basis to all its patrons for all amounts received and receivable from the furnishing of goods and/or services in excess of operating costs and expenses properly chargeable against the furnishing of goods and/or services. All such amounts in excess of operating costs and expenses at the moment of receipt by the cooperative are received with the understanding that they are furnished by the patrons as capital. The Cooperative is obligated to pay by credits to a capital account for each patron all such amounts in excess of operating costs and expenses. The books and records of the co-operative shall be set up and kept in such a manner that at the end of each fiscal year the amount of capital, if any, so furnished by each patron is clearly reflected and credited in an appropriate record to the capital account of each patron, and the Cooperative shall within a reasonable time after the close of the fiscal year notify each patron of the amount of capital so credited to his account. All such amounts credited to the capital account of any patron shall have the same status as though they had been paid to the patron in cash in pursuance of a legal obligation to do so and the patron had then furnished the Cooperative correspondending [sic] amounts for capital. Petitioner's method of operation was substantially as follows: When a customer of a local member cooperative association desired to finance the purchase of an electrical appliance, or the installation of an electrical system or water or plumbing system, he purchased the appliance from an appliance dealer, or had the system installed or well dug by a contractor. The customer made a downpayment and signed a promissory note and conditional sales contract for the balance of the cost. The dealer or contractor then assigned the promissory note and conditional sales contract to the local member cooperative association, which in turn reassigned the same to the petitioner. The petitioner in turn forwarded the balance due on the purchase or contract either directly to the dealer or contractor, or to the local member cooperative association, which in turn forwarded this amount to the dealer or contractor. Repayments of the promissory notes were made by the customer at interest to the local member cooperative association, which in turn remitted the amounts so collected to the petitioner. Normally, the local member cooperative association included the monthly installment due on the note in its regular monthly billing for electric service which it sent to the customer. Only customers of member rural cooperative associations could participate in this financing operation. Petitioner derived its operating capital by the issuance of certificates which it designated as "debentures" and from bank loans. The "debentures" were offered for sale only to the various rural electric cooperative associations on a voluntary basis. Petitioner sold "debentures" to at least one rural cooperative which, after a while, withdrew from petitioner's financing operations but kept the "debentures" as an investment. Some rural cooperatives have participated in petitioner's financing operations without purchasing its "debentures." Through an oversight the petitioner sold a few "debentures" to a bank, but when the oversight became apparent, the petitioner called in the "debentures." Petitioner issued both 3-year 312-percent "debentures" and 5-year 4-percent "debentures." It is stipulated that "The 'debentures' were specifically subordinated to bank credit, but to no other 'debts' of the petitioner." The following schedule reflects the amounts of membership fees (members were charged an initial membership fee of $10), bank loans, "debentures," and loans receivable of the petitioner as of December 31 of each of the years 1954 through 1957: Most of petitioner's funds were used in its financing operations. As of the close of 1956 the petitioner's books of account reflected a "net profit" or "net margin" of $3,052.44 after the payment of “interest" on its "debentures." Within 812 months after the close of 1956 the petitioner allocated this amount among the member cooperative associations on the basis of the dollar volume of loans made through the member cooperatives and considered this allocation as "patronage dividends" or "capital credits." This amount was reflected on the petitioner's books of account in a capital credits account which is similar to a surplus account, and was never actually paid to the member cooperatives. Petitioner excluded this amount from income on its income tax return for 1956 with the explanatory statement "Distribution to Members based on Participation." Respondent, in computing petitioner's income for 1957, disallowed a deduction for "interest" payments made to the "debenture" holders who were members of petitioner. Respondent made the following explanation in the statutory notice of deficiency: Explanation of Adjustments (a) It has been held that monies paid as interest to holders of debentures who are members of the corporation represent a return of capital and therefore do not constitute an allowable deduction. This determination is based on the fact that no stock has ever been issued, and the debentures do not represent true debts since they are subordinate to all credit extended by banks and are not secured by any property. Computation of the adjustment is as follows: Deduction claimed___ Increase in income___. $22, 496. 