its powers and deals in a class of merchandise not
authorized by the Act, it cannot escape assessability and
should properly be taxed as a general merchant, to the
extent, at least, of its unauthorized sales.

Under the constitution of Wisconsin, it has been held that money raised by taxation could not be used in paying for services to encourage the organization of a particular cooperative or in advising "individuals or groups *** in the organization of a cooperative association and so to promote the organization * ** and engage in such educational activities * * * relative to the benefits to be derived from the organization of a cooperative association" in a particular county, because this was regarded as a local and not a State problem and the State's money could not be devoted to its solution.36

In this case, however, the court did not sustain an attack made on the statute appropriating funds to the Wisconsin Development Authority to be used for the encouragement and promotion within the State generally of rural electric cooperatives. The following statement from the court's opinion concerning the separate classification of these cooperatives is of significance in determining the reasonableness of such classification:

The encouragement of cooperative action is by no
means new in this state.

While these particular provisions [relating to agri-
cultural cooperatives] have not been tested as to their
constitutionality, this court has definitely held that agri-
culture cooperatives are favored in the law and impliedly
held that such favor as has been shown cooperatives by
the legislature is not invalid as being private in purpose
or discriminatory in operation. Northern Wisconsin Co-
op Tobacco Pool v. Bekkedal, 182 Wis. 571, 197 N.W.
936; State ex rel. Saylesville Cheese Manufacturing Co.
v. Zimmerman, 220 Wis. 682, 265 N. W. 856. Bearing in
mind that one of the highly important circumstances in

36 State ex rel. Wisconsin Development Authority v. Dammann, 228 Wis. 147. 280 N.W. 698, 711, 712, 716 (1938), setting aside opinion appearing in 277 N. W. 278 (1938).

ascertaining the public character of an appropriation is
the course and usage of government, we think the course
of legislative action in connection with agricultural co-
operatives is entitled to great weight as indicative that it
has been the course and usage of government in this state
to consider as public in character and state wide in scope
the encouragement of cooperative enterprises, and we
are unable to resist the conclusion that, provided the
activity be general and educational in character, the
state may encourage cooperative activity in the utility
field.

The Federal revenue acts of 1921 and 1924 impose a stamp tax under a provision reading: “Capital stock, issued: On each original issue, whether on organization or reorganization, of certificates of stock, or of profits, or of interest in property or accumulations, by any corporation, on each $100 of face value or fraction thereof, 5 cents."37

The Kansas Cooperative Wheat Marketing Association, a nonstock organization, paid, under protest, a stamp tax of 5 cents on each of its certificates of membership under the foregoing provision. The association then successfully brought suit for the recovery of the amount paid.38 The court held that the certificates of membership of the association did not come within the scope of the statutory provision in question and said that "Before any member has anything of monetary value in the hands of the association, he must not alone have become a member, as shown by certificate of membership, but must further have delivered wheat to the association; that two or a dozen certificates of membership in the association are of no more actual worth or value than is one."

It has been held that voting trust certificates issued in pursuance of a voting trust agreement are subject to this stamp tax.39

The stamp tax law was amended by section 441 of the Revenue Act of 192840 to make it plain that the tax did not apply to "stocks and bonds and other certificates of indebtedness issued by any

3742 Stat. 227, 303; 43 Stat. 253, 334.

38 Kansas Co-op Wheat Marketing Association v. Motter and Kansas Wheat Growers' Association v. Motter, 14 F. 2d 242, 243 (D. Kan. 1926).

39 Pennroad Corporation v. Ladner, 21 F. Supp. 575 (E.D. Pa. 1937). 4045 Stat. 791, 867.

farmers' or fruit growers' or like associations organized and operated on a cooperative basis for the purposes, and subject to the conditions, prescribed in paragraph (12) of section 231" of the Revenue Act of 1926. This provision has been carried forward substantially unchanged in the Internal Revenue Code of 1954.41

Section 4251 of the Internal Revenue Code of 1954 imposes an excise tax on amounts paid for local and toll telephone service. A telephone cooperative has been allowed a credit or refund of the tax paid on amounts credited to the capital credit accounts of its members on the basis that such amounts did not constitute payments for telephone service.42 The cooperative was required to show that it paid the tax refund to the members from whom the tax was collected, or obtained the "consent of the members to the allowance of the credit or refund." The cooperative was organized to provide its members with telephone service at cost. It was obligated under its capital credit bylaws to credit to the individual capital accounts of its members any amounts paid in excess of operating cost and expenses for the year.43 Members' capital credits, to the extent they related to telephone service, were thus considered an adjustment of the "amounts paid" for service giving rise to an overpayment of the communications tax for which credit or refund claims were in order.

This ruling was amplified in Revenue Ruling 70-13.44 There it was pointed out that a patron, by subscribing to the services of the cooperative, was bound by the bylaws. He therefore had agreed that the cooperative, instead of directly refunding to him any overpayment of communications tax, could credit his capital account with the overpayment and that the credit had the same effect as if the cooperative had refunded the overpayment to the patron and he had returned it as additional capital.

