[996]*996OPINION.
Oppek :
Petitioner contests this deficiency on the ground, first, that it is a tax exempt organization, and, second, that even if it is not, the two controverted items involved in the deficiency were nontaxable, since they do not represent income to the petitioner. The respondent concedes error in his disallowance of two small items, leaving in dispute the $8,062.28 “Building Fund” item and the amount of $5,948.10 deducted from the proceeds of the pools and used for the payment of a 3 percent dividend.
Exemption from tax is claimed under section 103 (12) of the Revenue Act of 1932,1 which grants exemption to farmers’ and fruit [997]*997growers’ marketing associations organized and .operated on a cooperative basis. Bespondent asserts that the provisions of this section, and of the regulation issued in connection therewith,2 must result in rejection of the claim for exemption if in any respect petitioner fails to meet the requirements therein specified. We have accordingly examined the facts disclosed by the record for the [998]*998purpose of determining what, if any, of the requirements set forth “are absent here.
It is apparently conceded that petitioner complies with the provision that dividends shall be limited to 8 percent, that substantially all of its stock be owned by producers who market through the association, and that products marketed for nonmembers shall not exceed in value those marketed for members. We do not understand respondent’s position to be that the building fund reserve, for which the item of $3,062.28 was retained out of the carrot pool by petitioner, is not for a necessary purpose or is not reasonable in amount as required by the statute. Indeed, one example of a “necessary purpose” given by the regulations is “to provide for the erection of buildings and facilities required in business.” Respondent urges, however, that petitioner* was not “organized * * * on a cooperative basis”, and that its operations do not accord with the statutory definition because of its so-called “commercial departments” and because no provision is made for turning back to nonmember producers the proceeds of sales of their products less necessary marketing expenses.
It is true that petitioner’s articles of incorporation authorize it to exercise powers much broader than the mere operation of a farmers’ marketing cooperative. It is in evidence, however, that at the time of incorporation no Oregon law particularly applicable to the organization of cooperative associations had yet been passed. It is stipulated that petitioner was organized “for the purpose of marketing fruit and other agricultural products for farmers.” And petitioner’s manager testified that petitioner:
* * * was organized in 1908, and it engaged in the business of processing and marketing fruits and vegetables grown by its members.
Q. Was that the primary purpose of this organization?
[999]*999A. The purpose of the organization was to create an outlet for the products of the farmers of that section on a cooperative basis.
Q. State whether or not this policy has been followed * * * since its organization.
A. It has.
This testimony is uncontradicted, and seems to us to furnish evidence as to the basis of petitioner’s organization much more persuasive than the formal terms of a charter. See Fruit Growers’ Supply Co. v. Commissioner, 56 Fed. (2d) 90, 91; Unity School of Christianity, 4 B. T. A. 61, 69; I. T. 1914, C. B. III-1, p. 287. We think it must be concluded that petitioner was organized on a cooperative basis.
In addition to the processing and marketing of members’ products on a nonprofit basis, petitioner also conducts “commercial departments”, which apparently engage in certain other activities. These departments operate a refrigeration plant selling ice and ice cream, maintain a machine shop in which some custom work is done, manufacture vinegar, beverages, and certain “specialties” such as pectin, mayonnaise, salad spreads, pickles, jams, jellies, and juices, and handle certain supplies such as sprays and fertilizers. Besides this, they take over from the producers’ “pools” inventories of canned and processed products which have not been disposed of at the end of a reasonable period, “paying” for these items on an estimated fair market basis and thus permitting the more expeditious liquidation of the pools themselves. The products so acquired are disposed of by this department as occasion permits.
