431 F.2d 1320 | 5th Cir. | 1970
Lead Opinion
The government appeals from separate judgments entered for Mississippi Chemical Corporation and Coastal Chemical Corporation (hereinafter, taxpayers) in their suits for refund of federal taxes. Taxpayers based their claims for refund on the contention that $99 of each $100 expended for the purchase of certain Class C stock in the New Orleans Bank for Cooperatives constituted deductible expenses in the year of purchase. The government contended that these amounts were the nondeduetible costs of acquiring capital assets. The district court concluded that the payments were deductible as interest expenses, and we affirm.
Taxpayers are Mississippi corporations with their principal place of busi
The governing legislation
Farmers cooperatives, like taxpayers, acquire Class C shares in three ways: (1) Each cooperative must purchase a qualifying share of Class C stock to be eligible to borrow from the Bank. (2) A borrower cooperative is required to make quarterly investments in Class C stock; these purchases are referred to as “interest override” payments. The amount required to be invested is not less than ten nor more than twenty-five percent of the interest payable by the borrower for that quarter, to be determined by the Bank’s directors.
Mississippi Chemical Corporation acquired its qualifying share of Class C stock in 1956; Coastal Chemical Corporation purchased its share in 1957. Each carried its initial share on its books at the $100 cost, and neither sought a deduction for any part of this expense. These qualifying shares were not involved in the suit below.
Mississippi Chemical’s suit concerned the fiscal years ending 30 June 1961, 1962, and 1963. As a result of its borrowings during those years it was required to make “interest override” purchases of 189, 169, and 193 shares of Class C stock respectively. The purchase price of each share of stock was $100. In its tax returns for each year, Mississippi Chemical reported $1 per share as the cost of acquiring a capital asset and claimed a deduction in the amount of $99 a share as an interest expense. In the same fiscal years, Mississippi Chemical received “patronage refunds” of 287, 275, and 251 shares of Class C stock respectively. It reported $1 per share of the “patronage refund” as a reduction of interest expense and investments, but it made no report of the remaining $99 of par value of each share.
Coastal Chemical’s suit involved a longer period of time including the fiscal years ending 30 June 1958 through 1963. In these years Coastal Chemical purchased 118, 339, 473, 417, 351, and 421 shares of Class C stock respectively pursuant to the “interest override” requirements. During the same years, it received 143, 474, 516, 605, 523, and 630 shares of Class C stock as “patronage re
The Commissioner disallowed the interest deduction claimed by each taxpayer and asserted deficiencies. Taxpayers paid the deficiencies and filed claims for refund which were disallowed. Taxpayers then instituted their actions which were consolidated for trial in the district court. The court below upheld the taxpayer’s contention that $99 of each $100 expended for the purchase of a share of Class C stock was deductible as an interest expense. In the district court the government also contended that taxpayers should have reported the Class C stock received as patronage refunds as income. The court did not sustain this position and it has been abandoned by the government.
I
Central to the district court’s decision was its finding that the Class C stock,
Additional characteristics of the stock severely limit its value in the hands of the taxpayers. It pays no dividend and has no growth potential. After the purchase of their initial, qualifying shares, taxpayers gained no voting rights by the purchase of additional Class C stock. The Bank has a first lien on all Class C shares.
The government appears to concede that these shares have no market value,
Prior to 1964, the holders of class C stock of each [regional] bank could elect only one of its seven directors, and since 1964, they have elected two of the seven. The other five directors are elected by the local district Production Credit Associations (two members), and the local district Federal Land Bank Associations (two members), with the seventh being appointed by the Governor of the Farm Credit Administration.15
With their share of control in the Bank thus limited, the fact that Class C shareholders were having capital they supplied substituted for that previously furnished by the government can scarcely be seen as enhancing the value of their shares.