The ruling concludes that, under the bylaws and accounting method described, the credits to the individual capital accounts constituted repayments of the communications tax within the meaning of section 6415(a) of the Internal Revenue Code and section 130.78 of the regulations. Refund claims had to be supported by an affidavit, "executed by the board of directors of the

type.

4126 U.S.C. 4382(a)(3).

42 Rev. Rul. 68-206, 1968-1 Cum. Bull. 557.

43See "Sample Legal Documents," p. 578, for a bylaw of the capital credit

441970-1 Cum. Bull. 272.

telephone cooperative"45 and attached to the claim, stating that credits had "actually been made to the individual capital accounts in an aggregate amount equal to excess charges for service, including the excess payments of communications taxes being claimed."

It is highly important that every cooperative carefully ascertain its tax status. Cooperatives may be subject to many taxes. A determination should be made as to the applicability of each tax to the cooperative and its operations, the time and place where returns or reports are required to be filed and the tax paid. Without this type of information a cooperative could find itself overtaxed, or subject to penalties for failure to file and pay, or otherwise be adversely affected. In California, for example, the powers of a corporation that failed to pay franchise taxes could be suspended and a corporation whose powers had been so suspended lost the right to defend a suit brought against it.46

Federal Income Taxes

Nine times, following the adoption of the 16th (income tax) amendment to the Constitution of the United States, the Congress has enacted tax legislation dealing specifically with farmer cooperatives. In each instance, the distinct character of the cooperative form of doing business has been recognized. Congress also has clearly manifested a desire to foster these mutual, self-help institutions of farmers.

Substantial revisions were made in the Federal income tax laws relating to the tax treatment of cooperatives and their patrons in 19621 and again in 1966.2 These revisions were designed to assure that amounts received by cooperatives in the course of their

45 See REA Telephone Operations Manual, § 1036, Exhibit F, Rural Electrification Administration, U.S. Dept. Agr. (Oct. 1971).

46 Boyle v. Lakeview Creamery Company, 9 Cal. 2d 16, 68 P. 2d 968 (1937). 'See section 17 of the Revenue Act of 1962 (Pub. L. 87-834, 76 Stat. 1045), which added subchapter T (sections 1381-3, 1385 and 1388) to the Internal Revenue Code of 1954. Unless otherwise stated, all citations in this section are to the Internal Revenue Code of 1954, as amended. The corresponding citation to Title 26 of the United States Code will be omitted.

2See section 211, Foreign Investors Tax Act of 1966 (Pub. L. 89-809, approved November 13, 1966, 80 Stat. 1580), amending subchapter T and section 6044 of the Internal Revenue Code relating to information reporting. In 1969, a "technical amendment" was added; see footnote 3, in this section.

business activities with their patrons are included in computing the income tax of either the cooperative or the patron, thus subjecting these amounts to a current single tax. Legislation in 1951 had attempted a "current single tax,” but no specific statutory provisions on patrons' tax treatment were included.

In 1969, Congress again considered changes in the tax laws affecting cooperatives. It adopted the ninth enactment relating to farmer cooperatives—an amendment clarifying certain questions relating to pooling arrangements.3 At the same time, it rejected a proposal that would have increased from 20 to 50 percent (over a 10-year period) the amount that must be paid in cash currently by a cooperative to qualify its patronage refunds as deductions in computing taxable income, and would also have required payment of the balance of the patronage refunds within 15 years.4

The Senate Finance Committee deleted the provision from its version of the Tax Reform Act of 1969 and directed its staff to undertake a study of problems in the taxation of cooperatives." The Conference Committee omitted the provision and the 1969 Tax Reform Act became law without it. In a related move, the Conference Committee also requested the Treasury Department and congressional staffs to study problems in the tax treatment of cooperatives and report by January 1, 1972.6

Over the years, there has grown an extensive body of case law, regulations, and rulings on the taxation of cooperatives and their patrons. No single facet of cooperative functioning has received as much attention or indepth analysis. Numerous writers have dealt

Tax Reform Act of 1969, section 911, Pub. L. 91-172, approved December 30, 1969. See p. 449, for further discussion of the amendment.

4Section 531, Tax Reform Act of 1969, H.R. 13270, as passed by the House of Representatives on August 7, 1969. See H. R. Rep. 91-413 (pt. 1), 91st Cong., 1st sess. 167-9 (1969), House Comm. on Ways and Means, to Accompany H.R. 13270, and H.R. Rep. 91-413 (pt. 2), 91st Cong., 1st sess. 121-2 (1969), Supplemental Report of House Comm. on Ways and Means.

'S. Rep. No. 91-552, 91st Cong., 1st sess. 308-9 (1969), Senate Comm. on Finance, to Accompany H.R. 13270.

"H.R. Rep. No. 91-782, 91st Cong., 1st sess. 322-323 (1969), Conference Report to Accompany H. R. 13270. Some of the alternatives being considered in the study of cooperative taxation are reviewed by Harold Dubroff, Legislation Attorney, Joint Committee on Internal Revenue Taxation, in his talk entitled Tax Reform Act of 1969 and Study of Cooperatives' Tax Problems by Congressional Committees, at the Special Tax Conference, National Rural Electric Cooperative Association, Minneapolis, Minn., Dec. 1971. See footnote 125, in this section.