commission was designated and known as "Farmers Union Livestock Commission."
Patrons shipped their livestock to the Farmers Union Livestock Commissions just as they would have shipped to any old line commission house. The livestock was weighed and sold and the proceeds of the sale sent to the shipper, after a commission at the rate charged by the old line commission houses had been deducted for *1061 handling the*1249 transaction. At the end of the year there were deducted from the commissions collected the expenses of operating the business and there was refunded to patrons who were members of the State Union, in proportion to the amount of business they had transacted with the Farmers Union Livestock Commissions, a large percentage of the savings accomplished. The only income of the Farmers Union Livestock Commissions, except a small amount of interest and occasional small miscellaneous items, was the commissions charged the shippers.
All patrons were treated alike except that a nonmember patron was not entitled to receive, and did not receive, any patronage dividend until he had qualified as a member of the State Union. Upon becoming a member, his patronage dividend was paid to him. The proportion of the business conducted with nonmembers was not large. The savings not distributed, including the savings of nonmembers, were small in proportion to the amount of business done.
The exact amounts of the undistributed earnings of the three livestock commissions returned to the income of the State Union, were as follows:
| 1918 | $3,972.63 |
| 1919 | 7,940.86 |
| 1920 | 14,472.82 |
| 1922 | 17,945.12 |
| 1923 | 28,940.53 |
*1250 These amounts represent the excess of the total livestock commissions received, and other income received during the several years, over the total expenditures, plus patronage dividends actually paid by the livestock commissions to patrons thereof during each year. The amount for 1918, which was returned to the income of the State Union, was included in the income taxable to the Farmers Exchange. None of these undistributed earnings were received by the Union.
The gross income, net income, and patronage dividends paid by the three commissions during the several years, in round numbers, and the percentage of dividends paid to net income, were as follows:
| 1918 | 1919 | 1920 | 1921 | 1922 | 1923 | |
| Gross income | $78,000 | $125,000 | $187,000 | $265,000 | $330,000 | $476,000 |
| Net income | 32,000 | 50,000 | 90,000 | 151,000 | 200,000 | 305,000 |
| Dividends distributed | 26,000 | 43,000 | 74,000 | 135,000 | 179,000 | 272,000 |
| Percentage | 81+% | 86+% | 82+% | 89+% | 89+% | 89+% |
In 1918 the Sioux City Commission operated at a loss of over $2,000 and its activities are not included in the above. The St. Joseph Commission began operating in August of 1918.
For the calendar year*1251 1918 there were returned to the income of the State Union and reflected in the deficiencies asserted against the *1062 Farmers Exchange dues received in that year by the State Union from its members in the amount of $34,117.92, and fees received in that year by the Union from its members in the amount of $10,639.
For the calendar taxable year 1919 the item of $38,746.98, returned to the income of the State Union from the Farmers Exchange and reflected in the deficiency asserted against the State Union, is an accumulated fund from the activities of the Farmers Exchange.
For the calendar taxable year 1919 the items of $38,952.40 and $8,340 returned to the income of the State Union and reflected in the deficiency asserted against the State Union, were dues and fees, respectively, received in that year by the State Union from its members.
The items of $48,980.62, $17,797.24, and $14,629.53 for the calendar taxable years 1920, 1922, and 1923, respectively, returned to the income of the State Union, and reflected in the deficiencies asserted against the State Union, were dues and fees received in those years by the State Union from its members.
OPINION.
MATTHEWS: The*1252 main issues for determination are (1) whether the Farmers Educational and Cooperative State Union of Nebraska is an exempt corporation under the provisions of the Revenue Acts of 1916, 1918, and 1921; (2) whether the Farmers Union State Exchange is an exempt corporation under the provisions of the Revenue Acts of 1916 and 1918, and, if not, (3) whether it is taxable on the undistributed savings of 1917 and 1918; and (4) whether the period of limitation for 1918 had expired prior to the date on which the notice of deficiency for that year was mailed.
If the State Union is an exempt corporation, that disposes of all issues raised in Docket Nos. 10596, 27194, and 31748, and some of the issues raised in Docket No. 18105. We will dispose of this issue first.