[T]he cold fact remains that when plaintiff cooperative shareholder paid the $407 for the 4.07 shares, it received stock which was greatly less valuable from an economic and financial standpoint than the purchase price required by law and the terms of the loan agreements. The “intangible benefits” bestowed by Congress on farmers’ cooperatives generally do not alter this fact. * * * The required purchase of such stock gave plaintiff no economic or financial benefit other than the circumstance that it could not have obtained the loan with its favorable interest rate without fulfillment of the statutory requirement. But in the extremely practical field of taxation, in which substance prevails over form, it cannot reasonably be concluded under the circumstances that Congress has granted favors to cooperatives in furtherance of agricultural policies and taken them away (on the theory of intangible benefits) in whole or part in the field of raising of public revenues. It is obvious under the facts of this case that plaintiff did not consider, nor could it reasonably be held to have considered, that its required payment of $407 for such stock, was an investment, as no return on such purported investment could be realized, except repayment of the bare purchase price delayed for many years.17
In Penn Yan, the cooperative shareholder assigned a value of $6.90 to its Class C shares and introduced expert testimony tending to support this general figure as a reasonable estimate of the shares’ fair market value. The Court of Claims approved the cooperative’s evaluation. In M.F.A. Central Cooperative v. Book-waiter,18 the district court concluded that Class C shares in the St. Louis Bank for Cooperatives had no fair market value at all. This conclusion was reversed by the Eighth Circuit which stated, “While the Class C stock has no established market value, it has a substantial book value and while it is likely not worth its par value at the time it is issued, it certainly has substantial value.”19 It should be noted that there is a considerable difference, as to the factors affecting value, between the shares of the St. Louis bank and those involved here.20 In the present case, considering the nature of the Class C stock and the testimony as to its value adduced in the district court, that court was not clearly erroneous in determining that the Class C shares had no fair market value and no more than a nominal value to the taxpayers.21
II
Notwithstanding the absence of a fair market value for the Class C shares, the government contends that taxpayers were not entitled to deduct any portion of their purchase price. It cites Montana Power Co. v. United States
If one buys something and pays more than it is worth, and more than he*1325 can resell it for, there are no immediate tax consequences of this everyday occurrence. * * * He must “realize” his bad bargain, his loss, by selling.
We do not dispute the soundness of this tax principle, but consider it inapplicable to the present case.
[I]t would be unfair and unjust to apply such a doctrine in the circumstances where disposition by the plaintiff of the class C stock was a practical impossibility due to lack of a market, which resulted from the statutory restrictions placed upon such stock under the capitalization formula prescribed by law for the banks for cooperatives.24
Montana Power and the other cases relied on by the government are readily distinguished from the present situation. Taxpayers in the instant case have not been the victims of a bad bargain in the traditional sense;
We agree with the trial court and with the Court of Claims in Penn Yan, that the purchase price of the Class C stock (in excess of the nominal value assigned it by taxpayers) is deductible as interest in the year of purchase. Section 163(a) of the Code
[I]f as a condition to the making of a loan at an apparently permissible rate of interest, the lender requires the borrower to sell property to him at less than its. value or to purchase property from him at an excessive*1326 price, the difference, represents interest. * * *31
In M.F.A., the district court held that the amounts paid by the plaintiff cooperative for Class C shares of the St. Louis Bank for Cooperatives were not deductible as interest under § 163(a),
This Class C stock purchased quarterly was of absolutely no use or benefit to M.F.A. Central Cooperative. * * The only reason it was purchased was because M.F.A. Central wanted to borrow money from the St. Louis Bank for Cooperatives and the agreement to purchase Class C stock was imposed as a condition of the loan. It is impossible to separate the loan from the purchase of the stock. One was the motivation for the other.35
The district court in M.F.A. also considered the loan agreement as significant evidence that the parties understood the obligation to purchase the Class C stock to be apart from the interest requirements. We do not feel that the attitude of the parties is controlling. We agree with the Court of Claims in Penn Yan that a current deduction was proper and that the appropriate deduction lies under § 163(a).
Accordingly, the judgment of the district court is affirmed.
. 12 U.S.C. § 1141j.
. 12 U.S.C. § 1134.
. 12 U.S.C. § 11344.
. The rate for the New Orleans Bank during the periods in question was 15%.
. 12 U.S.O. § 11347(b).
. In a footnote to its brief the government states:
The Government also contended in the lower court, that the taxpayers should have reported the patronage dividends (refunds) of shares of Class C stock during the taxable periods in issue as income. The lower court refused to sustain that contention. The Government has not appealed from that part of the judgment.
In this connection the following argument is advanced by amicus curiae:
By failing to appeal from the decision below that Class “C” stock received as patronage refunds must be included in plaintiffs’ income only to fhe extent of $1 per share, the government in effect concedes that the fair market value of such stock is no more than $1 per share. Clearly the same standard must apply in assessing the value of the identical stock which is purchased pursuant to the requirements of a loan agreement.
See Commissioner of Internal Revenue v. Carpenter, 219 F.2d 635 (5th Cir. 1955); Long Poultry Farms v. Commissioner of Internal Revenue, 249 F.2d 726 (4th Cir. 1957); Treas.Reg. § 1.61-5(b) (1) (iv) (1959).
