be attached to this return. (The term "person" includes individuals, fiduciaries, partnerships, corporations, associations, and other organizations.) Receipts by a "central" organization from organizations included in a group return need not be itemized in the "central" organization's separate return.

6. If the total of income items 6 and 7 is not more than $5,000, amounts includible in item 12 through item 19 may be entered under item 21 through item 26 under the appropriate headings. Where sections "A" and "B" must both be completed, items of expense may be divided between these sections on the basis of accounting records, or, if such records do not provide for this division, any items of expense which do not fall wholly under either of these sections may be divided on any reasonable basis, such as an approximation of the use of a facility or the time spent by an individual.

7. If item 34 does not equal item 11, attach a schedule accounting for the difference.

8. The balance sheets, Schedule A, should agree with the books of account or any differences should be reconciled. All organizations reporting to any national, State, municipal, or other public officer may submit, in lieu of Schedule A, copies of their balance sheets prescribed by any such authority as at the beginning and end of the taxable year.

9. In all cases where line 6, Schedule A, includes 10 percent or more of any class of stock of any corporation, attach a list showing the name of the corporation, the number of shares of each type of stock owned (including information indicating whether the stock is voting or nonvoting), and the book value of the stock included in line 6.

10. For further information see regulations under sections 54 (f) and 101 of the Internal Revenue Code.

Form 1028

U. S. Treasury Department
Internal Revenue Service

(Revised Jan. 1947)

EXEMPTION AFFIDAVIT FOR USE OF FARMERS', FRUIT GROWERS', OR LIKE ASSOCIATIONS CLAIMING EXEMPTION FROM FEDERAL INCOME TAX UNDER SECTION 101 (12) OF THE INTERNAL REVENUE CODE AND THE CORRESPONDING PROVISIONS OF PRIOR REVENUE ACTS

(To be made only by a principal officer of the organization claiming exemption.) STATE OF

19.

(Full address, including street and number) the following answers and statements relative to the year ended __. (Fiscal or calendar year on basis of which your books are kept) are true to the best of his knowledge and belief:

4. State the amount of each class of capital stock outstanding and the value of the consideration for which it was issued..

(a) State the rate of dividend paid on each class of such capital stock

*5. State the amount of each class of capital stock owned by:

(a) Producers

(b) Nonproducers

(c) Persons who were nonproducers at the time stock was acquired.. *6. State the circumstances surrounding the acquisition of your capital stock by nonproducers

(a) What provision is made for retiring the capital stock held by nonproducers?

*The information called for in 5 and 6 above need not be supplied with respect to nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends.

7. If the association issues any nonvoting preferred stock, explain whether the owners thereof may participate in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends

8. What is the legal rate of interest in the State in which the association is incorporated?

9. Does the State law require the maintenance of a reserve?

state the amount of such reserve, $_.

(Yes or no)

If so,

10. Does the association maintain any reserve or reserves other than required by the State law? ___ If so, state:

(Yes or no)

(a) Amount of each reserve

(b) Purpose for which each reserve is maintained

11. What are the requirements for membership in the association? 12. Does the association deal with both members and nonmembers? 13. Value of agricultural products marketed (or

handled) for:

*(a) Members:

(1) actually produced by such mem

15. Amount of business done for the United States Gov

ernment or agencies thereof.

ucts marketed for

(a) Members

(b) Nonmembers.

17. State fully the plan followed in charging for supplies and equipment pur

plain how such payments are made and whether in cash or otherwise:
(a) Members

(b) Nonmembers

(c) Were all of the net earnings for the year, after payment of dividends, if any, on capital stock, distributed as patronage dividends?

(Yes or no)

If not, state the purpose for which the balance of the net earnings was used or held

(d) If any portion of the net earnings was set aside in a reserve or surplus, or was used to acquire capital assets, or to reduce indebtedness thereon, was such portion allocated on the records to all patrons on a patronage basis?

(Yes or no)

*If it is necessary to own one or more shares of stock in order to become a member, only the amount of business transacted with persons actually owning the required number of shares should be included in 13 (a) and 14 (a).

16. State fully the manner in which distribution is made of the proceeds of prod

19. Is the information contained herein representative of the purposes. and activities of the association since January 1, 1925, or date of organization, if organized subsequent to that date?