The State Union earnestly contends that it is entitled to exemption for the years involved under the following provisions of the Revenue Acts of 1916, 1918, and 1921:
Revenue Act of 1916:
SEC. 11. (a) That there shall not be taxed under this title any income received by any -
First. Labor, agricultural, or horticultural organization;
* * *
Eleventh. Farmers', fruit growers', or like association, organized and operated*1253 as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them.
Revenue Act of 1918:
*1063 SEC. 231. That the following organizations shall be exempt from taxation under this title -
(1) Labor, agricultural or horticultural organizations;
* * *
(11) Farmers', fruit growers', or like associations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them.
Revenue Act of 1921:
SEC. 231. That the following organizations shall be exempt from taxation under this title -
(1) Labor, agricultural, or horticultural organizations;
* * *
(11) Farmers', fruit growers', or like associations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them; or organized and*1254 operated as purchasing agents for the purpose of purchasing supplies and equipment for the use of members and turning over such supplies and equipment to such members at actual cost, plus necessary expenses.
The State Union is a division of the Farmers Educational and Cooperative Union of America, commonly called the National Farmers Union. It was duly chartered by that body and complied with the statutes of Nebraska governing the organization of cooperative societies, and qualified as a cooperative company under the laws of Nebraska on July 13, 1914. The pertinent provisions of the Nebraska statutes in force at that time are quoted in the margin. 1
*1255 *1064 In our opinion, the State Union is both an agricultural organization and a farmers' cooperative organization, under the provisions quoted above, and is exempt from income and profits tax.
Article 73 of Regulations 33, entitled "Labor, agricultural and horticultural organizations. -", provides in part:
Agricultural or horticultural organizations, which are exempt under this title, do not include those corporations engaged in growing agricultural or horticultural products, raising live stock or similar products for profit, but will include only those organizations which, having no net income inuring to the benefit of their members, are educational or instructive in character, and which have for their purpose the betterment of the conditions of those engaged in these pursuits, the improvement of the grade of their products, and the encouragement and promotion of those industries to a higher degree of efficiency. (T.D. 2090.)
The same provisions appear in all the later regulations.
The State Union was not engaged in growing agricultural products or raising livestock; it had no net income inuring to the benefit of its members; it was educational and instructive*1256 in character, and had for its purpose the betterment of the condition of the farmers of Nebraska, the improvement of the grade of their products, and the encouragement and promotion of agricultural industries to a higher degree of efficiency.
Its purposes, as set forth in its constitution, are set forth in our findings of fact. The facts also show how diligently and with what success it carried out the purposes for which it was organized.
One of the purposes stated is "to assist our members in buying and selling." This would result in the betterment of the condition of the farmer by eliminating the middleman's profits on the farm products sold and on the supplies purchased by the farmer. The cooperative purchasing of supplies in the larger market at Omaha offered the farmers savings in the purchase of their supplies. Hence the activities of the Exchange were started. The sale of their livestock in the large stockyard centers by their own organization offered the shippers the way to save for themselves a large part of the commissions charged by the old line commission houses. Hence the establishment of the livestock commissions.
Although the livestock commissions were*1257 operated and originally financed by the Union for its members, no part of the undistributed earnings of the commissions inured to the benefit of the Union.
If the question before us were whether the three livestock commissions are such cooperative sales agents as are exempt from tax under the statutes, they would meet the test prescribed. From about 82 to 90 percent of the net earnings of the livestock commissions was distributed to the patrons each year on a proportionate basis. The undistributed earnings of the livestock commissions *1065 were small in proportion to the business done and were certainly no more than were necessary to be reserved for the exigencies of the business. The business with nonmembers was negligible, and upon the nonmember patron becoming a member he received his patronage dividend. The retention of such a small proportion of the savings would not be sufficient to destroy the exempt status of a cooperative sales agent. The operation of the commissions by the Union did not have the effect of taking the Union out of the exempt class.
The Farmers Exchange was incorporated under the statutes of Nebraska governing cooperative corporations. The*1258 stock of the Exchange was held by the Union as trustee for its members. No part of the net income of the Exchange inured or could inure to the benefit of the stockholder. It was not conducted for profit, but for the benefit of the members of the State Union. We are of the opinion that the holding of the stock of the Farmers Exchange by the Union, as trustee for the members of the Union, is not sufficient to destroy its classification as an agricultural organization, within the meaning of the several revenue acts.
