Full opinion text
GRAVEN, District Judge. Suit by a taxpayer for refund of federal income, excess profits and declared value excess profits taxes and interest thereon paid pursuant to a deficiency assessment by the defendant Collector against the taxpayer for the fiscal year of the taxpayer ending October 31st, 1944, involving the question of the exclusion of a patronage dividend from the taxable income of the taxpayer. This action was originally brought in the Southern District of Iowa. It was transferred to this District under the provisions of Section 1404(a) of the Revised Judicial Code, 28 U.S.C.A. Plaintiff, hereinafter referred to as taxpayer, is a farmers cooperative association whose place of business is at Greenfield in Adair County, Iowa. The taxpayer was originally organized as a stock corporation under the chapter of the Iowa Code relating in general to the incorporation of organizations for pecuniary profit and it continued under that form of organization until February 8th,' 1944. On February 8th, 1944, at a stockholders’ meeting the taxpayer reorganized * as a nonstock agricultural cooperative under Section 8512.43 of Chapter 390.1 of the Code of Iowa 1939, presently Chapter 499 of the Code of Iowa 1946, I.C.A. § 499.43. The taxpayer was both an agricultural marketing and agricultural purchasing cooperative organization handling livestock, grain, farm supplies and equipment, and similar merchandise. At the time of its reorganization provision was made for the exchange of membership and interest certificates for all outstanding shares of stock. Prior to October 31st, 1944, this plan was carried out, so that on October 31st, 1944, the taxpayer had no capital stock outstanding, and there were on that date no obligations existing or claimed arising out of the reorganization, either to any stockholder or to any other person. On November 3d, 1944, three days after the close of taxpayer’s fiscal year, an accountant employed by the taxpayer completed his audit of taxpayer’s books, and at a special directors’ meeting held on that date the following motion was adopted: “Motion by Sieg seconded by Shirk that a deferred dividend be set up to the members at the rate of a cent a bushel on grain eight percent on merchandise and six-tenths of one percent on livestock. Motion carried.” Though the taxpayer reports on the accrual basis no action had been taken by its directors prior to November 3d, 1944, with respect to the declaration or allocation of any dividends for taxpayer’s fiscal year ending October 31st, 1944. . The deferred dividend provided by taxpayer’s board of directors amounted to $5913.14 and was set up on taxpayer’s books as “Patronage Dividend Payable.” Each member’s share was computed and credited to his individual account on the patronage ledger of the taxpayer as of November 4th, 1944. In computing the dividend of the members, they were given credit for the amount of.business done with the taxpayer for the period from February 8th, 1944, to October 31st, 1944, which was the period during which the taxpayer was operating under the-Iowa laws relating to cooperatives. In addition, they were given credit for the amount of business done with the taxpayer during the period from November 1st, 1943, to February 8th, 1944, when they were stockholders of the taxpayer while it was operating as a stock corporation. A portion of the taxpayer’s profit for its fiscal year 1943-1944 came from transactions with nonmembers. It is the claim of the taxpayer that it withheld from the patronage dividend an amount equal to the profits made from transactions with nonmembers, so that no profits from business transacted with nonmembers was included in the dividend. The members were informed of the credits to their accounts at the annual membership meeting in February, 1945. Pursuant to appropriate resolutions of taxpayer’s board of directors dated January 5th, 1946, and November 6th, 1946, 60 percent of the deferred dividend was paid to the members on January 31st, 1946, and the balance was paid on February 17th, 1947. The taxpayer’s earnings before taxes for the year ending October 31st, 1944, amounted to $16,372i53.. On January 16th, 1945, the taxpayer paid corporation income, excess profits and declared value excess profits taxes on its taxable income for its fiscal year ending October 31st, 1944, in the amount $2619.21. In computing its taxable income the taxpayer excluded therefrom the dividend credited to its members on November 4th, 1944, in the sum of $5913.14. The Commissioner disallowed this exclusion and on January 2d, 1947, imposed a deficiency assessment against the taxpayer in the amount of $4627.25. The taxpayer paid the • deficiency. On'November 20th, 1947, the taxpayer filed a. claim for refund with the Commissioner. No action was taken by the Commissioner during the ensuing six months’ period. On June 18th, 1948, the taxpayer brought this action to recover $4324.96. The difference between the amount of the deficiency assessment and the amount sought to be recovered is occasioned by adjustment of minor items. Alb of the $4324.96 sought to be recovered by the taxpayer in this action arises from additional taxes assessed by the Commissioner because of the denial by him of the taxpayer’s claim for exclusion from its income of the patronage dividend in question. Since taxpayer transacted business with both members and nonmembers but only allocated patronage dividends to member patrons, it was not entitled to and does not claim the statutory exemption accorded some farmer cooperatives by Section 101 (12) of the Internal Revenue Code, 26 U.S. C.Á. § 101(12). The controversy between the defendant Collector and the taxpayer is as to whether the taxpayer could exclude from its taxable income the amount allocated and subsequently paid as a patronage dividend. The said patronage dividend was derived from the earnings of the taxpayer for the period from November 1st, 1943, to October 31st, 1944. The defendant Collector contends that the taxpayer could -not legally • include in the patronage dividend any amount derived from business transacted with the present members prior to February 8th, 1944. In support of this position the Collector points out that merely being a stockholder in the original stock corporation does not confer on that stockholder, who subsequently becomes a member of the reorganized successor, cooperative corporation, the status of a member toward the income earned by the organization while it was a stock corporation. In other words, it is the claim of the defendant Collector that membership .in the cooperative has no retroactive effect for any period prior to the time such membership was obtained and so far as the present members are concerned the income of the stock corporation for the period November 1st, 1943, to February 8th, 1944, was derived from transactions with nonmembers. The Collector further argues that during the period the taxpayer functioned as a stock corporation it wás under no obligation either by statute or its articles of incorporation to pay any of its stockholders any patronage dividends. The taxpayer and the Collector are also in disagreement as to the exclusion of that amount of the dividend credited to the members based upon business transacted by the members during the period the taxpayer functioned as a cooperative from February 8th, 1944, to the end of its fiscal year on October 31st, 1944. It has been heretofore noted that