. The same question has been involved in two recent cases. In Penn Yan Agway Cooperative, Inc. v. United States, 417 F.2d 1372 (Ct.Cl.1969), the Court of Claims held that amounts paid for Class C shares of the Springfield Bank for Cooperatives under the “interest override” requirements were currently deductible as interest. In M.F.A. Central Cooperative v. Bookwalter, 286 F.Supp. 956 (E.D.Mo.1968), the district court allowed current deduction of the cost of Class C shares in the St. Louis Bank for Cooperatives, but considered it an ordinary and necessary business expense rather than interest. On appeal the Eighth Circuit reversed the district court and held that the cost of Class C shares was not currently deductible. M.F.A. Central Cooperative v. Bookwalter, 427 F.2d 1341 (8th Cir. 1970).
. The New Orleans Bank does not issue certificates for the Class C shares. Thus, Class C shares are really only credits entered on the books of the bank in units of $100 and fractional parts thereof.
. The Bank’s Class C shares have changed hands only at the liquidation of a cooperative or its merger with another.
. 12 U.S.C. § 1134d(c).
. For purpose of valuation, the Penn Yan court accepted 30 or 31 years as the period required before the stock would be retired based on the history of the Springfield Bank. It is not clear to what extent this figure reflected the discretion of the bank officials or other factors which could operate to defeat or prolong recovery.
. [Fair market value] is the price at which property will change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the facts.
Willow Terrace Dev. Co. v. Commissioner of Internal Revenue, 345 F.2d 933, 936 (5th Cir. 1965).
. The Government states in its brief:
In truth, because of the special characteristics of the stock there is no reasonable and determinable market value which can be assigned to it. As one authority puts it [Packel, Law of Cooperatives (3d ed.), Sec. 45 (d) at 234.]:
The circumstances surrounding the issuance of revolving fund certificates are often such that no particular market value can be ascribed to the certificate even though it refers to a sum certain.
. The history, organization, and capital structure of the Banks for Cooperatives is discussed by the court in Penn Yan. 417 F.2d at 1373-1376.
. Penn Yan Agway Cooperative, Inc. v. United States, 417 F.2d 1372, 1375 (Ct. Cl.1969).
. 417 F.2d 1372 (Ct.Cl.1959).
. Id. at 1377-1378.
. 286 F.Supp. 956 (E.D.Mo.1968).
. M.F.A. Central Cooperative v. Bookwaiter, 427 F.2d 1341 (8th Cir. 1970).
. From statements contained in briefs filed in this court, it appears that by June 30, 1967 the St. Louis Bank had completely retired its Class A shares and substantially reduced the amount of Class B investment. As a consequence it was able to redeem all Class C shares issued during the fiscal year ending June 30, 1956. The M.F.A. Cooperative had purchased St. Louis Class C shares from other cooperatives, and it appears that transactions between cooperatives were not uncommon.
. Rule 52(a) Fed.R.Civ.Pro.
. 159 F.Supp. 593, 595, 141 Ct.Cl., 620 cert. denied, 358 U.S. 842, 79 S.Ct. 23, 3 L.Ed.2d 76 (1958).
. See Ancel Greene & Co. v. Commissioner of Internal Revenue, 38 T.C. 125 (1962); McMillan Mortgage Co. v. Commissioner of Internal Revenue, 36 T.C. 924 (1961). These cases are thoroughly discussed in Penn Yan. 417 F.2d at 1380-1381.
. See Montana Power Co. v. United States, 159 F.Supp. 593, 141 Ct.Cl. 620 (1958).
. See Dresser v. United States, 55 F.2d 499, 512, 74 Ct.Cl. 55, cert. denied, 287 U.S. 635, 53 S.Ct. 85, 77 L.Ed. 550 (1932); Hoppers Co. v. United States, 278 F.2d 946, 949 (Ct.Cl.1960).
. Our decision on this point appears to be at odds with that of the Eighth Circuit in M.F.A. Central Cooperative v. Bookwalter, 427 F.2d 1341 (8th Cir. 1970). Insofar as that court’s decision is not attributable to the difference in value of the St. Louis shares, we are simply unable to agree. If we concluded, as did the Eighth Circuit, that the “interest override” payments were made to acquire Class C shares as capital assets, we would agree that recognition of gain or loss must ordinarily await realization through sale or exchange. However, we agree with the court below that, for tax purposes, the bulk of these payments were not actually made to acquire an asset.