The last item is by far the largest in dollar volume. It accounts for $102,409.61 out of total gross sales of all the “commercial departments” of $236,572.42. It may be questioned whether this item is essentially different from the sales made out of the pools themselves, since sales of the same products are made to the same market. Though referred to as a “sale” by the pools, the transfer to the “commercial department” is nothing so imposing, since title to the products is in the association from the beginning. The distinction is principally one of bookkeeping. Sales out of the pools are prorated among the producers in the pool and the proceeds of these sales are distributed only after the sales have been made and the inventory exhausted, there being first deducted an amount later used for payment of dividends. Products not so disposed of, and taken over to be sold by the “commercial department”, return a payment to the producers immediately, but this is an estimate of what they would have brought had they been sold from the pool, namely, estimated market price less estimated cost of marketing. Only if these estimates prove erroneous can there be any “profit.” And this “profit”, [1000]*1000even if it results,3 is not essentially different from the dividends paid out of pool operations. It goes almost entirely to the producer-members in any event, though not as participants in the operation of the pools but as stockholders. This single factor, however, can not be sufficient to condemn petitioner’s plan of operation, since the payment of dividends up to 8 percent is expressly permitted by the revenue act, and petitioner is not authorized to exceed this figure. Petitioner’s practice appears to be an appropriate method of solving one of its operating problems and we should be reluctant to conclude that it would thereby become disqualified for exemption.
Another group of products is presumably specially processed or mixed, such as vinegar, “soda fountain supplies”, and “specialties.” These items are apparently little different from that just described except that the ingredients seem to be “purchased” from the pools from time to time and without awaiting the outcome of the pool operation. We do not understand respondent to contend that the producer members are not paid their pro rata share of the proceeds of the ingredients so used, and there is no evidence in the record to that effect. The purpose is “the salvage of by-products” and the grower members supply the ingredients “in a large part.” This was explained by petitioner’s manager on the ground that “there are always certain byproducts of a fruit-growers’ plant which may be better marketed by further processing and by mingling with other products which must be purchased on the outside.”
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[996]*996OPINION.
Oppek :
Petitioner contests this deficiency on the ground, first, that it is a tax exempt organization, and, second, that even if it is not, the two controverted items involved in the deficiency were nontaxable, since they do not represent income to the petitioner. The respondent concedes error in his disallowance of two small items, leaving in dispute the $8,062.28 “Building Fund” item and the amount of $5,948.10 deducted from the proceeds of the pools and used for the payment of a 3 percent dividend.
Exemption from tax is claimed under section 103 (12) of the Revenue Act of 1932,1 which grants exemption to farmers’ and fruit [997]*997growers’ marketing associations organized and .operated on a cooperative basis. Bespondent asserts that the provisions of this section, and of the regulation issued in connection therewith,2 must result in rejection of the claim for exemption if in any respect petitioner fails to meet the requirements therein specified. We have accordingly examined the facts disclosed by the record for the [998]*998purpose of determining what, if any, of the requirements set forth “are absent here.
It is apparently conceded that petitioner complies with the provision that dividends shall be limited to 8 percent, that substantially all of its stock be owned by producers who market through the association, and that products marketed for nonmembers shall not exceed in value those marketed for members. We do not understand respondent’s position to be that the building fund reserve, for which the item of $3,062.28 was retained out of the carrot pool by petitioner, is not for a necessary purpose or is not reasonable in amount as required by the statute. Indeed, one example of a “necessary purpose” given by the regulations is “to provide for the erection of buildings and facilities required in business.” Respondent urges, however, that petitioner* was not “organized * * * on a cooperative basis”, and that its operations do not accord with the statutory definition because of its so-called “commercial departments” and because no provision is made for turning back to nonmember producers the proceeds of sales of their products less necessary marketing expenses.
It is true that petitioner’s articles of incorporation authorize it to exercise powers much broader than the mere operation of a farmers’ marketing cooperative. It is in evidence, however, that at the time of incorporation no Oregon law particularly applicable to the organization of cooperative associations had yet been passed. It is stipulated that petitioner was organized “for the purpose of marketing fruit and other agricultural products for farmers.” And petitioner’s manager testified that petitioner:
* * * was organized in 1908, and it engaged in the business of processing and marketing fruits and vegetables grown by its members.