07 Interest on debentures sold to a bank which was not a member, and also to one non-member cooperative. In an amended answer the respondent alleged that in the notice of deficiency he had erroneously determined that the petitioner was entitled to a net operating loss carryover deduction from the year 1956 to the year 1957 in the amount of $4,263.90, and that, instead, the petitioner's net operating loss for the year 1956 allowable as a carryover to 1957 should be in the amount of $196.03. This reduction of $4,067.87 in the net operating loss carryover deduction from 1956 to 1957 resulted from two adjustments made by respondent (in his amended answer) in petitioner's income for 1956. One adjustment, in the amount of $1,015.43, is conceded by the petitioner. The other adjustment is explained in paragraph 6(b) (1) of the amended answer as follows: (1) The petitioner claimed a special deduction in its income tax return for the year 1956 for "distributions to members based upon participation" (page 3, line 40) in the amount of $3,052.44, which amount it did not pay. Respondent erroneously failed to disallow this deduction in the notice of deficiency, although the amount thereof is not an allowable deduction under the applicable provisions of the Internal Revenue Code of 1954. Accordingly, the petitioner's net operating loss for the year 1956 is properly reduced in the amount of $3,052.44. OPINION. The first issue is whether petitioner is an organization exempt from tax under section 501 (c) (12), which provides exemption for "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 percent or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses." Petitioner is engaged solely in the business of financing purchases of electric appliances and the installation of electrical systems and water and plumbing systems by the customers of the rural electric cooperatives who are members of petitioner. All of petitioner's members are exempt from taxation under section 501 (c) (12) as associations engaged in the distribution of electrical energy to residents of the agricultural areas of Kentucky. Petitioner states on brief that an exemption of both the State statute, under which petitioner and its member rural electrical co 1 Chapter 279 of the Kentucky Revised Statutes provides at section 279.020 that a "nonprofit cooperative corporation" may be formed under that chapter for either of the following purposes: (1) To promote and encourage the fullest possible use of electric energy in this State by making electric energy available by production, transmission, distribution or otherwise to persons in rural areas of the State at the lowest cost consistent with sound business methods and prudent management, and by making available to such person, at the lowest cost consistent with sound business methods and prudent management, electrical devices, equipment, wiring, appliances, fixtures and supplies, and all kinds of tools, equipment and machinery operated by electric energy. (2) To promote and encourage the fullest possible use of electric energy in this State by making electric energy available to persons in rural areas of the State at the lowest cost consistent with sound business methods and prudent management by producing, transmitting, distributing or furnishing electric energy to any corporation formed under this chapter for the purposes provided by subsection (1) of this section and only to such corporation, and by making available to such corporations and only to such cor operatives were organized, and the Federal statute establishing the Rural Electrification Administration 2 reveals a purpose "not merely to have cooperatives string wires and make electricity available but actively to encourage the use of the electricity by sponsoring and promoting the wiring of houses, the sale of electrical appliances, and the financing of these activities." Petitioner also states that "The obvious purpose of the entire REA program was to upgrade the entire economy of the rural areas" and that the petitioner's objective "to finance the sale of electrical appliances, equipment, wiring and plumbing systems was directly and completely germane to the objectives of the REA Enabling Acts both State and Federal." Petitioner then contends that since all of its member rural electric cooperatives are exempt from taxation under section 501 (c) (12), it follows that the petitioner "in performing one of the specific functions laid by law as a responsibility upon all Kentucky Rural Electric Cooperatives must also be exempt" under section 501 (c) (12). It is not controlling that petitioner was organized under Kentucky law as a nonprofit cooperative association. Medical Diagnostic Association, 42 B.T.A. 610. In order to qualify for the exemption under section 501 (c) (12) the petitioner