the corporate action of the taxpayer relating to the declaration of the patronage dividend in question was not taken until after the end of the taxpayer’s fiscal year and that the patronage dividend was not credited to the member patrons until after the end of such fiscal year. It is the contention of the taxpayer that no corporate action formally declaring such patronage dividend was necessary to make it excludable for federal income tax purposes since under the applicable Iowa statute and' its own articles of incorporation the taxpayer was obligated to. allocate patronage dividends to its member patrons. The Collector’s position on this point is that neither the applicable state statutes nor taxpayer’s articles of incorporation created an obligation on the part of the taxpayer to pay of to allocate to its member patrons the patronage dividend in question and that until the board of directors acted there was neither an obligation on the part of the taxpayer to allocate a patronage dividend nor a right in its'member patrons to receive such a dividend. In addition, the Collector claims that the statutes and articles vested such discretion in the taxpayer’s board of directors that they had the right to declare or not to declare distributions of earnings to members, as they saw fit, thus further negativing any preexisting obligation to allocate its earnings to 'member patrons which taxpayer might claim to have. The determination of the questions involved in the present case would seem to require a study of considerable of the history and background of farmer cooperatives and the numerous statutory provisions relating to them. The growth of farmer cooperatives throughout the United States has been very rapid, and it is estimated that today from one-third to one-half of the nation’s farmers are cooperative members. Voorhis, Recent Trends in Urban Cooperative Development, 13' Law and Contemporary Problems 458, Duke University (1948). In 1913 there were 2,988 farmer marketing cooperative associations and 111 farmer purchasing cooperatives. Two years later, in 1915, these had increased to 5,149 farmer marketing cooperatives with a membership of 591,683 and 275 farmer purchasing cooperatives with 59,503 members. By the years 1943-1944 there were 7,522 farmer marketing cooperatives with 2,730,000 members and 2,778 farmer purchasing cooperatives with 1,520,000 members, or a total membership of 4,250,000. In 1913 farmer marketing cooperatives did an estimated $304,385.00 business while farmer purchasing cooperatives did $5,928.00 business. This had. increased in 1943-1944 to $4,430,000,000.00 for farmer marketing and $730,000,000.00 for farmer purchasing cooperatives. House Report No. 1888, 79th Cong., 2nd Sess. (April 7th, 1946) Competition of Cooperatives with Other Forms of Business Enterprise, and authorities cited therein. It has been estimated that by 1947 there were approximately 1,040 farm cooperatives in Iowa, with about the same number of non-farm cooperatives, most of the latter being consumer cooperatives. See Note 34 Iowa Law Review 340, 341 (1948). Farmer co-■ operatives have been and are of increasing economic importance. It is of interest to note that a case book dealing with cooperatives and their organizational, functional, and legal problems is now available for a law school course. Stedman, Bunn's Cases and Materials on Cooperative Associations (2nd ed., 1942). Cooperatives in general and their relation to the tax laws in particular have been and are subjects of wide interest and about which much has been written. For an especially valuable discussion dealing with various phases of cooperatives and cooperative law see 13 Law and Contemporary Problems 391-551, Duke University (1948). For discussions of state statutes and Tax Commission regulations pertaining to farmers’ cooperatives under the Iowa income and property tax laws see Notes, 33 Iowa Law Review 123 (1947), and 34 Iowa Law Review 340 (1949). For rulings on certain of the requirements which an Iowa cooperative must comply with, see [1944] Opinions of the Iowa Attorney General, p. 40; [1942] Opinions of the Iowa Attorney General, p. 65. For an extensive discussion of the arguments for and against the taxation of cooperative receipts see, Sowards, Should Cooperatives Pay Federal Income Taxes?, 19 Tennessee Law Review 908 (1947). See also,.House Report No. 1888, supra; Bradley, Taxation of Cooperatives, Harvard Business Review 576 (Autumn, 1947); Packel, The Law of The Organization and Operation of Cooperatives (2nd ed. 1947), reviewed by Professor L. K. Tunks in 33 Iowa Law Review 437 (1948); Packel, Cooperatives and the Income Tax, 90 University of Pennsylvania Law Review 137 (1941) ; Note, 34 Virginia Law Review 314 (1948) and Comment, 50 Harvard Law Review 1321 (1937). The writers of the Virginia and Harvard Law Review articles cited above Suggest that in case ex-elusion of patronage dividends was denied a cooperative, it could still avoid being taxed on its earnings by charging patrons less than cost for its products or paying more than the market price to producers so that there would be a deficit at the end of the year rather than a surplus. Operating capital which would offset this deficit .could allegedly be secured by requiring capital investments from patrons on the basis of their patronage. There are a number of A.L.R. annotations on the subject of cooperatives. See annotations to the cases of Phez Co. v. Salem Fruit Union, 1921, 103 Or. 514, 201 P. 222, 205 P. 970, 25 A.L.R. 1090; Tobacco Growers’ Co-operative Ass’n v. Jones, 1923, 185 N.C. 265, 117 S.E. 174, 33 A.L.R. 231; Tobacco Growers’ Co-operative Ass’n v. Harvey & Son Co., 1925, 189 N.C. 494, 127 S.E. 545, 47 A.L.R. 928; Watertown Milk Producers Co-operative Ass’n v. Van Camp Packing Co., 1929, 199 Wis. 379, 225 N.W. 209, 226 N.W. 378, 77 A.L.R. 391; Neith Co-operative Dairy Products Ass’n v. National Cheese Producers’ Federation, 1934, 217 Wis. 202, 257 N.W. 624, 98 A.L.R. 1403; Yakima Fruit Growers’ Ass’n v. Henneford, 1935, 182 Wash. 437, 47 P.2d 831, 100 A.L.R. 435; Tigner v. State of Texas, 1940, 310 U.S. 141, 60 S.Ct. 879, 84 L.Ed. 1124, 130 A.L.R. 1321. It seems apparent that some of the public confuse the question of the so-called “cooperative exemption” from federal income tax with the question of the exclusion from a cooperative’s gross income of what are commonly known as “patronage dividends” for federal income tax purposes. Congress has made specific statutory provision for the exemption from federal income tax of those cooperatives which meet certain specified requirements. However, there is no federal statute which specifically authorizes the exclusion of patronage dividends for federal income tax purposes. Such exclusion has been permitted by Treasury Department rulings and by decisions of federal courts other than the United States Supreme Court. The. United States Supreme Court has never, passed upon the legality of excluding patronage dividends for federal income tax purposes. While the matter of the so-called “cooperative exemption” is dissimilar from the matter of the exclusion of patronage dividends by cooperatives for federal income tax purposes, yet the statutes, rulings,' and decisions relating to the so-called “cooperative tax exemption” do throw light' on questions having to do with patronage dividends. The so-called’ cooperative- exemption from federal income .tax, which is only extended to those cooperatives