Q. Was that the primary purpose of this organization?
[999]*999A. The purpose of the organization was to create an outlet for the products of the farmers of that section on a cooperative basis.
Q. State whether or not this policy has been followed * * * since its organization.
A. It has.
This testimony is uncontradicted, and seems to us to furnish evidence as to the basis of petitioner’s organization much more persuasive than the formal terms of a charter. See Fruit Growers’ Supply Co. v. Commissioner, 56 Fed. (2d) 90, 91; Unity School of Christianity, 4 B. T. A. 61, 69; I. T. 1914, C. B. III-1, p. 287. We think it must be concluded that petitioner was organized on a cooperative basis.
In addition to the processing and marketing of members’ products on a nonprofit basis, petitioner also conducts “commercial departments”, which apparently engage in certain other activities. These departments operate a refrigeration plant selling ice and ice cream, maintain a machine shop in which some custom work is done, manufacture vinegar, beverages, and certain “specialties” such as pectin, mayonnaise, salad spreads, pickles, jams, jellies, and juices, and handle certain supplies such as sprays and fertilizers. Besides this, they take over from the producers’ “pools” inventories of canned and processed products which have not been disposed of at the end of a reasonable period, “paying” for these items on an estimated fair market basis and thus permitting the more expeditious liquidation of the pools themselves. The products so acquired are disposed of by this department as occasion permits.
The last item is by far the largest in dollar volume. It accounts for $102,409.61 out of total gross sales of all the “commercial departments” of $236,572.42. It may be questioned whether this item is essentially different from the sales made out of the pools themselves, since sales of the same products are made to the same market. Though referred to as a “sale” by the pools, the transfer to the “commercial department” is nothing so imposing, since title to the products is in the association from the beginning. The distinction is principally one of bookkeeping. Sales out of the pools are prorated among the producers in the pool and the proceeds of these sales are distributed only after the sales have been made and the inventory exhausted, there being first deducted an amount later used for payment of dividends. Products not so disposed of, and taken over to be sold by the “commercial department”, return a payment to the producers immediately, but this is an estimate of what they would have brought had they been sold from the pool, namely, estimated market price less estimated cost of marketing. Only if these estimates prove erroneous can there be any “profit.” And this “profit”, [1000]*1000even if it results,3 is not essentially different from the dividends paid out of pool operations. It goes almost entirely to the producer-members in any event, though not as participants in the operation of the pools but as stockholders. This single factor, however, can not be sufficient to condemn petitioner’s plan of operation, since the payment of dividends up to 8 percent is expressly permitted by the revenue act, and petitioner is not authorized to exceed this figure. Petitioner’s practice appears to be an appropriate method of solving one of its operating problems and we should be reluctant to conclude that it would thereby become disqualified for exemption.
Another group of products is presumably specially processed or mixed, such as vinegar, “soda fountain supplies”, and “specialties.” These items are apparently little different from that just described except that the ingredients seem to be “purchased” from the pools from time to time and without awaiting the outcome of the pool operation. We do not understand respondent to contend that the producer members are not paid their pro rata share of the proceeds of the ingredients so used, and there is no evidence in the record to that effect. The purpose is “the salvage of by-products” and the grower members supply the ingredients “in a large part.” This was explained by petitioner’s manager on the ground that “there are always certain byproducts of a fruit-growers’ plant which may be better marketed by further processing and by mingling with other products which must be purchased on the outside.”
As to the sale of ice and ice cream and the custom work done in the machine shop, the same witness stated:
“The refrigeration is an essential to the marketing of certain fruit products, and the association, for that reason, acquired a refrigeration plant adjoining its property. This refrigeration plant was at that time engaged in a wholesale and retail ice business, and also the manufacture and sale of ice cream. The association continued to carry on these functions in order to balance the operations of the ice plant. * * * The machine shop is necessarily maintained in the plant. The association provided a machine shop, and in order to make that machine shop more profitable, did some custom work there.”
