Hills Mercantile Co. v. Commissioner

*114 In this proceeding the petitioner contends that the respondent, in determining deficiencies in the amounts of $2,679.07 and $105.04 in income taxes for the fiscal years ended June 30, 1920, and June 30, 1923, respectively, erred in denying it tax exemption under section 231(11) of the Revenue Acts of 1918 and 1921.

Counsel for both parties have agreed and stipulated that, if the Board decides that petitioner is not exempt from taxation for the *115 years in controversy, the correct deficiency is $1,143.17 for the fiscal year ended June 30, 1920, and no deficiency for the fiscal year ended June 30, 1923. *2171 The petitioner has abandoned the other issues raised by the pleadings.

FINDINGS OF FACT.

The petitioner, whose principal place of business is at Hills, Rock County, Minn., was incorporated on or about January 24, 1903, under the laws of that State. Its articles of incorporation as amended March 11, 1918, provide in part as follows:

ARTICLE II.

The general nature of said corporation shall be the buying, selling, receiving, storing, forwarding and handling of wheat and other cereals, and products thereof and also farm products of every description; also flour, feed and millstuffs, salt, fuel, implements, machinery, binder twine, lumber and building material of all descriptions; buying, feeding, shipping and selling of livestock. To purchase and retain, sell, convey, lease, mortgage, encumber, or improve such real estate, buildings and personal property as the business of the corporation may require within the state of Minnesota.

* * *

ARTICLE IV.

The amount of the capital stock of this corporation shall be $30,000.00 and the same shall be divided into 1200 shares of the par value of $25.00 each. No share shall be issued for less than its par value and no member*2172 shall own shares of greater par value than $1,000.00 or be entitled to more than one vote. No stock in said corporation shall be issued at any time except on application to and approval of the Board of Directors; and no member shall transfer any of his stock to any other person without the express consent and approval of the Board of Directors.

ARTICLE V.

The indebtedness of the incorporation shall at no time exceed the amount of stock issued.

* * *

ARTICLE VII.

The management of said corporation shall be vested in a Board of Directors consisting of nine members, who shall be elected by the stockholders at the regular annual meeting * * *. The Board of Directors immediately after their election shall annually elect from their own number a president, a vicepresident, a secretary and a treasurer * * *. The corporation may adopt such by-laws as it may see fit, not inconsistent with law, * * *. The Board of Directors shall have full power and authority from time to time to adopt such rules and regulations as they may deem necessary for the proper conduct of the business mand for the general discharge of their respective offices by the officers of the corporation.

*2173 *116 The petitioner's by-laws are not materially different from its articles of incorporation except that they contain the following provision for the distribution of earnings:

ARTICLE IV. SECTION IV.

The earnings of the corporation shall be used and distributed annually as follows: There shall be a dividend declared and paid on the stock from the earnings for the preceding year of not exceeding eight per cent on the par value of the stock. Any earnings above that amount shall be placed in a surplus fund and used in the corporation business or the same may be distributed among the stockholders in proportion to the amount of grain or produce of any kind sold by the stockholders to the corporation during the preceding year, as may be determined by the board of managers. Not to exceed two per cent of the net earnings of the corporation may be set aside by the board of managers each year to be used for advertising and other incidental general educational work for the benefit of the corporation.

Since its organization the petitioner's business has been that of a farmers' elevator company, whose operations have been conducted in accordance with its articles of incorporation*2174 and by-laws. Prior to 1918 it rented an elevator, but in that year it built its own elevator. The petitioner's patrons haul their grain to the elevator and have the option of having the petitioner ship and sell the grain for them and return to them the proceeds less freight and shipping charges and a service charge of 2 cents per bushel; or of selling their grain to the petitioner at the market price (usually at Minneapolis) less freight and shipping charges and the service charge of 2 cents per bushel. The charge of 2 cents per bushel on all grain handled is made by the petitioner to enable it to pay all of its expenses and, if possible, dividends not in excess of 8 per cent of the par value of its capital stock. During is lifetime only six dividends, at a rate of 8 per cent or less, have been paid. The petitioner's operations have not been primarily for profit, but rather for the benefit of its stockholders and patrons.

The petitioner has issued $14,500 par value of its capital stock and has 123 stockholders, 95 per cent of whom are farmers who constitute 95 per cent of the petitioner's patrons. There has been practically no change in petitioner's stockholders.

At the*2175 request of petitioner's stockholders, and solely for their convenience, the petitioner has followed the practice of purchasing a small amount of coal and cement for sale to its patrons at cost to petitioner plus a small charge to pay the expense of handling the same. The patrons found it convenient, upon delivering grain at the elevator, to haul bags of cement, if needed, or their supply of coal, on their return trip to their farms.

The fiscal year ended June 30, 1920, was an unusually profitable year for the petitioner and during that year its sales, gross profits, and net income were as follows:

OPINION.

*117 TRUSSELL: The parties hereto having stipulated that there is no deficiency for the fiscal year ended June 30, 1923, the*2176 only issue is whether the petitioner is exempt from taxation for its fiscal year ended June 30, 1920, under the Revenue Act of 1918, which provides:

SEC. 231. That the following organizations shall be exempt from taxation under this title -

* * *

(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.

Since its organization, the petitioner's business has been that of a farmers' elevator company, and it contends that such business has been conducted upon a cooperative basis, that is, for the benefit of its stockholders and its few nonstockholder patrons. However, the petitioner has not confined its operations to that of "sales agent for the purpose of marketing the products of members" during the year in question, but it has also purchased grain from its patrons and then sold such grain on its own account. No definite showing has been made as to the amount of grain purchased and sold by petitioner during that year, but the stipulated figures*2177 as to gross sales and profits clearly indicate that petitioner derived large gross profits from the purchase and sale of grain as compared with the gross profit of 2 cents per bushel charged to the patrons on all grain handled by petitioner. Upon the facts as established, it is our conclusion that the petitioner purchased and sold more grain on its own account than it sold as agent for the purpose of marketing the patrons' grain and turning back to them the proceeds of the sales, less selling expenses, on the basis of the quantity of grain furnished by them.

The petitioner's by-laws provide that any earnings in excess of the amount used for dividends may be added to surplus and used in *118 the business or may be distributed among the stockholders on the basis of the amount of produce sold by them to the petitioner. No showing has been made as to the distribution, if any, of the petitioner's net profits for the year in question.

We have held, heretofore, that an organization claiming tax exemption under section 231(11) of the revenue acts must prove that its operations come within the exempting provisions and that if not, for one reason or another, exemption must be*2178 denied. See ; ; ; . We are of the opinion that during the fiscal year ended June 30, 1920, the petitioner's business was not operated in such a manner as to bring it within the provisions of section 231(11) of the Revenue Act of 1918, and that it is not entitled to tax exemption for that year.

Pursuant to the stipulation of the parties hereto, there is no deficiency for the fiscal year ended June 30, 1923, and the deficiency for the fiscal year ended June 30, 1920, is in the amount of $1,143.17.

Judgment will be entered for the petitioner as to the fiscal year ended June 30, 1923. Judgment will be entered for the respondent in the amount of $1,143.17 for the fiscal year ended June 30, 1920.