meeting certain requirements, has been included in one form or another in all the federal' revenue acts passed since the adoption of the Sixteenth Amendment. Section II G(a) of the first Federal Revenue Act of 1913, 38 Stat. 172, exempted from income tax agricultural and horticultural cooperative marketing associations and Article 92, Regulations 33 promulgated under the 191-3 Act provided for the exemption of cooperative dairies meeting certain standards'. The Treasury Regulations of- the Revenue Acts' of 1916-1918 gave rather liberal interpretations to the less specific terms, of the Revenue Acts for those years in exempting from income tax those farmers’ and fruit growers’ marketing associations which could show that they had no net income upon, their own account and that the entire proceeds of their sales, lqss selling expenses, were returned to their members upon the basis of the quantity of products furnished by them. This was in line with recognized practice since the function of a treasury regulation is to consistently and reasonably carry into ef•fect the will of Congress as generally, expressed but not explicitly stated in The statute. Manhattan General Equipment Co. v. Commissioner, 1936, 297 U.S. 129, 56 S.Ct. 397, 80 L.Ed. 528, rehearing denied 297 U.S. 728, 56 S.Ct. 587, 80 L.Ed. 1010. See also Korth v. Mountain City Copper Co., 10 Cir., 1949, 174 F.2d 295. The Revenue Act of 1921, Section 231 (11), 42 Stat. 253, contained provisions similar to the 1918 Act, 40 Stat. 1057 et seq., but in addition specifically exempted farmers’ purchasing cooperatives from income tax. The Treasury Regulations promulgated under the 1921 and 1924 Acts further liberalized the provisions of the earlier regulations by providing that (a) the maintenance of reasonable reserves for depreciation or possible loss, or a sinking fund, or surplus to provide for the erection of buildings or facilities required in the business, or for the purchase and installation of machinery and equipment, or to retire indebtedness would not destroy the exemption, and (b) farmer cooperatives would not lose their exemption by virtue of having capital stock upon which they paid á dividend not exceeding the legal rate, or 8 percent per annum, nor (c) because they inarketed the products of nonmembers, provided the value of the products marketed for nonmembers did not exceed the value of products marketed for members. Section 231(11), Revenue Act of 1924, 43 Stat. 282, was substantially the same as Section 231(11) of the 1921 Act, and Section 231 (12) of the Revenue Act of 1926, 44 Stat. 40, followed largely the liberal regulations promulgated under the 1924 Act. The corresponding provisions in the Revenue Acts and the Treasury Regulations down to the present day have been substantially the same. Section 101(12) of the present Internal Revenue Code, 53 Stat. 4, 33, 26 U.S.C.A. § 101(12),' establishes the requirements for tax exemption of cooperatives for federal income tax purposes as follows: 1. They must be organized by farmers on a cooperative basis. 2. They must operate as a marketing ■or purchasing, agency on a cost basis, ultimately turning back all net proceeds to member and non-member patrons, 3. Substantially all stock except nonvoting, ' nonprofit-sharing preferred stock must be owned by producers or purchaser member patrons. 4. Dividends may' not exceed 8 percent or the legal rate in the state of incorporation, whichever is greater. 5. Only reserves required by state law, or reasonable reserves for a necessary purpose may be accumulated. 6. Neither the cooperative nor its member patrons may gain a discriminatory advantage on non-member business. 7. Non-member business must not exceed member business and purchasing cooperatives are limited in their purchases for non-member nonproducer patrons to 15 percent of their total business. Section 29.101 (12) — 1 as amended by T. D. 5458, June 15th, 1945, is the applicable Treasury Regulation and among other things retains the provision limiting this exemption to farmer cooperatives, for subsection (d) provides that, “Cooperative organizations engaged in occupations dissimilar from those of farmers, fruit growers, and the like, such as marketing building materials, are not exempt.” The association must be organized and operated in the prescribed manner and for the purposes specified to be tax exempt. Burr Creamery Corp. v. Commissioner, 1931, 23 B.T.A. 1007, affirmed 9 Cir., 1932, 62 F.2d 407, certiorari denied, 1933, 289 U.S. 730, 53 S.Ct. 527, 77 L.Ed. 1479; Producers’ Creamery Co. v. United States, 5 Cir., 1932, 55 F.2d 104; Riverdale Cooperative Creamery Ass’n v. Commissioner, 9 Cir., 1931, 48 F.2d 711. However, if the cooperative is organized in such a way that it can meet the requirements of the statute in regard to equality of treatment between member and non-member patrons, the presence of additional charter powers will not cause the cooperative to lose its exemption. I.T.1914, C.B. III-1 (1924) 287; S.M. 2286, C.B. III-2 (1924) 236. In Fruit Growers’ Supply Co. v. Commissioner, 1930, 21 B.T.A. 315, affirmed 9 Cir., 1932, 56 F.2d 90, page 91, the court stated: “It is conceded that the corporate powers of the petitioner are a great deal broader than those indicated in the statute, but it is correctly contended that, where the organization actually operated as a purchasing agent for the purposes defined in the statute, it is entitled to exemption, notwithstanding the fact that its powers exceeded those found in the statute (cit.).” The mere fact that a farmer cooperative is organized under state cooperative statutes is not sufficient in and of itself to bring such organization within federal statutes exempting farmer cooperatives from taxation. Farmers Union Co-operative Co. v. Commissioner, 1935, 33 B.T.A. 225, affirmed 8 Cir., 1937, 90 F.2d 488. And where the cooperative discriminates between member and non-member patrons in the allocation or distribution of its earnings the exemption will be denied. Fertile Co-operative Dairy Ass’n v. Huston, 8 Cir., 1941, 119 F.2d 274; Farmers Cooperative Co. of Wahoo, Neb., v. United States, 1938, 23 F.Supp. 123, 87 Ct.Cl. 154; Producers’ Creamery Co. v. United States, supra; Council Bluffs Grape Growers Ass’n v. Commissioner, 1941, 44 B.T.A. 152; Farmers Mutual Cooperative Creamery v. Commissioner, 1935, 33 B.T.A. 117; Central Cooperative Oil Ass’n v. Commissioner, 1935, 32 B.T.A. 359; Cf. San Joaquin Valley Poultry Producers Ass’n v. Commissioner, 9 Cir., 1943, 136 F.2d 382. However, such discrimination is not violative of the rights of the patrons discriminated against. Mooney v. Farmers’ Mercantile & Elevator Co., 1917, 138 Minn. 199, 164 N.W. 804. The exemption may de denied because of inequality in the treatment of member patrons. Farmers Union Cooperative Oil Co. v. Commissioner, 1938, 38 B.T.A. 64. But in the case of a non-member patron a cooperative can apply on the payment for a share of .stock for the non-member patron or for his membership in the association that part of its earnings which accrue to the business of such a nonmember, and not lose its exemption. G.C.M. 11068, C. B. XII-1 (1933) 122; I.T. 2791, C.B. XIII-1 (1934) 77. A federated type of cooperative may be exempt if it qualifies otherwise, I.T. 2000, C.B. III-1 (1924) 290; S.M. 2595, C.B. III-2 (1924) 238; S.M. 2286, C. B. III-2 (1924) 236, but where a cooperative was composed in part of consumer cooperatives it was held non-exempt. Co-operative