LOCAL BENEVOLENT LIFE AND MUTUAL COMPANIES.

LAW. Section 231. ... (10) Benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations; but only if 85 per centum or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses; .

REGULATION. It is a prerequisite to exemption under paragraph (10) of section 231 that at least 85 per cent of the income of the organization in question shall consist of amounts collected from members for the sole purpose of meeting losses and expenses. If an organization issues policies for stipulated cash premiums, or if it requires advance deposits to cover the cost of the insurance and maintains investments from which more than 15 per cent of its income is derived, it is not entitled to exemption. On the other hand, an organization may be entitled to exemption, although it makes advance assessments for the sole purpose of meeting future losses and expenses, provided that the balance of such assessments remaining on hand at the end of the year is retained to meet losses and expenses or is returned to members."

The phrase "of a purely local character" applies to benevolent life insurance associations, and not to the other organizations specified in the paragraph. It applies, however, to any organization seeking exemption on the ground that it is an organization similar to a benevolent life insurance association. An organization of a purely local character is one whose business activities are confined to a particular community, place, or district, irrespective, however, of political subdivisions. (Art. 521.)

A local association organized for the purpose of furnishing light and water to its members, all revenues being used exclusively for such service and not otherwise, is a "like organization" under the 1921 law whose requirements were more stringent than the present statute. (C. B. II-1, 158; I. T. 1671.)

An insurance association which permitted automobile owners to exchange contracts of insurance and indemnity without becoming jointly liable as subscribers on risks was held to be a "like organization" under the 1918 law. (C. B. I, 207; O. D. 312.)

FARMERS' OR OTHER MUTUAL INSURANCE COMPANIES.

LAW. Section 231. . . . . (11) Farmers' or other mutual hail, cyclone, casualty, or fire insurance companies or associations (including interinsurers and reciprocal underwriters) the income of which is used or held for the purpose of paying losses or expenses; . . . .

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[Former Procedure] This regulation assumed its present form in V-15-2690; T. D. 3847, approved April 2, 1926, at which time the words "or is returned to members" were added. For procedure under 1924 and earlier laws see Income Tax Procedure, 1926, pages 63-67.

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[Former Procedure] This section is new in the 1926 law. In the 1924 law, "farmers' or other mutual hail, cyclone, casualty, or fire insurance companies," appeared among the organizations listed in section 231 (10).

Before 1924, because of poor phrasing in the statute rather than due to intention, the requirement that the organization be "of a purely local character" was applied to farmers or other mutual insurance companies. The following clause was included in the 1924 law to rectify the situation under the earlier laws. It is not repealed by the 1926 law, and consequently remains in effect.

1924 LAW. Section 1013. . (b) The exemption provided in paragraph (10) of subdivision (a) of section 11 of the Revenue Act of 1916, and in subdivision (10) of section 231 of the Revenue Act of 1918, and in subdivision (10) of section 231 of the Revenue Act of 1921, shall be granted to farmers' or other mutual hail, cyclone, or fire insurance companies (if otherwise exempt under such paragraphs), whether or not such organizations were of purely local character. Any taxes assessed against such organizations shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited or refunded.

In a ruling under the 1924 law exemption was denied an association which sought classification as a mutual casualty insurance company, on the ground that the casualties against which it offered protection were sickness or accident to individuals whereas Congress intended to restrict the exemption to organizations insuring against the effects of accidents resulting in injury to property only.33

RULINGS. A mutual fire insurance company, although it writes insurance at the established Michigan bureau rates, is entitled to exemption under section 231 (10) of the Revenue Act of 1924 if its policyholders are liable to additional assessments as losses occur and are also entitled to the return of any unexpended balance of the so-called premium.

The fact that such a mutual insurance company receives income from reserves and from reinsurance, the total of which is less than 15 per cent of its income, does not deprive it of such exemption under section 231 (10) of the Revenue Act of 1924, although it does make it subject to tax under the corresponding section of the Revenue Acts of 1918 and 1921. (V-222765; I. T. 2288.)

Amounts collected by mutual insurance associations from reinsuring companies are to be treated as income in determining the percentage of income collected from members for purposes of exemption under section 231 (10) of the Revenue Act of 1924." (C. B. IV-2, 78; I. T. 2248.)

COOPERATIVE ASSOCIATIONS, ETC.

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LAW. Section 231. . . . . (12) Farmers', fruit growers', or like associations organized and operated on a cooperative basis (a) for the purpose of marketing the products of members or other producers, and

*C. B. III-2, 224; I. T. 2109. See also C. B. III-2, 232; I. T. 2113. "Section 231 (11) of the 1926 law formed a part of section 231 (10) of the 1924 law.

turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (b) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. Exemption shall not be denied any such association because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 per centum per annum, whichever is greater, on the value of the consideration for which the stock was issued, and if substantially all such stock (other than 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) is owned by producers who market their products or purchase their supplies and equipment through the association; nor shall exemption be denied any such association because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose. Such an association may market the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, and may purchase supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the purchases made for persons who are neither members nor producers does not exceed 15 per centum of the value of all its purchases:

