Appendix — United States v. Bass
Supreme Court brief1971
Ask Donna
What actually matters in this document.
Text
ATES ea By
Ee icrakh
~~ oe
s i
| APPENDIX
a the Suprne Gout af the wie States
“Deroeas Ter, 1970 —— =
. No. 4082. : 70-5 2
-Unrtep States OF AMERICA, PETITIONER \.
v. ; : = .
MIssIssIPPI CHEMICAL CoRPORATION, ET AL.
. os
x
=, ON WRIT OF CERTIORARI TO THE UNITED STATES.
COURT OF APPEALS FOR THE FIFTH CIRCUIT.
| PEIITION FOR WRIT OF CERTIORARI FILED mek 1970
_ CERTIORARI GRANTED FEBRUARY 22, 1971
ht the Supreme our of te- Wied Sites
OcToBER TERM, 1970 oi
3 : Ba 1082
ane. Unrrep STATES OF AMERICA, PETITIONER
v.
MisstssiPPr CHEMICA} CORPORATION, ET AL.
X
ON WRIT OF CERTIORARI. THE UNITED STATES COURT OF ©
“APPEALS FOR JHE FIFTH CIRCUIT
2 : Pee @
7 alee oe INDEX
SS Page
Docket entries of the District Court of the°U nited States_- eeace «
Complaint in Mississippi Chemickl Corporation v. United States_:----_ 5
Complaint. in-Coastat-Chemical Corporation v. United States__--__-- 55.
“~~ _Knswer in Coastal Chemieal Corp. v. United States__..2-2.-+---2 2... 7 . 79
at Answer in Mississippi Chemical Corp. v. United States________—----- 86
gene ea as.to Facts and Documents filed in Coastal Chemical Corp. -
. United States..2. ..---,---- Ea RGR Lae Tes PRE CE . 93
\ Stigudation as to Eacts and Documents filed in Mississippi Chemical oS 7”
\ Corp. v. United States. at aa) eee Oe ag ia Ble ng Gate ES a a 1fl_ .
Exhibits to the Stipulation as to Facts and Documents filed in Coastal
Chemical Corp. v. United States and | Misdissippi Chemical Corpora- .
‘ tion ¥. United. Bates... =|... v0 cn ec de ek eee eee nee - 123 —
_-Exhibit$’2; 5-A; 6-A; 7;8;9-] ; 10-C; 10-D; 11; 12-A; 12-B;
ae «6 $C; 15; 18-A; 16-B; 10-8 et -* 123
Defendant’s Exhibit , TR Se leeeuuns eakencukbmes een Sue 2-- 216
Defendant’s Exhibit 3../..._...-:..-_-----.--- Sanat Satiek i... - 216
_ Defendant’s Exhibit '4__/_--_-_-______________- 2 Loe urea pews 217
~. Defendant’s Exhibit 5.-._.______- Sse Bisa ends leoienidie iitew busine tain 2 .'38.
Deposition of Walter C. Werlander:.....-..2------- 22-22-2222: --- 225-.
..Transcript of Testimony ‘taken November 7, 1968_.+--.- lecwcnnct « 22
Opinion of the distric® ej a weee----+* 842
- Judgment of the district court in inate id Chemical Corp.» Vv. United
; Slates. __._- Sip te alate asa eicsni at cies se aa ioe ea wan te wm cig oa 346
Judgment of the district court in Coastal ee Corp.. ¥ Vv. United .
PU hao ooo twining ape iw Bie Bees es Eee ewe tneSepach codecs -. 847
Opinion of the court of appeals eee baie hee a ase ne ee ‘bnew ke . ee
(1) " - , ;
o
oe
: INDEX—Continued | Teta
“ - Page
\adamend of the Seart Oe iiss a hk Sls a tndinsncketens | H4
Order of Supréme “Court of the United States granting a Writ of
Bear! dated — BO, POU ninse sens eeeanaeh eeaneonse 375.
/
H “ .
~ .
7 :
‘
j *
bad ; ‘
‘ a . -
= <a , . « : . °
id -
‘ e . . a
< , ' :
: ‘
« . 7 .
“a 2 mot .