. 26 U.S.C. § 163(a).
. Old Colony R. R. v. Commissioner of Internal Revenue, 284 U.S. 552, 560, 52 S.Ct. 211, 213, 76 L.Ed. 484 (1932).
. Wiggin Terminals, Inc. v. United States, 36 F.2d 893 (1st Cir. 1929); L-R Heat Treating Co. v. Commissioner
. 417 F.2d at 1379; quoting, Memorial Gardens of Wasatch v. Everett Vinson & Assoc., 264 F.2d 282, 285 (10th Cir. 1959).
. While the Eighth Circuit reversed the district court insofar as it allowed a deduction as a business expense, it adopted the district court’s opinion on the question of interest. M.F.A. Central Cooperative v. Bookwalter, 427 F.2d 1341 (8th Cir. 1970).
. 26 U.S.C. § 162(a).
. See note 30 supra.
. The quid pro quo for taxpayer’s present deduction for an interest expense will arise when and if the Class C shares are redeemed. In that event taxpayers must take $99 into ordinary income. J. Chom-mie, Federal Income Tax § 17 at 33 (1968) ; 1 J. Mertens, Federal Income Tax § 7.34 et seq. (1969).
Dissenting Opinion
(dissenting) :
The majority opinion is a demonstration of what one of the few authorities on the law of cooperatives has counselled against:
The entire field of cooperative corporation law is so relatively new, the basic principles of the cooperative plan are so fundamentally different from those of corporations for profit, and the temporary or interim character of the capital required for proper functioning of a cooperative is so different from the permanent share capital of other business corporations, that even well established concepts in the field*1327 of business corporation law cannot safely be applied to cooperative corporations without careful understanding of the reasons underlying those principles and the applicability or inapplicability of those reasons to cooperatives. The fable of the three blind men’s impressions of an elephant holds a pointed moral for judges and lawyers approaching the problems of cooperative corporation law and, particularly, the problems of financial structure and operation of cooperatives. Revolving capital cannot be assumed to result from the creation of either an exclusively debtor-creditor relationship or an exclusively corporation-shareholder relationship. Rather it involves a blending of certain elements of both, and frequently something new has been added as well. The resultant product is sui generis. In the long run, the public interest will best be served by thorough, patient, and understanding comprehension of what participants in a cooperative enterprise are trying to achieve, rather than by unwarranted assumption that new legal relationships arising from cooperative business transactions and organizations must be neatly and quickly, albeit somewhat forcibly, classified according to preexisting legal concepts developed under different conditions for different purposes in different kinds of transactions and organizations.
Nieman, Revolving Capital in Stock Cooperative Corporations, 13 Law and Contemporary Problems 393 at 402 (1948).
The taxpayers are incorporated farmers’ cooperatives. In issue is the tax treatment of amounts which they have paid for Class C stock which they hold of the New Orleans Bank for Cooperatives, an incorporated stock cooperative of which they are members and from whom they borrow.
Once one grasps the function of this particular stock in an institution organized by the Congress as a cooperative
The Eighth Circuit, in M.F.A. Central Cooperative v. Bookwalter, 427 F.2d 1341, has reached the same conclusion which I reach. That court held that the required quarterly investments in Class C stock were payments for capital assets. It affirmed the holding of the District Court
1.
Central to this case is the fact that the New Orleans Bank for Cooperatives is itself a cooperative. “A cooperative is an association which furnishes an economic service without entrepreneur profit and which is owned and controlled on a substantially equal basis by those for whom the association is rendering service. * * * ‘[Entrepreneur profit’ * * * really represents the antithesis of the benefits normally ascribable to cooperatives. ‘Entrepreneur profit’ is used in the true economic sense of a return for the speculative or risk element in an enterprise. In a cooperative, all the members assume, in a broad sense, the economic risk, and they contemplate no return for the undertaking of the risk.” Packel, The Law of Cooperatives, § 1, pp. 2-3 (3d ed.).
“The primary objective of an ordinary cooperative is not charitable. * * In the normal case * * * the cooperative is designed to further the economic interest or welfare of its members. Economic welfare does not merely refer to financial savings or increased monetary returns. It cuts much deeper and takes into consideration basic aspects of economic life. Quality of product, decency of service, ownership, control and satisfaction of self-help are important benefits of cooperatives and sometimes are even more important than the direct financial benefits.” Id. at pp. 6-7.