(Yes or no)

If not, state the changes that have occurred and dates of such changes 20. Has the association filed income tax returns? If so, for what year

(Yes or no)

or years? 21. Attach to this affidavit a classified statement of the receipts and expenditures of the organization during the year herein covered and a complete statement of the assets and liabilites as of the end of that year; a copy of the articles of incorporation, if incorporated, or, if not incorporated, a copy of the constitution, articles of association, or other document setting forth the aims and purposes of the organization; and a copy of the bylaws, or other similar code of regulations. (N. B.-When specifically requested by the Commissioner, a separate affidavit and financial statement must be submitted for each year for which exemption is being claimed.)

A mere claim or contention by an organization that is exempt from income tax under section 101 of the Internal Revenue Code and the corresponding provisions of prior revenue acts will not relieve the organization from filing income tax returns and paying the tax. Unless the Commissioner has determined that an organization is exempt, it must prepare and file a complete income tax return for each taxable year of its existence. Accordingly, every organization that claims to be exempt should furnish the information and data specified herein, together with any other facts deemed material to the question, with the least possible delay, in order that the Commissioner can determine whether or not it is exempt. As soon as practicable after the information and data are received, the organization will be advised of the Commissioner's determination, and if it is held to be exempt from the tax, no further returns of income, other than an annual return of information on Internal Revenue Form 990, will be required.

Subscribed and sworn to before me this 19____

(Signature of officer making affidavit) day of

[NOTARY'S SEAL]

(Signature of officer administering oath) (Title)

(If the space provided for the insertion of information or data under any of the above questions is inadequate, additional sheets may be used which should be properly identified and securely attached hereto.)

(This affidavit may be executed without cost before any Internal Revenue Officer authorized to administer oaths.)

Mr. WILCOX. May I say, Mr. Ballinger, in answer to a question you asked yesterday, this Form 990 does require the filing of a copy of the

balance sheet.

I should also, Mr. Chairman, like to offer, not necessarily for the record, but I think it may be helpful to the committee, a statement of Bureau rulings and court decisions relating to patronage refunds which I think may be of some help to you, inasmuch as it has been prepared by us.

Chairman PLOESER. We already have a brief written on the subject, but we would like to have it.

It better be included in the record as part of your remarks.
Mr. WILCOX. This statement is as follows:

BUREAU RULINGS AND COURT DECISIONS RELATING TO PATRONAGE REFUNDS

The attention of the committee is respectfully invited to the following rulings and decisions with respect to the treatment of patronage refunds in determining the taxable net income of a nonexempt cooperative corporation.

These rules also apply to any other type of corporation. It is incorrect to say that patronage refunds are deducted from net income. They are exclusions from gross income.

That distinction is clearly made in the Bureau rulings and Tax Court decisions. One of the early rulings on this subject was made under the Revenue Act of 1918 with respect to an agricultural purchasing cooperative which was not exempt under that act.

Only marketing cooperatives were exempt under the 1918 act.

The following is quoted from that ruling S. M. 2595, published in Cumulative Bulletin III-2, page 238:

"Although not exempt from taxation under the provisions of sections 231 of the Revenue Acts of 1918 and 1921, should the company be allowed, for incometax purposes, to exclude from gross income amounts returned to members as rebates or patronage dividends? Article 522 of regulations 45 provides in part: "(b) Cooperative associations acting as purchasing agents are not expressly exempt from tax and must make returns of income, but rebates made to purchasers, whether or not members of the association, in proportion to their purchases may be excluded from gross income in computing the net income subject to tax. Any profits made from nonmembers and distributed to members in the guise of rebates are, of course, subject to tax."

In Treasury Decision 2737 it was held that nonexempt cooperative associations might exclude from gross income as discounts or rebates the amount of patronage dividends paid to members.

The Department has followed this holding under the Revenue Acts of 1918 and 1921. It is therefore held that the company is entitled under the Revenue Acts of 1918 and 1921 to exclude from its gross income the amounts returned to its members as true patronage dividends.

However, to the extent that the amounts distributed represent profits made on business with nonmembers, they are not true patronage dividends and are not deductible (I. T. 1499 (C. B. 1-2, 189), A. R. R. 6967 (C. B. III-1, 287) (p. 241)).

The distinction between deduction and exclusion has been consistently adhered to in subsequent Bureau rulings. I. T. 3208, C. B. 1938-2, page 127, pointed out the distinction in the following language:

"Under long-established Bureau practice, amounts payable to patrons of cooperative corporations as so-called patronage dividends have been consistently excluded from the gross income of such corporations. The practice is based on the theory that such amounts in reality represent a reduction in cost to the patron of goods purchased by him through the corporation or an additional consideration due the patron for goods sold by him through the corporation. As such amounts are not includible in gross income of the corporation, they are obviously not deductible by it, though, where they have been erroneously included in gross income in the first instance, the correcting adjustment is sometimes loosely termed a deduction."