4 . 3 . - ? ~~“
; *
e ran ° ig 2
’ + 7 - <-
, € t
al 2 . °
°
° . »
t o
\ ’ ‘ é
* *@e °
:
a
a s
k- .
2
.
Cs 2
on ‘
&
ee wT Me
cS ee
. - aes «
a A we.
a = e
Yer. ee
» - aie : . , i
te" No, 1213-Citil DOCKET
aaa : » 7 : a - ‘ 4. ?
Titleof Case | Cee . Attorneys
a © ; A aa
° ; a? “ : s : #
7 >
.MississipP1 CHEMICAL CoRPORATION, PLAINTIFF - For Plaintiff:
te se ys ee os 7 John C. Satterfield ~
- | “— : P.O. Box 466 :
? Yazoo City, Miss.
* . ss 39194
| vs. °
UNITED STaTEs OF AMERICA, DEFENDANT. — ~__-«~ For Defendant:
* CONSOLIDATED WITH CIVIL ACTION , ; ‘ - Robert E. Hauberg
P.O. Box 2091
No. 1214 PER ORDER’ FILED 4-8-68
. *.* ; . - '. Jackson, Miss. 39205
ae
l--
|
|
|”
“Basis of Action:. Claim for| Income Tax Refund
4 “12-13-67 J, S. ;
Date’ “Plaintiff's Account -- Receival Disbursed
oa bs Band i ° is
12-15-67 ‘Satterfield 2-2 - eet —_ ee. 15,00 22
“20-67. US. Treas. 8. CD16-5-- ------------ 22-22-24 Pane -- 15.00
Abstract of costs, To Whom Due, US. Clerk. Amount $15.90... 0°
Date § ~* - Bilings-Proceedings .
. 12-15-67 COMPLAINT with four copies with Exhibits A through: F—filed.
12-15-67 SUMMONS issued and forwardéd to. U.S. Marshal with four copies
and four.copies of complaint-and exhibits A through F attached ~
; _ for service on U.S. Attorney and Attorney General:
2- 9-68 ‘Copy of Rule as to Non-Resident here ‘mailed to John Satter-
, field.
a 2-19-68, Answer of Defendant, United States of America, with Certificate
of service thereon—filed,
2-28-68 Marshal's return of serv ice on summons éxecuted on the Un ted
; ~~ $tates of America December 19, 1967 by mailing a copy 0 “the |
——)
Summons and Complaint to Ramsey Clark, Attorney General,
USA, Department of Ju: itice, Washington, D.C. (Registry Re
ceipt attached to ‘return )—and Executed at: Jackson, Miss. on
December 19, 1967 by delivering-a copy of the summons and
. complaint to Joseph E. Brown, Assistant U.S. Attorney—filed.
(QQ) ve Pa
2.
par an Ae
. ae . : 4 -
er 5 :
Date a Sa eee Filtngs-Proceedings . @ on,
2. 4- 4-68 Plaintiff's Motion to Corisolidate Civil Action Nos. 1313 and baad,
o) with Certificate of Service, filed. :
+- 8-68 “ORDER : consolidating Civil Action Nos. 1 213: ‘and 1214 for hear- ™
° ing. and otherwise (with the exception that separatg, judgments:
’ shall be entered in each proceeding) and shall be considered
: together upon the docket of this Court as if: both had been
ot assigned upon the docket Civ il Action No. 1213, filed and entered
OB, 1968, Page 91. (Copies ‘mailed attoffieys) ee
: 5-14-68 DEPOSITION of Walter C. . Varlanger, ar. President, Nae
. Orleans Bank for Cooperativ es, taken by’ ‘Defendant on April 19,
1968, filed. ES cok *
“11- 668 Stipulation as to facts and documents w ith copies of exhibits 30-A
through 32 attached, filed. — :
11- 5-68 Marshal's return exectited on subpoena : as to A. E. Beall, filed.
_ 11-T1-68 EXHIBITS: P-1 through P-5; D-1 through D-4, filed. Pane oF
1-17-69 Court Reporter’s transcript’of hea ring before Hon. Harold Cox on
November 7, 1968, filed. ©
- [ur) 2-14-69 Finding of Facts and- Conclusigns of Law es “s nuaiate e
& Sg ‘judgment accordingly may be presented for entry ice accordance
with this opfnion in each of these cases.”, filed. 2
-2-14-69 Copy,of above mailed to attorneys. Haybers and, Sitterfield.