Among the normal attributes of a cooperative are:
(3) transfer of ownership interests is prohibited or limited;
(4) capital investment receives either no return or a limited return;
(5) economic benefits pass to the members on a substantially equal basis or on the basis of their patronage of the association;
Id. at 3.
Justice Brandeis pointed out in his dissent in Frost v. Corporation Commission, 278 U.S. 515, 536, 49 S.Ct. 235, 73 L.Ed. 483, 495 (1929) that farm cooperatives seek, in addition to the immediate and direct financial advantage of members, a type of economic democracy as well in which there is equitable assumption of responsibilities and equitable distribution of benefits, and that in addition to financial benefits they promote and effect cooperation among farmers. These objectives, coupled with that of economic strength springing from the combination in a single institution of the combined effort and contributions of all, is important in grasping the relationship between the appellant cooperatives and the cooperative financial institution from which they borrow.
2.
As Professor Nieman points out, the capital of a cooperative, insofar as permanence or impermanence of shares of stock or other units of capital is concerned, is essentially different from the capital of other business corporations.
A cooperative’s capital, however, more often represents essentially a loan or temporary contribution by its patrons to finance certain economic services for them. The patron-member or patron-shareholder expects that the capital which he contributes will be*1329 returned to him prior to dissolution, but not until his own and other patrons’ subsequent contributions to capital render his earlier contribution unnecessary to finance the cooperative’s facilities and operations. He does not expect to wait until dissolution, and he knows that his share are not readily salable. He looks to the cooperative to return his capital contributions to him if, and as soon as, it can do so.
Nieman, supra, at 393-394. This concept is a formalization of early, informal cooperative arrangements.
Most of the formalized early cooperatives were corporations, which organized and structured their capital under the general corporation laws, the only laws available, though unrelated to the particular capital requirements of the cooperative. Id. at 393 and 395. “There ever since has been a trial-and-error effort to develop for cooperatives a kind of capital more adequately suited to their peculiar needs and still within the corporate form.” Id. at 395.
As cooperatives evolved, necessity imposed the creation of a new kind or temporary of interim capital, revolving fund capital.
Provision frequently was made for the return of a member’s share of the capital upon the termination of his membership. The risk to the cooperative’s financial integrity in the event that a substantial number of members should withdraw and demand the return of their membership capital at the same time required modification of the right to demand a return of membership capital promptly upon termination of membership. Provision was made to suspend the rights and privileges of membership or to retain the member’s share of the capital until such time as the cooperative should be financially able to pay it out without undue prejudice to other members or creditors. The problems incident to the existence of permanent capital, even membership capital repayable upon termination’ or suspension of membership or reasonably soon thereafter, eventually were met by the creation of a new kind of temporary or interim capital which has now become quite common, although peculiar to cooperatives — that is, revolving-fund capital.
Id. “The revolving fund plan ‘has been likened to a water wheel, picking up water, using it to create the power that turns the mill machinery, and returning the water to the midstream.’ ” Id. at 396. As the fund of capital becomes adequate it is maintained at that level by continuing to receive each year new con
The relationship of the stock cooperative to the member-stockholder who contributes capital is not strictly debtor-creditor, for there is no loan with a maturity date, nor corporation-shareholder in the commercial sense. Though styled corporation-shareholder it is in fact sui generis. Nieman, swpra, at 397 and 402.
3.
It is against this background of recognized principles of cooperative reorganization and operation that Congress has established a comprehensive farm credit system, which is but a part of a broader program of encouraging the organization and development of effective cooperatives.
The Farm Credit Act of 1933
The Farm Credit Act of 1953 required a study of methods by which to effect increased borrower participation in the management, control, and ultimate ownership of institutions operating under the permanent system of agricultural
The House Committee Report described the purpose of the legislation in this way:
The primary purpose of title I of the bill is to provide a plan under which the banks [for cooperatives] would be organized on a truly cooperative basis. Borrowing cooperatives would continually make capital contributions to the system so long as they used its credit service. Each year final net savings (after taxes, dividends, reserves, and surplus requirements) would be distributed as patronage refunds to borrowing coopei’atives in the form of capital stock, all of which capital would remain in the system until all of the capital stock of the United States had been retired. Each year Government capital would be retired in an amount equal to the required stock contributions of and the patronage refunds to the borrowing cooperatives.
Id. at 2951.