Central Exchange v. Commissioner, 1932, 27 B.T.A. 17. A cooperative association which paid a 10 percent dividend to its stockholders and which also accumulated large surplus and reserve accounts was denied an exempt status because of such actions in South Carolina Produce Ass’n v. Commissioner, 4 Cir., 1931, 50 F.2d 742. Transacting more than the prescribed volume of business with .nonmembers may also cause the cooperative to lose its exempt status. Farmers Union Co-operative Ass’n v. Commissioner (1941) 44 B.T.A. 34; Farmers Co-operative Grain & L. Ass’n v. Hildreth (1942) B.T.A.Memo., Docket No. 98281, P. H., par. 42,030. The Attorney General of Iowa has ruled that ordinary corporations for profit, cooperative associations not organized under .Chapter 390.1,. Code of Iowa 1939, Chapter 499 Code of Iowa 1946, I.C.A. § 499.1 et seq., partnerships, cities, towns, counties or townships are not eligible for member■ship in a cooperative association organized under Chapter 390.1, Code of Iowa 1939. [1946] Opinions of Iowa Attorney General, p. 21. There is no partial tax exemption. Farmers Union Cooperative Oil Ass’n v. Commissioner, supra. Either the cooperative meets the requirements for exemption as stated in the statute and regulations, or the most that it can claim is an exclusion from gross income of that part of its earnings allocated or distributed as a patronage dividend in accordance with the administrative practice of the Treasury Department and court decisions recognizing that. practice. It is important to note that to comply with the cooperative exemption statute the cooperative may not market products or purchase supplies for nonmembers in a greater amount than that marketed or purchased for members. And purchases made for persons who are neither members nor producers must not exceed fifteen percent of the value of all purchases. These requirements would seem to be among the most difficult for cooperatives to comply with, for Justice Brandéis in his dissent in Frost v. Corporation Commission, 1929, 278 U.S. 515, 528, page 545, 49 S.Ct. 235, page 246, 73 L.Ed. 483, stated that, “Experience has demonstrated * * * that doing business for nonmembers is .usually deemed essential to the success of a cooperative (cit.). More than five-sixths of all the farmers’ co-operative associations in the United States do business for nonmembers.” It might be noted here parenthetically that this differs greatly from the English situation, for a writer in an English publication stated that only two percent of the business of English cooperatives was conducted with nonmembers. Crichton, Cooperative Societies and the Income Tax, 38 Law Quarterly Review 48 (1922). Because of these and other statutory restrictions, “A surprisingly large number of farmer cooperatives have elected not to qualify for income tax exemption, but operate as taxpaying corporations. Apparently, farmers owning such cooperatives do not care to be fettered or restricted by the rigid limitations imposed by law on exempt cooperatives.” House Report No. 1888, supra at p. 16. Of the 10,300 agricultural cooperatives doing business in 1945 the Treasury Department reported that approximately 54 percent qualified for tax exemption. House Report No. 1888, supra at p. 19 fn. 3. The provision in Section 499.30 of the Code of Iowa 1946, I.C.A., set out infra, that patronage dividends can only be allocated to imembers would seem to further increase the difficulties of an Iowa cooperative attempting to attain an exempt status under Section 101(12) of the Internal Revenue Code, 26 U.S.C.A. § 101 (12), which, as stated, previously, requires equality of treatment between member and non-member patrons as one of the prerequisites for exemption. It would seem that an Iowa cooperative must specifically provide in its charter or its by-laws that no business will be transacted with nonmembers, or it must be able to prove that its business was conducted only with members, in order to meet the requirements both of Section 499.30 and Section 101(12). In Eugene Fruit Growers Ass’n v. Commissioner, 1938, 37 B.T.A. 993, the Board of Tax Appeals held that the fact that no provision was made for profit sharing by nonmembers did not affect petitioner’s exempt status where all of its contracts were with members. And apparently a nonmember patron would be unsuccessful in an attempt to force the cooperative to distribute a portion of its earnings to him, in the absence of any provision in the cooperative charter or by-laws allowing such distribution, for the court in Farmers Truck Ass’n v. Strawberry & Vegetable Auction, Inc., La.App., 1935, 163 So. 181, held that a non-member patron could not compel the association to pay him a patronage dividend where its organization papers» and procedure did not provide for doing so. Since apparently only a few Iowa cooperatives, notably organizations handling dairy products, do not transact business with at least some nonmembers, the major problem so far as the tax situation for federal income tax purposes of Iowa cooperatives is concerned would not seem to be one occasioned by the so-called cooperative exemption, but rather the matter of the excludability of patronage dividends from the gross income of those cooperatives claiming such exclusions under the administrative practice of the Treasury Department, and court decisions in accord therewith. One writer has made an interesting analysis in general terms of the relative advantages of farmer cooperatives exempt and non-exempt from federal corporate income-tax. Foley, 25 Taxes 197, 199 (1947). “Non-Exempt Exempt 1. Must file regular corporate income tax Form (1120). 1. Must obtain letter of exemption from Commissioner and then file Form 990 annually. 2. Must pay tax on such taxable income as: 2. Does not pay such taxes. a. Non-operating or extraneous income or ’ capital gains. a. No tax. b. Reserved operating earnings. b. No tax, but subject to limitations. c. All operating earnings not distributed in ■prescribed manner. c. Must allocate. operating savings to all patrons on a patronage basis. d. All earnings distributed as interest or dividends on capital stock. d. No tax, but subject to limitations. e. All earnings done for U. S. A. or its agencies, if not refunded to them. e. May distribute to all other patrons, or (sic) patronage basis. “Non-Exempt Exempt 3. Must purchase and affix excise stamps to certain documents. 3. Not required. 4. No Social Security preference. 4. Have very limited exemption on this tax. 5. Must maintain each year its legal .and corporate basis for excluding refunds from gross income. 5. Must adhere to requisites for exemption sat all time during subject year. 6. May pay any rate of dividend or interest on capital shares (but is taxed on amounts so paid or accrued) . 6. Rate is limited to state rate or 8%. 7. May have unlimited capital reserves (after income tax thereon is paid). 7. Must limit such reserves and allocate them to patrons on patronage basis. 8. Must maintain patronage records. 8. Must maintain patronage and allocation records. 9. Owned and controlled by anyone. 9. Must be substantially controlled by producer-patrons. 10. May operate in part commercially and in part cooperatively. 10. Must operate 100% cooperatively. 11. May engage in any type of business. 11. Must adhere to requisites for exemption. 12. May do business with anyone. 12. Must adhere to requisites for exemption. 