But if it should be thought that because of these activities the State Union is not an agricultural organization within the meaning of the statute, it is clearly a farmers' cooperative association, which is exempt from tax under subdivision (11). It is a cooperative organization under the Nebraska statutes. No part of the savings of the Farmers Exchange inured to it as a stockholder. It held the stock of the Exchange and operated livestock commissions for the benefit of its members. The greater part of the savings of the livestock commissions was returned to the shippers as patronage dividends, the amount retained being no more than a necessary reserve for the exigencies*1259 of the business of the commissions, and such amount did not inure to the benefit of the Union.
We hold, therefore, that the State Union is exempt from income tax under the provisions of the Revenue Acts of 1916, 1918, and 1921. This disposes of all issues raised with respect to the years 1919, 1920, 1921, 1922, and 1923. It also disposes of the issues raised by the Farmers Exchange for 1917 and 1918 with respect to including in income taxable to the Exchange, the fees, dues, and undistributed earnings of the livestock commissions.
We shall next consider whether the Farmers Exchange is an exempt corporation.
The Farmers Exchange, as stated above, was organized under the Cooperative Statutes of Nebraska. It was both a cooperative sales agent and a cooperative purchasing agent for the members of the Union. The revenue acts in effect in the years 1917 and 1918 do not specifically mention farmers' purchasing agents as being in the *1066 exempt class. Petitioner argues that the inclusion of purchasing agents in the Revenue Act of 1921 in no way indicates that farmer purchasing organizations were not exempt from tax under prior acts and that the inclusion of such organizations*1260 in the 1921 Act was the adaptation of the law specifically to a practice already sanctioned.
The Board heretofore had occasion to consider arguments of this nature in Riverdale Cooperative Creamery Assn.,18 B.T.A. 1159">18 B.T.A. 1159; affd., 48 Fed.(2d) 711, and held contrary to petitioner's contention. On the authority of this decision we hold, therefore, that the Farmers Exchange is not an exempt corporation under the Revenue Acts of 1916 and 1918.
Although cooperative purchasing agencies are not exempt from tax and are required to file returns under the Revenue Acts of 1916 and 1918, the regulations under such acts permit a deduction of the amount of patronage dividends paid. It has also been held that a deduction is allowable where there is a definite liability to make such payment, Home Builders Shipping Assn.,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 Cooperative Assn.,13 B.T.A. 969">13 B.T.A. 969. The question then is whether the Farmers Exchange was under such a definite liability to pay the savings for 1917 and 1918 to its patrons as to permit their deduction.
*1261 The Exchange was a nonprofit organization conducted for the benefit of the members of the State Union. The bylaws of the Exchange, if any were ever adopted, were not introduced in evidence. The provision in the articles of incorporation that the bylaws shall provide for the distribution of earnings in whole or in part, on the basis of the business done with the members of the Union, may be considered to have the same force as would a provision to like effect in the bylaws. We are of the opinion, however, that the charter provision alone cannot be construed as creating in each year a definite liability to pay the entire savings of that year, or any particular part thereof, to the patrons. In order to make the liability sufficiently definite to permit a deduction of any amount, there should have been some declaration or act on the part of the directors with respect to payment of patronage dividends. In the absence of evidence that any such declaration or act was made or done, we hold that the Exchange is not entitled to any deduction from income for 1917 and 1918 on account of patronage dividends which were not declared or paid.
We turn now to the question of the expiration*1262 of the period of limitation on the assessment and collection of the deficiency determined for 1918.
The period for assessment and collection of taxes for 1918 started to run on June 16, 1919, when the tax return was filed, and under *1067 the provisions of section 250(d) of the Revenue Act of 1918 the respondent had five years from that date to assess and collect any additional tax found to be due. On January 15, 1923, the Farmers Exchange executed an unlimited waiver extending the period for the assessment and collection of taxes for 1917 and 1918, "irrespective of any period of limitations", and under date of June 9, 1924, an income and profits tax waiver was executed by the Farmers Exchange which relates to taxes for 1918 and which recites: "This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned."
It is the petitioner's position that the five-year period prescribed by the*1263 statute would have expired on June 16, 1924, if no waivers had been executed, and that the waiver dated June 9, 1924, extended the statutory period for one year, or until June 16, 1925. The respondent is contending that the unlimited waiver dated January 15, 1923, covered the year 1918 as well as 1917 and that the respondent had a reasonable time within which to act thereunder. The notice of deficiency for 1918 was mailed on May 4, 1926. The respondent argues that the period of 22 months and 18 days which elapsed between the expiration of the original statutory period and the mailing of the notice of deficiency amounts to a reasonable time and that the respondent's determination is timely, in view of the execution of the above described waivers.