The Act established a pure revolving fund capital structure. Penn Yan, supra, 417 F.2d at 1374. It created Classes A, B and C stock, A owned by the government (nonvoting and no dividends), B owned by investors (nonvoting but dividend paying), and C (voting but only one vote to a member, no dividends). 12 U.S.C. § 1134d. Each year, as capital is added through investment in Class C shares by each borrower, and through distribution to borrowers of patronage refunds in the form of Class C shares, an equal amount of Class A shares is retired. Retirement of Class C shares will commence when all Class A stock has been retired, except that as Class C is retired all earlier issued Class B must also be called for retirement.
In lieu of the one-time purchase of stock previously required of each borrower, the 1955 Act substitutes a system of scheduled purchases of Class C stock. “[E]ach borrower * * * shall be required to invest quarterly in class C stock an amount equal to not less than 10 nor more than 25 per centum * * * of the amount of interest payable by it to the bank during the calendar quarter. Payment for such stock shall be made quarterly or when the regular interest payments of the borrower are payable.” 12 U.S.C. § 1134d(a) (3). Prior to the 1955 Act required purchases were unrelated to interest but keyed to the amount of the loan. Post-1955 purchases are keyed to interest only as a measure of the amount of stock to be purchased. It is obvious that they are keyed to payments of interest for convenience of billing and payment — the borrower pays his scheduled contribution to capital when he makes his interest payment, whether quarterly or otherwise. Amounts due for interest and investment in stock are rendered in the same bill, although separately stated and identified. A borrower who owns Class B stock and does not want to make the required investment in Class C stock by paying cash can convert his Class B to Class C. 12 U.S.C. § 1134d(a) (3). This has been done by the New Orleans Bank in many instances, always on a dollar-for-dollar basis, $100 par value of Class C for $100 par value of Class B.
The bank has a statutory lien on the borrower’s Class C stock. In cases where it has been exercised against a defaulting borrower, the full par value of the stock has been applied to the loan balance.
In 1956, promptly after the 1955 Act went into effect, the New Orleans Bank established 15 per cent of interest payable during the quarter as the amount of quarterly investment in stock required of the borrower. It did so pursuant to a policy determination that it hoped to retire all Class A stock by 1976, a 20-year period, and projected the 15 per cent figure as sufficient to achieve that. Retirement has been carried out each year as planned except that the rate of retirement has been better than expected. By 1963 Class A stock had been reduced from the 1956 level of $7,000,-000 to $4,880,000, as against the projected level for that year of $5,150,000. In 1966 the Bank estimated informally that all Class A stock would be retired by 1972 or 1973.
4.
Purchase of a single Class C share is a prerequisite to eligibility to borrow from the bank. 12 U.S.C. § 1134d(a) (3). The District Court, the majority in this case and the court in Penn Yan viewed the purchase of this single share as conferring upon the purchaser the full spectrum of benefits that could flow to it from stock ownership, so that no additional benefit could accrue by its securing a loan and, as an incident thereof, purchasing additional stock as required. This misses the whole point of the cooperative structure of the banks. The thrust of the Congressional scheme is the promotion of permanent institutions to supply low cost credit to farmers’ cooperatives and to foster the creation of additional cooperatives.
There are institutional values other than that of continued availability of low cost credit. There is the inherent cooperative concept that it is beneficial to channel into a single integrated effort the assets and needs of the group of patrons. There is the benefit of simple economic power, through ultimate substantial ownership of the established, fully capitalized, staffed, and accepted financial institution.
Other benefits are perhaps more easily perceived because in the more conventional garb of dollars. As borrowers, taxpayers qualify for patronage refunds, distributed to them annually in proportion — as in all cooperatives — to their use of the services offered, thus in this instance measured by interest paid. In 1958-63 Coastal received patronage refunds in Class C stock of $289,309.81. In 1961-63 Mississippi received $81,272.-57. Together these are 14 per cent of all Class C stock (purchases and refunds) outstanding at the end of fiscal 1963. When their purchases of Class C stock for those years are added, it is revealed that together the taxpayers owned 24 per cent of the outstanding Class C stock.
Also each bank allocates on its books each year to each patron, in proportion to interest paid by the patron, a portion of the amount by which the bank’s contingency reserves exceed its needs.
These benefits are measured by the borrower’s use of services. But he does not qualify for them by the act alone of borrowing, only by borrowing plus contributing to capital. Congress could have chosen other approaches. A large contribution to capital to become eligible for service was a possibility, but this would be inconsistent with the cooperative concept of nominal financial outlay to become a patron (a small membership fee for the nonstock cooperative, a small purchase of stock for the stock cooperative), with the real and substantial contribution to capital made in proportion to use of services. It would be inconsistent with the aim of fostering organization and growth of fledgling cooperatives. Congress could have required a large one-shot contribution when the loan is made, but it had discovered the disadvantages of this before 1955. It
5.