13. Regular two-year carry-over and carry-back provision on losses. 13. More flexible treatment for losses of any year.” The foregoing brings sharply into focus the distinction between those cooperatives which enjoy the cooperative exemption from federal income tax and cooperatives which do not have such exemption but seek to exclude patronage dividends • from their taxable income for federal income tax purposes. It must be kept in mind that it is only those cooperatives which do not desire or are unable to meet the statutory requirements for cooperative exemption which are interested in availing for themselves patronage dividend exclusions. What constitutes a cooperative' and a determination of the class of organization to'which it belongs are matters which have given rise to some difficulty. While cooperatives today are generally incorporated, according to the latest available report about 10 percent of all farmer cooperatives are still unincorporated. A Statistical Handbook of Farmers Cooperatives, Farm Credit Administration, p. 8 (1939). The first incorporated cooperatives were formed as stock companies under statutes which had not been enacted specifically for the incorporation of cooperative organizations. Statutory provision for the organization of nonstock cooperatives was a later development. Nieman, Revolving Capital in Stock Cooperative Corporations, 13 Law and Contemporary Problems 393, 394, Duke University (1948). It was stated informally in argument in the present case that the largest distributors of patronage dividends in Iowa are not incorporated under the Iowa laws relating to cooperatives. An eminent jurist has said that any definition of a cooperative is not too practical because no one plan of organization is to be labeled as truly cooperative to the exclusion of others. Justice Brandéis in a dissenting opinion in Frost v. Corporation Commission, 1929, 278 U.S. 515, 546, 49 S.Ct. 235, 246, 73 L.Ed. 483, 499 commented on in 29 Columbia Law Review 833 (1929). It has been stated that an agricultural cooperative is a unique type of business organization operated for the mutual benefit of its members on the basis of their patronage with the association rather than because of any financial investment made therein, and that the primary purpose of a farmer coopérative is either to market the products of each producer patron and-to return to him as much as possible for the product he sells, or to provide each purchasing patron with the kind and quantity of farm Supplies needed at the lowest possible cost; or to accomplish both of these ‘ objectives. Paul, The Justifiability of The Policy of Exempting Farmers’ Marketing and Purchasing Cooperative Organizations from Federal Income Taxes, 29 Minnesota Law Review 343 (1945). Incorporated cooperatives on occasion have' been distinguished from the ordinary business corporation. • In Doss v. Farmers’ Union Cooperative Gin Co., 1935, 173 Okl. 70, page 71, 46 P.2d 950, page 951, the Court stated, “ * * * a co-operative corporation is a special and peculiar form of business enterprise which is not within the class of corporation designed purely and solely for money profit.” The Arkansas Supreme 'Court held that a cooperative corporation was not liable for the torts of its employees in Arkansas Valley Cooperative Co-op. Rural Electric Co. v. Elkins, 1940, 200 Ark. 883, 141 S.W.2d 538. It is indicated that cooperative corporations in general possess many of the essential, attributes of ordinary business corporations, the most noticeable differences being in the matters of voting power and the basis of distribution of their net earnings. ‘ In the cooperative corporation each member or stockholder has one vote regardless of the number of shares he may hold, whereas each share of stock is entitled to one vote in the ordinary business corporation. There are also, nonstock cooperatives which issue membership certificates to their members.' The business corporation usually divides part of its profits among its shareholders in proportion to the shares owned, while a cooperative corporation, after distributing part of its profits to shareholders in the form of a dividend not exceeding a rate generally fixed by statute, distributes the remainder in proportion to the volume of members’ purchases and sales. Because of a definite and limited return accruing to an investor in a cooperative, his status has been distinguished from that of a stockholder in a business corporation and analogized rather to that of a bondholder. Albrecht, Economic Theory of Consumers’ Cooperation, 191 Annals of the American Academy of Political and Social Science 17 (1937). See also, Justice Brandeis dissent in Frost v. Corporation Commission, supra. The United States Courts of Appeal for the Sixth and Seventh Circuits in the cases of In re Wisconsin Cooperative Milk Pool, D.C. E.D. Wis.1940, 35 F.Supp. 787, reversed 7 Cir., 1941, 119 F.2d 999, certiorari denied Wisconsin Coop. Milk Pool v. First Wisconsin Nat. Bank of Milwaukee, 314 U.S. 655, 62 S.Ct. 105, 86 L.Ed. 525, and Schuster v. Ohio Farmers’ Co-op. Milk Ass’n, 6 Cir., 1932, 61 F.2d 337, analogized a cooperative to an ordinary business corporation for purposes of determining the cooperative’s amenability to the Bankruptcy Act, 11 U.S.C.A. § 1 et seq. In Lake Region Packing Ass’n v. United States, 5 Cir., 1944, 146 F.2d 157, a cooperative was held to be subject to the provisions of the Social Security Act, 42 U.S.C.A. § 301 et seq., like an ordinary corporation. The ordinary business corporation is taxed on its income and its stockholders are also taxed on that portion of the corporate earnings distributed to them by way of dividends. Likewise, both the non-exempt stock cooperative and its stockholders are taxed on amounts which the non-exempt cooperative distributes as dividends on its capital stock. Sacred Heart Cooperative Mercantile Co. v. Commissioner, 1925, 2 B.T.A. 24; Farmers Cooperative Ass’n v. Commissioner, 1926, 5 B.T.A. 61; Trego County Cooperative Ass’n v. Commissioner, 1927, 6 B.T.A. 1275; S.M. 2595, C. B. III-2 (1924) 238. However, the nonexempt cooperative may escape taxation on amounts distributed as patronage dividends if certain conditions are met. See Treasury rulings and cases cited infra. It has been the policy in general of both Congress, and the legislatures of the different states to enact legislation favorable to the formation and growth of farmer cooperatives. Tigner v. State of Texas, 1940, 310 U.S. 141, 60 S.Ct. 879, 84 L.Ed. 1124, 130 A.L.R. 1321; Liberty Warehouse Co. v. Burley Tobacco Growers’ Co-operative Marketing Ass’n, 1928, 276 U.S. 71, 48 S.Ct. 291, 72 L.Ed. 473 (containing extensive citations of cases indicating general- state approval of a policy favoring rural cooperatives); Stark v. Brannan,, D.C. 1949, 82 F.Supp. 614, 617; Note, 22 Notre Dame Lawyer 413 (1947). Today every state has passed rather broad agricultural cooperative association acts. For a collection of the state statutes see Jensen, The Bill of Rights of U.S. Cooperative Agriculture, 20 Rocky Mountain Law Review 3, 13 fn. 29 (1948). A distinction should be noted between “farmer cooperatives” and , “consumer cooperatives” as each phrase has acquired a distinct meaning through judicial interpretation and through usage in legal writings. Stedman, Bunns’ Cases and Materials on Cooperative Associations, supra, p. 41, contains a quotation to the effect that state legislators in some instances have not had this distinction in mind