It seems to us that. alTof the activities mentioned originated and were continuously maintained as incidents of the association’s principal function, cooperative marketing for agricultural producers. They were, according to the uncontroverted evidence, designed to assist in the efficient performance of that function by facilitating the marketing of products, on the one hand, and by reducing the cost of necessary operations, on the other. The encouragement extended to such enterprises by the favorable provisions of the revenue acts would to say the least be anomalous if the sacrifice of efficient operation were [1001]*1001to be required in order to attain the statutory exemption. We find no justification for such a construction of the law or of the regulations.
We refrain from extended discussion of the phase of petitioner’s business involving the purchase of growers’ supplies and their resale. The gross sales in this category are negligible, being less than 10 percent of the “commercial” items and approximately 2 percent of total gross sales. For all that appears they were handled at cost, and, although such articles were admittedly supplied “to some extent” to nonmembers, no attempt was made by respondent to elicit further details, it being apparently conceded that “The providing of fertilizers and sprays and other commodities peculiarly essential to fruit and vegetable growers is a matter of importance to an association of this kind.” No claim of exemption as a cooperative purchasing association is made by petitioner. And, since no particular significance appears to be attributed by respondent to this specific item, we feel justified in considering this aspect of petitioner’s activity as governed by the principles applicable generally to its so-called “commercial” operations.
Looked upon as a whole it seems to us that these “commercial departments” were purely incidental to petitioner’s principal purpose. They were conducted, not for their own sake, but as an adjunct and supplement to the cooperative marketing of farm products. See Producers’ Produce Co. v. Crooks, 2 Fed. Supp. 969. This seems to us to be the test, and not the numerical percentage of petitioner’s business attributable to those branches. It may be that the proportion of business done could be so great that it would be unreal to consider such operations incidental. Cf. Hills Mercantile Co., 22 B. T. A. 114. On this point we need express no opinion, since in our view no such contention could prevail on the facts before us. The principle we have stated has been applied in construing other subsections of section 103 and similar provisions, and we see no reason to reach a different result here. Santee Club v. White, 87 Fed. (2d) 5; King County Insurance Association, 37 B. T. A. 288; Trinidad v. Sagrada Orden de Predicadores, 263 U. S. 578; Unity School of Christianity, supra; Sand Springs Home, 6 B. T. A. 198. And it is to be noted that there is no statutory requirement that petitioner be engaged “exclusively” in cooperative marketing, as there was in some of the provisions construed by those decisions, but merely that it be “organized and operated on a cooperative basis (a) for the purpose of marketing the products of members * * We believe petitioner falls clearly within that definition.
It is urged with great force on respondent’s behalf that petitioner can not be both exempt and nonexempt and that if exempt there [1002]*1002was no ground for the filing of any return or the payment of any tax as to any part of petitioner’s income. That may be true, but whether true or not it raises no issue for our determination in this proceeding and we therefore refrain from deciding the question. If, on the one hand, it were possible for petitioner to be exempt .as to part of its income and subject to tax as to the balance, there would be no question before us, since petitioner would then have made the return and paid the tax required. If, on the other hand, petitioner is exempt as to all of its income, including that part on which it has already paid the tax, there is nevertheless no question before us, since no claim of overpayment is made, and petitioner specifically disclaims any attempt to litigate the necessity of filing a return or paying a tax as to its “commercial income.” Petitioner’s counsel stated: “No, we are not contending that the commercial department is free from taxation or is exempt. The only thing we are claiming is that the cooperative operations are exempt.” There being thus no basis in this contention for a different result on the issue before us, whichever way it might be decided, we refrain from discussing it further. See Central Co-Operative Oil Association, 32 B. T. A. 359.