The sui generis stock of an incorporated cooperative need not have the same characteristics as ordinary commercial stock to be a capital asset. But the differences loom so large in the minds of the plaintiffs, of the District Court
No Class C stock certificates are issued. A form for the certificates has been approved by the Farm Credit Administration, but the Board of Directors of the New Orleans Bank exercised the discretion given them by the bylaws not to issue certificates. The Bank reflects on its stock ledger the amount of each type of Class C stock owned and at the end of each fiscal year notifies each owner of the amount owned at the beginning and end of the year.
The stock has no dividend and no growth potential. This is normal for a cooperative.
Only the first share of Class C stock carries a voting right. “One person one vote” is a basic cooperative principle, which gives recognition to the concept of an economic democracy. Packel, supra, at 138-340.
Class C shareholders will not enjoy sole control of the bank in the commercial sense even when all Class A stock is retired since they will not elect all directors of the joint board which administers it and other farm credit agencies of the region. This makes the stock different from some commercial stock
The stock is not transferable except to other cooperatives and with the consent of the Bank.
6.
The majority center on, and repeatedly employ, the phrase “interest override,” and even characterize the requirements of the statute in those terms. The term nowhere appears in the statute, the Congressional history, the loan agreements,
Class C stock purchased under the required investment provisions is shown in the stock ledger separate from that issued as patronage dividends, and under the heading “Investment in C Stock (Interest Override).” The President defined “interest override” as “the amount we require our borrowers to pay over and above interest for the purchase of C stock.”
The promissory notes signed by taxpayers provide for interest. Each separate loan agreement provides:
Stock Purchase: The association shall invest quarterly in class C stock of the bank at its fair book value, not exceeding par, an amount equal to 15 per cent of the amount of interest payable by the association to the bank on said loans for said calendar quarter or part thereof. The association shall pay for said class C stock on the date interest is due and payable. * * *
7.
The plainly erroneous rule applied to the finding of the District Court that the Class C stock has only nominal value, may not be the basis of an affirmance. What has been said makes clear that the stock has, as the Eighth Circuit concluded in MFA, an intrinsic value. Also it is apparent that the District Court’s finding was based on the erroneous basis of comparing the stock, characteristic by characteristic, with that of the usual commercial corporation and totally overlooking its value as a capital contribution to a cooperative under the plan of the Congress.
On the issue of value, in Columbia Bank for Cooperatives v. Lee, 368 F.2d 934 (4th Cir. 1966), a bankrupt cooperative owned Class C stock of the Columbia regional bank with a par value (in round figures) of $54,200, Class B stock with a par value of $45,800, and there had been allocated to the bankrupt surplus of $13,000, total $113,000. The referee ordered the bank to allow a setoff of this $113,000 against the cooperative’s indebtedness to it of $162,000, and the District Court affirmed.
8.
My brothers have, in Professor Nei-man’s terms, felt the leg of the elephant
. The purchases were made by Coastal between 1958 and 1963 in the total amount of $211,799.68, and by Mississippi Chemical between 1961 and 1963 in the total amount of $55,113.19. Tax refunds ordered by the District Court are $265,044.35 to Coastal and $85,298.51 to Mississippi Chemical.
. E. g. Old Colony R. Co. v. Commissioner of Internal Revenue, 284 U.S. 552, 52 S.Ct. 211, 76 L.Ed. 484 (1932).
. Under a charter issued by the Farm Credit Administration.
. M.F.A. Central Cooperative v. Bookwalter, 286 F.Supp. 956 (E.D.Mo.1968).
. Perm Yan held that the purchase price of Class C stock was interest to the extent that it exceeded $6.60 per share, which the taxpayer conceded was its value.
. Nieman, supra, at 393.
. “When more than a century ago, a group of Ohio farmers joined together to ship their cattle to market at Pittsburgh, each of them presumably furnished his share of the cattle, wagons, and equipment which were the capital for the expedition; and each participant’s capital was returned to him upon the completion of the project. The horses, wagons, machinery, and labor required for barn raisings or threshing were furnished by the participants, and were returned to them after each job or threshing season. Each participant ceased to provide such capital, and capital previously furnished was returned to him, when he ceased farming and, thus, no longer had need for the barn-raising or threshing services and equipment of his neighbors. In such informal, cooperative enterprises, the temporary nature of the capital employed was plain.”
Id. at 394.