and consequently have lumped the two types together under the inclusive term of “cooperatives.” Farmer cooperatives consist only of those associations which market agricultural products or purchase supplies and equipment for those engaged in marketing agricultural products. National Outdoor Advertising Bureau v. Helvering, 2 Cir., 1937, 89 F.2d 878; Sunset Scavenger Co. v. Commissioner 9 Cir., 1936, 84 F.2d 453. A further distinction should be noted between farmer marketing cooperatives and farmer purchasing cooperatives. In the case of marketing cooperatives a patronage dividend has the effect of increasing the amount received for products marketed, while in the case of consumer or purchasing cooperatives a patronage dividend has the effect of reducing the cost of merchandise purchased. Farmer cooperatives similar to the taxpayer in the present case frequently act in the dual capacity of both a marketing cooperative and a purchasing cooperative. They are not thereby considered as forfeiting any claim they might otherwise have to either the cooperative exemption or the exclusion of patronage dividends from gross income. As heretofore noted, there is no federal statute which expressly provides for the exclusion of patronage dividends, but the exclusion of such dividends under certain conditions has been the administrative practice of the Treasury Department and the Bureau of Internal Revenue. T.D. 2737, June, 1918; I.T. 1499, C.B. I-2 (1922) 189; I.T. 1566, C.B. II-1 (1923) 85; A.R.R. 6967, C.B. III-1 (1924) 287; S.M. 2288, C.B. III-2 (1924) 233; S.M. 2595, C.B. III-2 (1924) 238; G.C.M. 12393, C.B. XII-2 (1933) 398; G.C.M. 17895, C.B. 1937-1, 56; I.T. 3208, C.B. 1938-2, 127. This practice has in turn been recognized and approved by the courts. “ * * * there is no * * * statutory provision for the deduction of patronage dividends from the gross income of a cooperative association. The Treasury Department, however, * * * has allowed such deductions ‘to’ the end that substantial justice may be done. * * * ’ ” Midland Cooperative Wholesale v. Commissioner, 1941, 44 B.T.A. 824, 830. See also, Co-operative Oil Ass’n v. Commissioner, 9 Cir., 1940, 115 F.2d 666; Anamosa-Farmers Creamery Co. v. Commissioner, 1928, 13 B.T.A. 907; United Cooperatives, In'c’., v. Commissioner, 1944, 4 T.C. 93, and other cases discussed infra. , The first Treasury Department ruling- pertaining to the exclusion of patronage dividends or refunds. made by coop eratives to its patrons, T.D. 2737, supra, did not purport to be based upon a specific section or sections of any .Revenue Act. I.T. 1499, supra, and several of. the subsequent Treasury Department rulings cited above were apparently issued under those sections of the Revenue .Acts for, the respective years providing for the exemption for federal .income tax purposes of those farmer cooperatives meeting certain qualifications. It is interesting to note that the so-called “Iowa ruling,” I.T. 3208, supra, which is the most recent ruling on the ex-cludability of patronage dividends from a cooperative’s gross income, was issued under Section 22 (a) of the Internal Revenue Code, 26 U.S.C.A. § 22(a), and is entitled, “What included in gross income.” These Treasury Department rulings do not exist in a legal vacuum sealed off from the Internal Revenue Code, and they are not legal Robinson Crusoes isolated from that Code. Since they do not pertain to the statutory exemption granted some cooperatives by Section 101 (12) of the Internal Revenue Code, 26 U.S.C.A. § 101(12), they must relate to some other section’ of the Revenue Code. The fact that earnings are not taxable .under some specific section of the Revenue Code does not preclude the possibility of their being taxed under the provisions of Section-22(a) of the Revenue Code, 26 U.S.C.A. § 22(a), relating to the taxability of income in general. See, Commissioner v. Smith, 1945, 324 U.S. 177, 65 S.Ct. 591, 89 L.Ed. 830, rehearing denied 324 U.S. 695, 65 S.Ct. 891, 89 L.Ed. 1295; Mallinckrodt v. Nunan, 8 Cir., 1945, 146 F.2d 1, certiorari denied 324 U.S. 871, 65 S.Ct. 1017, 89 L.Ed. 1426, rehearing denied 325 U.S. 892, 65 S.Ct. 1084, 89 L.Ed. 2004; Helvering v. Edison Bros. Stores, 8 Cir., 1943, 133 F.2d 575, certiorari denied 319 U.S. 752, 63 S.Ct. 1166, 87 L.Ed. 1706; United States v. Anderson, 6 Cir., 1942, 132 F.2d 98, certiorari denied 318 U.S. 790, 63 S.Ct. 994, 87 L.Ed. 1156, rehearing denied 319 U.S. 781, 63 S.Ct. 1156, 87 L.Ed. 1725. Thus it would seem •that those Treasury Department rulings •providing for the exclusion of patronage •dividends from the gross income of coop•eratives meeting certain conditions set forth in such rulings apparently relate to the provisions of Section 22(a) of the Internal Revenue Code, 26 U.S.CA. § 22(a), which establishes a general definition of gross income for federal income tax purposes. The exclusion of patronage dividends for federal income tax purposes is ■sometimes referred to as being a matter of ’“administrative grace” or “administrative .liberality.” It is believed that the use of such terminology makes for confusion, for it is obvious that no official of the Government is vested with the “grace” or “liberality” to exclude from a taxpayer’s income that which is legally taxable to him under the federal income tax statutes. It would seem that the crucial question involved in determining the taxability of patronage dividends is whether they constitute income to the cooperative, or to the patrons, or to both, similar to the amounts distributed as dividends by ordinary corporations. One writer contends that it is the income of neither. See O’Meara, The Federal Income Tax in Relation to Consumer Cooperatives, 36 Illinois Law Review 60 (1941). The Commissioner of Internal Revenue and the officials of the Treasury Department in a multitude of situations must determine whether particular amounts constitute income and to whom such income is taxable for federal income tax purposes; and that is what they have to determine in the case of patronage dividends. In New Colonial Ice Company v. Helvering, 1934, 292 U.S. 435, 440, 54 S.Ct. 788, 790, 78 L.Ed. 1348, 1352, the United States Supreme Court stated, “ * * * a taxpayer seeking a deduction must' be able to point to an applicable statute and show that he comes within its terms.” See also, White v. United States, 1938, 305 U.S. 281, 59 S.Ct. 179, 83 L. Ed. 172. As noted, there are no applicable statutes providing for the exclusion of patronage dividends for income tax purposes. It is the view of some that provisions obligating a cooperative to pay over to its patrons all or a portion of its net receipts to be earned in the future should be regarded similarly to anticipatory assignments of income or trust agreements governing income to be earned in the future and should fall within the scope of those decisions refusing to recognize such assignments of income or trust agreements for, federal income tax purposes. See Ad-cock, Patronage Dividends: Income Distribution or Price Adjustment, 13 Law and Contemporary Problems 505, 514, Duke University (1948). There are numerous decisions dealing with such assignments and agreements. Helvering v. Horst, 1940, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, 131 A.L.R 655; Lucas v. Earl, 1930, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731; Fontana Power Co. v. Commissioner, 9 Cir., 1942, 127 F.2d 193; Saenger v. Commissioner, 5 Cir., 1934, 69 F.2d 631; Porter