must meet the precise test laid down by the statute. It is the petitioner itself which must meet this test, and the fact that all of its members are tax-exempt organizations cannot determine the petitioner's status. Underwriters' Laboratories, Inc., 46 B.T.A. 464, affd. 135 F.2d 371. It may be true that the financing of electrical appliances and installations in rural areas is one of the objectives under chapter 279 of the Kentucky Revised Statutes and the applicable Federal statute. It may also be true that some of petitioner's member rural electric cooperatives were doing their own financing prior to petitioner's organization in 1954 and that this did not prevent their qualifica porations, electrical devices, equipment, wiring, appliances, fixtures and supplies, and all kinds of tools, equipment and machinery operated by electric energy, and accounting services, forms and supplies, bargaining services, business counsel and advice, engineering services, supervisory services, investment counsel, general purchasing services of all kinds, and any other services that are requested or deemed advisable or desirable in the conduct of its business by any corporation formed under this chapter for the purposes stated in subsection (1) of this section. Any corporation organized under this chapter may be organized to do any or all of the acts set forth in this subsection. 27 U.S.C., ch. 31, sec. 905, provides as follows: Sec. 905, Loans for electrical and plumbing equipment; persons eligible for loans The Administrator is authorized and empowered, from the sums herein before authorized, to make loans for the purpose of financing the wiring of the premises of persons in rural areas and the acquisition and installation of electrical and plumbing appliances and equipment. Such loans may be made to any of the borrowers of funds loaned under the provisions of section 904 of this title, or to any person, firm, or corporation supplying or installing the said wiring, appliances, or equipment. Such loans shall be for such terms, subject to such conditions, and so secured as reasonably to assure repayment thereof, and shall be at a rate of interest of 2 per centum per annum; interest rates on the unmatured and unpaid balance of any loans made pursuant to this section prior to September 21, 1944, of this amendment shall be adjusted to 2 per centum per annum. tion under section 501(c)(12). But the cooperatives which were granted exemption from tax under section 501 (c) (12) were primarily engaged in the distribution of electric energy to rural areas, and it is this activity which brought them within the meaning of "Benevolent life insurance associations of a purely local character, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations." (Emphasis added.) Petitioner's sole activity in financing consumer purchases may presumably satisfy one of the objectives of the State and Federal statutes governing rural electrification, but this certainly does not mean that it satisfies the test laid down by section 501 (c) (12), which is the statute controlling here. We fail to see how petitioner's purpose and operation, which are simply to finance consumer purchases, can qualify it as a "like organization" under section 501 (c) (12). Petitioner's operation closely resembles that of a commercial bank or finance company, and, in fact, petitioner's manager testified that when petitioner was still in the planning stage there were "discussions with the bank people from the standpoint of their helping set it up. They were advising with us, and giving us the benefit of their experience and how we might operate it." Moreover, an organization qualifies for exemption from tax under section 501 (c) (12) "only if 85 percent or more of the income consists of amounts collected from members for the sole purpose of meeting losses and expenses." It is clear that petitioner's income arises in the form of interest, not from its member rural electric cooperatives, but from the customers of such local cooperatives, and these local cooperatives merely served as conduits to the petitioner of the periodic payments made by the rural customers to such cooperatives. We hold that petitioner does not qualify as an organization exempt from taxation within the meaning of section 501 (c) (12). The next issue is whether petitioner is entitled to deduct as interest under section 163 the amounts paid by petitioner to holders of its so-called "debentures." This issue turns upon whether the amounts advanced by the member rural electric cooperatives to the petitioner constitute equity capital or a true indebtedness. The question is one of fact and the petitioner has the burden to establish the debtorcreditor relationship. In Wilbur Security Co. v. Commissioner, 279 F. 2d 657, affirming 31 T.C. 938, the Ninth Circuit enumerated 11 factors which the courts have generally used to resolve this issue. They are (1) the names given to the certificates evidencing the indebtedness; (2) the presence or absence of a maturity date; (3) the source of the payments; (4) the right to enforce the payment of principal and inter |