. Today, in most jurisdictions, a cooperative can incorporate either with or without capital stock. Packel, supra, § 5(c) at p. 35.
. Packel, supra,, § 60, p. 275 et seq.
. 39 Stat. 360.
. S.Rep. No. 144, 64th Cong.; 1st Sess. pp. 2, 4 and 10.
. The Senate Report said of this requirement :
“At the outset we secure the personal interest of the borrower by requiring him.to contribute to the capital of the loan association 5 per cent of the face of his loan. This personal stake makes the * * * borrower a cooperator.”
S.Rep. No. 144, supra, p. 10.
. 48 Stat. 257.
. 2 U.S.Code & Admin.News 1955, p. 2949, at 2950.
. 2 U.S.Code & Admin.News 1955 at p. 2951; Perm Yarn, supra, 417 F.2d at 1374.
. The Class B shares are of nominal importance. In 1963 they constituted only approximately 5 per cent of total stock outstanding in the New Orleans Bank.
. The necessity of not being hypnotized by the phraseology of the commercial corporation is pointed up by 12 U.S.C. § 1134d(b). If a borrower is not author
. The supplemental brief of the United States quotes from an exhibit in the M.F.A. record which states that five of the regional banks have retired all Class A stock and that it is anticipated that all others will accomplish full retirement of the government’s investment by 1971.
. The 1963 report of the New Orleans Bank states that more than half of the cooperatives regularly financed by it are the outgrowth of conferences held by its staff with groups of farmers contemplating the establishment of new cooperatives.
. The benefit to these taxpayers, of the New Orleans Bank as a source of low cost credit, is quickly seen by a look at the years here in question. Their purchases of Class C stock for these years were, in round figures: Coastal (1958-63)— $11,700; $33,900; $47,100; $41,700; $35,000; and $42,100. Mississippi (1961-63) — $18,900; $16,800; and $19,-300. Each purchase represents 15 per cent of the interest paid for the year. Interest usually was between 4 and 5 per cent. A simple calculation reveals the massive extent of the loans which they were enjoying.
From its organization through fiscal 1963 the New Orleans Bank made loans to its limited class of borrowers in its region (Louisiana, Mississippi and Alabama) of more than $618 million.
. Also it should be noted that the major source of loan funds for each bank is not its capital but funds which it obtains by borrowing from the Central Bank and the federal intermediate credit banks and by sale of debentures in cooperation with other regional banks. This access to low cost funds, and government-assisted credit, continues after Class A stock is retired.
. Included therein are like distributions which the regional bank receives from the Central Bank for cooperatives.
. The separate increments of value represented by the Class C stock (purchased and patronage refunds) and the allocated surplus are pointed out in Columbia Bank for Cooperatives v. Lee, 368 F.2d 934 (4th Cir. 1966).
. The District Court, after emphasizing the differences, concluded that the stock “does not enjoy the usual attributes of shares of stock but are mere bookkeeping entries or devices.” The District Court made no references to the peculiarities of cooperative financing. In fact its opinion does not even reveal that the New Orleans Bank is a cooperative.
. This system of recording stock ownership without issuing certificates is no surprise to any holder of shares of almost any one of the major mutual funds which employ the same method for shareholders authorizing automatic reinvestment of dividends and which, like the New Orleans Bank, notify the shareholder periodically of how many new shares he has acquired.
A certificate of stock is not the stock itself but only evidence of ownership. The rights and duties between corporation and stockholder exist apart from the certificate. 11 Fletcher, Corporations, § 5092 (Perm. ed.).
. The principle is carried forward into the Capper-Volstead Act under which a cooperative marketing association, if it wishes to enjoy immunity from the Sherman Act, must not allow a member more than one vote regardless of how much stock he owns. 7 U.S.C. §§ 291-292.
. Commercial preferred stock often is nonvoting, and nonvoting common of many companies is traded daily on the stock exchanges.
. There have been a few approved transfers incident to liquidation, merger or accommodation between cooperatives.
But compare Columbia Bank for Cooperatives v. Lee, 368 F.2d 934 (4th Cir. 1966), stating that once issued Class C stock is transferable to any person.
. The New Orleans Bank in many instances has made just such a full offset without legal proceedings.
. On remand (not officially reported) no valuation by the referee was necessary. The parties agreed that the trustee would receive a credit in the amount of the value of bankrupt’s stock plus allocated surplus, a total of $112,694.97, and the trustee agreed to pay the bank cash of $49,305.03, which was the balance of the bank’s claim.