Royalty Pool, Inc. v. Commissioner, 1946, 7 T.C. 685; Comer v. Davis, 5 Cir., 1939, 107 F.2d 355; Balkwill v. Commissioner, 6 Cir., 1935, 77 F.2d 569, certiorari denied 1935, 296 U.S. 609, 56 S.Ct. 127, 80 L.Ed. 432. However, no case has been found in which a court determined the applicability or inapplicability of such decisions to a cooperative’s distribution of patronage dividends under a pre-existing obligation. The exclusion of patronage dividends for federal income tax purposes has not been placed upon the ground that cooperatives are special creatures of statute under the tax laws, but is justified rather upon the theory that patronage dividends are in reality rebates on purchases or deferred payments on sales, allocated or distributed pursuant to a pre-existing obligation of the cooperative, and thus do not constitute taxable income to the cooperative. Cooperative Oil Ass’n v. Commissioner, 9 Cir., 1940, 115 F.2d 666; Midland Cooperative Wholesale v. Commissioner, 1941, 44 B.T.A. 824; Treasury Department Rulings, supra. The view is advanced by some that cooperatives take as agents or trustees only with no claim of right on their part to the patronage dividend and that, the cooperative is therefore a mere conduit through which the income flows to its patrons, hence such income is excludable from its gross income for federal income tax purposes. See Jensen, The Collecting and Remitting Transactions of a Cooperative Marketing Corporation, 13 Law and Contemporary Problems 403, Duke University (1948) and cases cited in footnote 4 therein; Paul, The Justifiability .of the Polity of Exempting Farmers’ Marketing and Purchasing Cooperative Organizations from Federal Income Taxes, 29 Minnesota Law Review 343, 369 (1945). In the case of Saenger v. Commissioner, 5 Cir;, 1934, 69 F.2d 631, 633 the United States Court of Appeals for the Fifth Circuit stated, “ * * * if compensation paid to one is paid to him as the agent or, servant in fact, not in fiction, of another, that income is taxable, not to the servant,or agent as earner, but to its real earner, 'the principal (cit.).” The Court cites in support of that statement cases dealing with community property or family partnership relations. The Mississippi Supreme Court in State v. Morgan Gin Co., 1939, 186 Miss. 66, 189 So. 817, used the theory advanced in the Saenger case to uphold a cooperative’s exclusion of patronage dividends from its income'subject to state income tax. Though no patronage dividends were involved, the United States Supreme Court in Commissioner of Internal Revenue v. Wilcox, 1946, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752, 166 A.L.R. 884, stated that in order for receipts to constitute taxable income to a taxpayer, there must be (1) the presence of a claim of right to such receipts, and (2) the absence of a definite, unconditional obligation to pay the same to another. See also, North American Oil Consolidated v. Burnet, 1932, 286 U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197; Haberkorn v. United States, 6 Cir., 1949, 173 F.2d 587. In the case of Trinidad v. Sagrada Orden de Predicadores, 1924, 263 U.S. 578, 44 S.Ct. 204, 68 L.Ed. 458, the United States Supreme Court emphasized that- in tax matters the destination father than the source of income is the controlling factor. See also, Commissioner v. Orton, 6 Cir., 1949, 173 F.2d 483, 486. In a very recent case, National Carbide Corp. v. Commissioner, 1949, 336 U.S. 422, 69 S.Ct. 726, 93 L.Ed. -, petitioners claimed a reduction in their income and excess profits taxes on the theory that by virtue of a contract with their controlling (Aireo) "corporation they were only agents of Aireo to the extent of all their earnings-in exces's of expenses and a six percent payment on their outstanding capital stock. The United States Supreme Court denied petitioners’ claims, holding that complete ownership of the subsidiary corporation and the control primarily dependent up-' on such ownership are no longer of significance in determining taxability. The Court went on to point out that the existence of the “agency contracts” requiring petitioners to pay all their profits above a nominal return to Aireo did not conclusively determine that the income “belonged to Aireo.” However, the possibility that a true agency relationship might exist was not absolutely foreclosed, for the Court, stated, 336 U.S. page 437, 69 S.Ct. page’ 734, that, “What we have said does not forclose a true corporate agent or trustee from handling the property and income of its owner-principal without being taxable therefor. Whether the corporation operates in the name and for the account of the principal, binds the principal by its actions, transmits money received to the principal, and whether receipt of income is attributable to the services of employees of the principal and to assets ber. longing to the principal (cit.) are some of the relevant considerations in determining whether a true agency exists. If the corporation is a true agent, its relations with’ its principal must not be dependent upon the fact that it is owned by the principal, if such is the case. Its business purpose must be the carrying on of the normal duties of an agent (cit.).” Sée also, Railway Express Agency v. Commissioner, 2 Cir., 1948, 169 F.2d 193, certiorari denied 336 U.S. 944, 69 S.Ct. 808, 93 LEd. —. It has been asserted that a cooperative cannot meet these tests of true corporate agency; that the cooperative cannot really be an agent for its patrons since when a patron makes a sale of commodities to the cooperative or a purchase of goods from it, title to such commodities or goods passes to the purchaser upon execution of the sale in both instances. “The cooperative does not act as the true agent of any particular patron. When a patron makes a sale of commodities to the cooperative or a purchase of goods from it, title to such commodities or goods passes to the purchaser upon execution of the sale in both instances. After a marketing cooperative purchases the commodities, acquiring title thereto, it treats the commodities as its own, commingling such commodities with those of others, mixing, processing, handling, and in some cases manufacturing them without any requirement that an individual accounting be made to each patron for each particular commodity handled. “ * * * A general analysis of the business operations of cooperatives reveals the impracticability if not the impossibility of relating patronage dividends to gain or loss upon any particular transaction with any particular patron. “To say, in effect, that a sale remains open until the end of an accounting period to permit the payment of an addition to the price does not recognize facts. For example, during 1946 there were extremely wide fluctuations in the price of flaxseed, the price increasing from $3.00 to $6.00 per bushel in just a few days. Many farmers sold flaxseed to cooperative grain elevators both before and after the price increase. In the case of a farmer who before the price increase sold flaxseed which the cooperative sold after the price increase, the theory that vhe former sale was not closed but was in fact open pending receipt of the additional price would require that aii additional payment of almost $3.00 per bushel be made. The farmer who had received $6.00 initially and whose flaxseed was sold by the cooperative at $6.00 plus freight and margin would not be entitled to receive additional payment. But cooperative