The Revenue Act of 1936 imposed a surtax upon "undistributed income and profits of a corporation." The Bureau was called upon to determine whether undistributed patronage margins were subject to that tax.

In holding they were not, because they did not constitute income to the corporation, G. C. M. 17895, C. B. 1937-1, page 56, said:

"The question is presented whether patronage dividends due patrons of a cooperative organization which are not distributed until after the close of the taxable year are subject to taxation as undistributed net income under section 14 of the Revenue Act of 1936 which imposes a surtax at specified rates upon the undistributed net income of every corporation not specifically exempted from such surtax.

"So-called patronage dividends have long been recognized by the Bureau to be rebates on purchases made in the case of a cooperative purchasing organization, or an additional cost of goods sold in the case of a cooperative marketing organization, when paid with respect to purchases made by, or sales made for, the account of the distributees. For the purposes of administration of the Federal income-tax laws, such distributions have been treated as deductions in determining the taxable net income of the distributing cooperative organization.

Such distributions, however, when made pursuant to a prior agreement between the cooperative organization and its patrons, are more properly to be treated as exclusions from the gross income of the cooperative organization (I. T. 1499, C. B. 1-2, 189; S. M. 2595, C. B. III-2, 238; G. C. M. 12393, C. B. XII-2, 398). "It follows, therefore, that such patronage dividends, rebates, or refunds due patrons of a cooperative organization are not profits of the cooperative organization notwithstanding the amount due such patrons cannot be determined until after the closing of the books of the cooperative organization for a particular taxable period.

"In view of the foregoing, it is the opinion of this office that such patronage dividends may be excluded in determining the amount of the undistributed net income of the cooperative organization subject to the surtax imposed by section 14 of the Revenue Act of 1936, provided the liability therefor is set up on the books of the cooperative organization pursuant to corporate action taken with respect thereto prior to the close of the particular accounting period."

This memorandum is applicable only to true cooperative organizations. The burden of proof is upon an organization to substantiate by competent evidence any contention it may make in that respect.

Section 213 of the National Recovery Act imposed an excise tax on dividends. The question was raised whether that tax applied to patronage refunds-often referred to as "patronage dividends."

Answering in the negative, G. C. M. 12393, XII-2, page 398, said:

"It is apparent, therefore, that true patronage dividends are recognized by the Bureau to be discounts or rebates on purchases made in the case of farmers' cooperative purchasing organizations, or part payment for produce furnished in the case of farmers' cooperative marketing organizations, when paid with respect to purchases or sales made for the account of the distributees. The fact that such cooperative organizations transact business with nonmembers is immaterial if nonmembers are dealt with as members in the distribution of patronage dividends.

"However, to the extent that such distributions are made from profits on business transacted with or for others than the distributees, they are not true patronage dividends and are subject to the excise tax on dividends imposed by section 213 of the National Industrial Recovery Act."

The position of the United States Tax Court (formerly known as the Board of Tax Appeals) is stated in United Cooperatives v. Commissioner (4 T. C. 93, decided September 29, 1944).

In that case the court said:

"The ultimate question here is whether certain 'patronage dividends' and 'patronage refunds' constitute a part of the gross income of the petitioner, or are, in reality, not the property of petitioner but of its several 'patrons.' There is no question involved of 'deductions' in the technical sense of the statute, for the petitioner's claim is the broad one that it is an agricultural cooperative, doing business not for its own profit but for the cheaper buying of agricultural and other goods by its members and, as such, is a mere conduit of their money."

The court then pointed out that the petitioner made no contention that it was exempt from taxation but that it contended that because of the nature of its organization and operation the amounts were not properly includible in taxable income.

The opinion discusses the organization and operation of the petitioner and proceeds:

"Having decided that petitioner is, in substance and reality, organized and operated as an agricultural cooperative association on a cooperative basis, it would follow in the usual case that the so-called patronage dividends would be treated for tax purposes by the Treasury Department as rebates upon the business transacted with its members, and would therefore be excluded from gross income in computing net income subject to tax (I. T. 1499, C. B. 1-2, p. 191; L. M. 2288, C. B. III-2, p. 236; L. M. 2595, C. B. III-2, p. 238; G. C. M. 12393, C. B. XII-2, p. 398, G. C. M. 17895, C. B. 1937–1, p. 56; I. T. 3208, C. B. 1938–2, p. 127).

"This administrative practice has been sanctioned by the decisions of this court. (See Midland Cooperative Wholesale, 44 B. T. A. 824, 830.)"