If the second waiver had not been executed it would be necessary to decide only whether the notice of deficiency was mailed prior to the expiration of the statutory period of limitation as extended by the unlimited waiver. An unlimited waiver does not suspend the running of the statute forever, but only for a reasonable time or until termination by either party upon reasonable notice. As stated, the original statutory period of limitation*1264 for the assessment and collection of taxes for 1918 would have expired on June 16, 1924, which is five years after the return was filed. But prior thereto, on June 9, 1924, the second waiver was executed which extended the period for one year after the expiration of the statutory period of limitation, "or the statutory period of limitation as extended by any waivers already on file with the Bureau." The only waiver already on file being the unlimited waiver, the question arises whether that unlimited waiver may be considered to have given the respondent a reasonable time after the expiration of the statutory period to assess and collect, to which may be added the additional year granted by the second waiver. We are of the opinion that this *1068 question must be answered in the negative. The two waivers must be construed together. Stern Bros. & Co.,17 B.T.A. 848">17 B.T.A. 848, affd., 51 Fed.(2d) 1042. To say that the first waiver remained in effect after the execution of the second waiver, under the circumstances set out, would be equivalent to brushing aside the meaning of the latter waiver. It must have been intended that the second waiver should be substituted*1265 for the unlimited waiver. Its execution on June 9, 1924, before the unlimited waiver became effective to extend the statutory period, was sufficient to constitute a reasonable notice that the unlimited waiver was terminated as of that date. Ethel D. Co.,27 B.T.A. 25">27 B.T.A. 25; affd., 70 Fed.(2d) 761. We hold, therefore, that the statute of limitations governing the assessment and collection of taxes for 1918 had expired prior to the mailing of the notice of deficiency on May 4, 1926, and the respondent was barred from making any further determination with respect to petitioner's tax liability for that year.
Reviewed by the Board.
Judgment will be entered under Rule 50 in Docket No. 18105. Judgment of no deficiency will be entered in Docket Nos. 10596, 27194, and 31748.
Footnotes
1. Rejected portion of claim for abatement of $20,108.09. ↩
1. Revised statutes of the State of Nebraska (1913) Part II, ch. 14, Art. XV -
733 Sec. 185 "Co-operative company" defined. - For the purpose of this article, the words "co-operative company, corporation or association" are defined to mean a company, corporation or association which authorizes the distribution of its earnings in part, or wholly, on the basis of, or in proportion to the amount of property bought from or sold to members, or of labor performed, or other service rendered to the corporation: Provided, nothing in this article shall be construed as in any way conflicting with or repealing any law relating to building and loan associations or installment investment companies. (1911 p. 195; Ann. 4271; Comp. 2241a.)
734 Sec. 186. How incorporated. - Any number of persons, not less than twenty-five, may be associated and incorporated for the co-operative transaction of any lawful business, including the construction of canals, railways, irrigation ditches, bridges, and other works of internal improvements. (1911 p. 196; Ann. 4272; Comp. 2241b.)
735. Sec. 187. Corporate powers. - Every co-operative corporation as such has power:
First - To have succession by its corporate name;
Second - to sue and to be sued, to complain and defend in courts of law and equity;
Third - to make and to use a common seal, and alter same at pleasure;
Fourth - to hold personal estate, and all such real estate as many be necessary for the legitimate business of the corporation;
Fifth - to regulate and limit the right of stockholders to transfer their stock;
Sixth - to appoint such subordinate officers and agents as the business of the corporation shall require, and to allow them suitable compensation therefor;
Seventh - to make by-laws for the management of its affairs, and to provide therein the terms and limitations of stock ownership, and for the distribution of its earnings. (1911 p. 196; Ann. 4273; Comp. 2241c.)
736 Sec. 188. Powers vested without being mentioned.↩ - The powers enumerated in the preceding section shall vest in every co-operative corporation in this state whether the same be formed without, or by legislative enactment, although they may not be specified in its charter or in its articles of association. (1911 p. 196; Ann. 4273; Comp. 2241c.)