corporations do not return to each farmer the net proceeds of the sales of his produce less necessary expenses; instead, they determine the over-all net profits for flaxseed and these profits are shared by all flaxseed patrons in proportion to their patronage. “The fact that cooperatives do not, by patronage dividends, adjust their prices so as to do business at cost is clearly seen in the case where transactions with a particular patron result in a loss. Assume, for example, that one patron sold only durum wheat to the cooperative, all of which was disposed of at a loss. The greater the patronage of this member, the greater is the cooperative’s loss on his business, and paradoxically, the greater is his share in the cooperative’s over-all net profit. “ * * * A further example will illustrate the true nature of the patronage dividend. A cooperative may maintain branches in town A and town B. Because of inefficient management or lack of sufficient volume at town B a net loss for the year may be incurred by the branch there, while a profit may be realized at the branch in town A. The patronage dividend paid to members dealing with the branch in town B represents nothing but a shifting to them of profits on transactions with an entirely different set of customers in town A. It is thus an absurdity to call the patronage dividend paid to the members in town B an .adjustment to the price of produce already handled by that branch at a loss.” Adcock, Patronage Dividends: Income Distribution or Price Adjustment, 13 Law and Contemporary Problems 505, 520 ,et seq. Duke University (1948). ; Several Courts on the other hand have not regarded the formalities of purchase and sale as of determinative importance in construing the contract between a cooperative and its patrons. In Texas Certified Cottonseed Breeders’ Ass’n v. Aldridge, 1933, 122 Tex. 464, pages 473-474, 61 S.W.2d 79, page 82; the Texas Supreme Court stated, “The farmers as a group form the association, and appoint it to act as their selling agent. They turn over to the association their commodities to be pooled and sold on the market to the best advantages. * * * The contract upon this point [transfer of title] is clothed in the terminology of a sale. The relation of consignor and factor has been abandoned. The logical and practical object of the members, as expressed in the contract, is to clothe the transaction in the language of a sale for the purpose of permitting the exercise of all powers named in the contract [,] rather than a consignment [,] in order to enable the association to enter bona fide transactions free from the embarrassment arising out of an incomplete title. * * * It being the clear intention of the members to create a true cooperative marketing association, under the powers enumerated by law and by the contracts, to perform certain servT ices exclusively for its members, and to hold in the face of this intention that the delivery of the seed to the association was an absolute sale would destroy it as a cooperative marketing association.” And in Rhodes v. Little Falls Dairy Co., Sup.Ct. 1930, 230 App.Div. 571, 245 N.Y.S. 432, affirmed 1931, 256 N.Y. 559, 177 N.E. 140, involving a suit by a patron against the cooperative for distribution of patronage dividends pursuant to a marketing agreement between the parties, the Court stated, 245 N.Y.S. page 434, “We do not agree with the Special Term that the contract is the ordinary one of purchase and sale. Even though title may have passed, still the arrangement is for co-operative marketing. The status of the parties partakes of a trust or fiduciary character, and is not the simple relation of vendor and vendee; the fund derived from the marketing of the product being subject to distribution among the various producers, sales of whose product had gone to make it up (cit.).” In Johnson v. Staple Cotton Coop. Ass’n, 1926, 142 Miss. 312, 107 So. 2, it was held that the cooperative marketing contract between the association and a member created the relation of principal and agent; the association being a sales agency operating for the benefit of its members. In an extensive opinion, Bowles v. Inland Empire Dairy Ass’n, D.C.E.D. Wash.1943, 53 F.Supp. 210, the Court recognized the existence of a contract between the cooperative and its patrons by virtue of the cooperative’s by-laws which provided, 53 F.Supp. page 212, footnote 1, that the patron agreed to “sell and deliver to the Association” and the Association agreed to “buy and receive such milk or cream.” In spite of this plain language of purchase and sale in the by-laws, the Court held that defendant cooperative acted merely as its patrons’ agent in selling their products to the ultimate consumers, and did not buy such products. Although the above cases deal only with marketing cooperatives, it could be argued that the conclusions stated would hold true for purchasing cooperatives also, in view of the general language used by Courts in construing these cooperative contracts. In addition to the cases cited, see also, California & Hawaiian Sugar Refining Corp. v. Commissioner, 9 Cir., 1947, 163 F.2d 531, certiorari denied 1948, 332 U.S. 846, 68 S.Ct. 350, 92 L.Ed. 417; Irvine Co. v. McColgan, 1945, 26 Cal.2d 160, 157 P.2d 847, 167 A.L.R. 934; Burch v. South Carolina Cotton Growers’ Cooperative Ass’n, 1936, 181 S.C. 295, 187 S.E. 422; City of Owensboro v.. Dark Tobacco Growers’ Ass’n, 1927, 222 Ky. 164, 300 S.W. 350. But see, Central Co-operative Oil Ass’n v. Commissioner, 1935, 32 B.T.A. 359; Maryland & Virginia Milk Producers’ Ass’n v. District of Columbia, 1941, 73 App.D.C. 399, 119 F.2d 787. Where under the applicable state statutes a cooperative is authorized to act both as agent and purchaser, the parties may abandon the agency relationship and expressly adopt by agreement and practice the seller-purchaser relationship in order to derive economic advantages thereby. See Clinton Co-op. Farmers Elevator Ass’n v. Farmers Union Grain Terminal Ass’n, 1947, 223 Minn. 253, 26 N.W.2d 117. Writers have also argued that the co-operating members are the real parties in interest in any transaction undertaken by the association; that the cooperative is a legal entity and takes legal title to goods in order to adapt itself to the usages of trade and that this legal title preserves the rights of members and exists only for a special and limited purpose, i. e., for the benefit of those who deal with the association in good faith' and in the normal course of business. Henderson, Cooperative Marketing Associations, 23 Columbia Law Review 91 (1923); Note, 23 Notre Dame Lawyer 342 (1948). For a consideration of the passage of title under cooperative agency and sale type contracts, see Goldsmith, Passage of Title under Cooperative Marketing Contracts, 18 Oregon Law Review 157 (1939). Some confusion apparently exists as to whether a patronage dividend is properly termed a “deduction” or an “exclusion” from cooperative gross income. It is in fact considered by the Treasury Department as an exclusion from gross income. G.C.M. 17895, C.B. 1937-1, 56; I.T. 3208, C.B. 1938-2, 127. It is believed that the use of the term “exclusion” instead of “deduction” makes for clarity. See Bradley, Taxation of Cooperatives, Harvard Business Review 576, 577 (Autumn, 1947). On occasion patronage dividends have been referred to generally as “rebates,” with no distinction being made between those distributions to purchasing patrons of a cooper