We are thus brought to respondent’s final contention, that provision has not been made for participation by nonmember producers. It may first be remarked that it is only when nonmembers participate in operations that they must be permitted to share in the proceeds, and that it is not essential that the privileges of the association be extended to nonmembers in the first place. “The clear intent of this provision of the statute is that nonmember patrons, if dealt with, at all, will be treated the same as members * * (Italics supplied.) C. B. X-2, p. 164. Here, the fact that petitioner’s charter fails to establish a profit-sharing arrangement for nonmember producers is deprived of significance by the circumstance that petitioner’s marketing business is done exclusively for members. The stipulation of facts recites: “The Petitioner has Marketing Agreements (Exhibit ‘3’) with Growers, all of whom, are stockholders of Petitioner.” (Italics supplied.) On these facts it seems to us unnecessary that provision should be made for participation in profits by nonmembers until such time as nonmembers participate in petitioner’s operations.
This situation furnishes the distinction from the cases cited by respondent. In Fruit Growers' Supply Co. v. Commissioner, supra, where the petitioner was a cooperative purchasing association, the Circuit Court of Appeals for the Ninth Circuit, in affirming 21 B. T. A. 315, said (p. 92): “Where, however, the corporation engaged in business with nonmembers, the situation to that extent is entirely [1003]*1003different. The nonmember pays the market price. From this market price the petitioner can and did derive a profit.” Exemption was accordingly denied. In Farmers' Union Co-Operative Co. v. Commissioner, 90 Fed. (2d) 488, affirming 33 B. T. A. 225, the corporation operated a grain elevator, feed store, and general merchandise store, and it purchased, sold, and shipped grain and other farm products, and handled machinery supplies and repairs. It claimed that all of its activities constituted either marketing or purchasing on a cooperative basis. It had extensive dealings with nonstockholders, but its bylaws allowed the payment of patronage dividends only to stockholders ; nonmember patrons were wholly excluded from any possible participation. Thus in its allegedly cooperative activities of marketing and purchasing it failed to meet the requirement that nonmember patrons are to be treated the same as member patrons in the distribution of patronage dividends. Producers' Creamery Co. v. United States, 55 Fed. (2d) 104, involved a corporation buying dairy products at market prices and reselling them. Stockholders received a smn.11 bonus based on the quantity of the products they furnished, but 30 percent of the petitioner’s products were purchased from nonmembers to whom it turned nothing back. Because of this difference in treatment of members and nonmembers in its allegedly cooperative operations, the taxpayer was denied the statutory exemption. A similar result was reached in Farmers Cooperative Co. of Wahoo, Neb. v. United States, 23 Fed. Supp. 123, and Farmers Union Cooperative Supply Co. of Stanton, Neb. v. United States, 23 Fed. Supp. 128, decided on the same day on the authority of the preceding case. And cases where exemption was denied under the early revenue acts because of nonmember dealings not then permitted are of course entirely irrelevant to this proceeding. See Riverdale Co-operative Creamery Association v. Commissioner, 48 Fed. (2d) 711; Burr Creamery Corporation v. Commissioner, 62 Fed. (2d) 401, affirming 23 B. T. A. 1007.
The amendment contained in the 1926 Act was directly and designedly intended to “assure associations * * * that the liberal construction * * * of existing law is sanctioned by Congress.” That liberal construction included “allowing such associations to manufacture their products, to change the form of raw materials, and: in some cases to operate subsidiaries, so long as the operations are not conducted on an ordinary profit-making basis.” Senate Beport No. 52, 69th Cong., 1st sess., pp. 23, 24. For the reasons stated, we believe petitioner’s operations bring it within the ambit so defined, and do not at any point exceed the restrictions placed upon organizations seeking exemption. It follows that there is no ground upon which to sustain respondent’s determination.
[1004]*1004In view of our conclusion on the main issue, it is unnecessary to consider the petitioner’s alternative contention that the items giving rise to the deficiency do not in any event constitute income to it. Reviewed by the Board.
Decision will be entered for the petitioner.
Black, Leech, and Hxll dissent.