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REGULATION. (a) Cooperative associations engaged in the marketing of farm products for farmers, fruit growers, live stock growers, dairymen, etc., and turning back to the producers the proceeds of the sales of their produce, less the necessary operating expenses, on the basis of the produce furnished by them, are exempt from income tax and shall not be required to file returns. Thus cooperative dairy companies which are engaged in collecting milk and disposing of it or the products thereof and distributing the proceeds, less necessary operating expenses, among the producers upon the basis of the quantity of milk or of butter fat in the milk furnished by such producers, are exempt from the tax. If the proceeds of the business are distributed in any other way than on such a proportionate basis, the association does not meet the requirements of the statute and is not exempt. An association which has capital stock will not for such reason be denied exemption, (1) if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 per cent per annum, whichever is greater, on the value of the consideration for which the stock was issued, and (2) if substantially all of such stock (with the exception noted below) is owned by producers who market their products or purchase their supplies and

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[Former Procedure] The corresponding section of the 1924 law read as follows:

"Farmers', fruit growers,' or like associations, organized and operated as sales agents for the purpose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them; or organized and operated as purchasing agents for the purpose of purchasing supplies and equipment for the use of members and turning over such supplies and equipment to such members at actual cost, plus necessary expenses;

equipment through the association. Any ownership of stock by others. than such actual producers must be satisfactorily explained in the association's application for exemption. The association will be required to show that the ownership of capital stock has been restricted as far as possible to such actual producers. If by statutory requirement all officers of an association must be shareholders, the ownership of a share of stock by a nonproducer to qualify him as an officer will not destroy the association's exemption. Likewise, if a shareholder for any reason ceases to be a producer and the association is unable, because of a constitutional inhibition or other reason beyond the control of the association, to purchase or retire the stock of such non-producer, the fact that under such circumstances a small amount of the outstanding capital stock is owned by shareholders who are no longer producers will not destroy the exemption. The restriction placed on the ownership of capital stock of an exempt cooperative association shall not apply to nonvoting preferred stock, provided the owners of such stock are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends. The accumulation and maintenance of a reserve required by State statute, or the accumulation and maintenance of a reasonable reserve or surplus for any necessary purpose, such as, to provide for the erection of buildings and facilities required in business or for the purchase and installment of machinery and equipment or to retire indebtedness incurred for such purpose, will not destroy the exemption. An association will not be denied exemption because it markets the products of nonmembers, provided the value of the products marketed for nonmembers does not exceed the value of the products marketed for members.

(b) Cooperative associations engaged in the purchasing of supplies and equipment for farmers, fruit growers, live stock growers, dairymen, etc., and turning over such supplies and equipment to them at actual cost, plus the necessary operating expenses, are also exempt. The provisions of paragraph (a) relating to a reserve or surplus and to capital stock shall also apply to associations coming under this paragraph. An association which purchases supplies and equipment for nonmembers will not for such reason be denied exemption, provided the value of the purchases for nonmembers does not exceed the value of the supplies and equipment purchased for members, and provided the value of the purchases made for nonmembers who are not producers does not exceed 15 per cent of the value of all its purchases.

In order to be exempt under either (a) or (b) an association must establish that it has no net income for its own account other than that reflected in a reserve or surplus authorized in paragraph (a). An association engaged both in marketing farm products and in purchasing supplies and equipment is exempt if as to each of its functions it meets the requirements of the statute. (Art. 523.)

Section 231 (12) of the law has been entirely rewritten. The changes made may be briefly summarized as follows:

1. Whereas the 1924 law was silent with respect to the business relations which the association might maintain with non-producers and non-members, the 1926 law states the specific limits within which such relations must be confined;

2. Instead of setting up, "the quantity of produce furnished" as the sole basis of distributing the proceeds of sale, the 1926 law permits as a basis "either the quantity or the value of the products furnished";

3. The 1926 law specifies the precise conditions under which a cooperative association may have capital stock, adopting substantially the rules formerly stated in the regulations; and

4. The new law clearly states that legally required or "reasonable" reserves may be accumulated, a point formerly left to the regulations. In general, it is apparent that these changes make the procedure more liberal and more definite.

RULING. Where it appears not only that 12 per cent of the outstanding common stock of a marketing association is held by nonproducers but also that over 9 per cent of such outstanding common stock was voluntarily sold or issued to persons who at the time of issuance were not farmers or producers, substantially all the common stock of the issue is not owned by producers, and the association is not exempt from income tax under section 231 (12) of the Revenue Act of 1926 and the corresponding provisions of prior Acts. (V-41-2931; G. C. M. 557.) *

If by its acts, the corporation is within the law, its exemption will not be denied because its charter permits acts which would prevent exemption.37

A company whose stock was owned by, and which acted as sales agent for, certain lumber companies, and which made no profit, was held not to be a farmers' fruit growers', "or like association,” because lumbering is not like fruit growing. (C. B. I-1, 263; I. T. 1312.) This would seem to be an extremely narrow construction. The law states that associations, other than farmers and fruit growers, must be "like associations"; it does not state that lumbermen must be like fruit growers. If lumbermen or shoemakers organize an association which market the products of its members or purchases supplies for them, it is a cooperative association and is just as much exempt as if organized by farmers. It should be noted that livestock growers are specifically mentioned in article 523. A more liberal interpretation is likely to be applied in the future.

A cooperative apartment-owning corporation, which collects each month from its members their pro rata share of the expense of oper

[Former Procedure] Under prior laws, the Treasury held that the voluntary sale or issuance of any common stock to non-producers made the corporation taxable. (Reg. 65, Art. 522.)

C. B. III-1, 287; I. T. 1914. The Treasury previously held otherwise, see C. B. 1, 194; O. D. 190.