2-18669 At frection of Judge Cox, 1st page of stbove Opinioh peneeaget.
3-24-69 Copy of above Judgment. nailed te‘attorneys of. record.
3-24-69. JUDGMENT: Ordered, ‘adjudged ~and dec reed: that. plaintiff,
Mississippi Chemical Corp. a corp., do hay € and: Tecov er of and
from the defendant, the United States of. America, the princi
4 Sum of 385, 298.: 51, together with interext thereon at the rate of -*
“six per cent ‘per annum as follows : From April 4, 1966, upon the
sum of $33, 859.37, from June 29, 1967, upon the sum of $20,006. fi,
and from July 21, 1967, upon the sum of $31,433.03, all interest -
‘ ‘beirig payable until this judgment is pad, filed and entered.
Beat O.B: 1969, Page 42.
3-24-69 Final JS-6 Card, filed.
_ 5-21-69 Defendant's , Notice of Appeal to the U:S. Court of Agwesia: for the ¥
- Fifta Cireuit from Judgment entered herein on March 24, 1968,
- with Certificate of Serv ‘ice, filed.
5-22-69 Certified copy of above Notice of — ‘mailed 40 Clerk of Fifth,
Circuit.
. 6323-69 Order’ extending time for filing the rec ord upon. Spero fitiy (30)
. days or a total of ninety .(90) days ‘from:the date of filing of the
first. Notice of Appeal, filed and enterest O.B. 1008, Page 131.
‘ - ¢ .
(Copy mailed to Fifth Cireuit. )* . 7 -
. ar i er st
Ss + ‘ . % -
y
- 1213, PER ORDER mg. 48-68
Unitep. STATES oF AMERICA, DEFENDENT : P.O. Box 466 |
CONSOLID ATED WITH CIVIL ACTION NO. - Yazoo City, Miss. 39194
For. Defendant:
8 . * Robert E. Haubérg »
3 Gg ene "" _. P.O. Box 2001-
“6p mM ; , +Jaekson, (Miss. 39205
a See s ‘of actfon: Claim | for — Tax Refund ‘
ee hee Aa gT I. ry ee ee
e ; : o ve f ‘.
pe “9 es ” PiathAs ocelot” : ig Réceived Disbursed _
* 12-15-67 Satterfield. °-£._, son eae eeeneNieg hae ee
00-07 UB. Yrent CD 16-8202: £28002 22. oben ate eee 15.00
Abstract of yah tT Whom a its US. Clerk, Amount 15. 5.00. e,
- Date — ar OO ae "Filings Procécdings \e
°
‘12-15-67 COMPLAINT original and four copies-—with Exhibits ‘ik through
Fattached—filed. . i +.
* 12-15-67 ,SUMMONS issued and forwgriledino US. ‘Marshal with Four
copies Symmons—complaint and exhibits attached—for service
on U.S. Attorney and Attérney General.
{[v] 2-19-68 Answer of, Defendant, United States of Anierica, with. Cer- .
peel tificate of Sérvice—filed. -
‘3 1-68 Marshal's return on summons, executed; filed. °
+ +468 Plaintiff's Motion to Consolidaté Civil Action Nos. 1213 and 1214,
CSwith Certificate of Service, filed..
4+ 8-68 ORDER : consolidating Civil Action Nos. 1213 and 1214 for hearing
and otherwise (with the exception that separate judgments
‘ + ghail-be éntered in each proceeding) and shall be considered to-
' gether upon the docket of this Court as if botlvhad been assigned F
supon the docket Civil Action No. 1213, filed and entered OB,
en Page 91. {Copies mailed attorneys) . . &
id . , o e st
\ 4 3 A o ri
: of .. 3 - *
[rv] A true_copy, I hereby certify. — ‘ 7”
Rowesr’ C. Tuomas, i: Ge aaa es “a ;
y a terk. ; ; : a
(SEAL) e, : Pas a o8 ; . : ‘ * . Ee ““ , .
Sears” aan 3 -- By /s/-B. Price,.
é > —— ; f 7 7 : . ; e Deputy Clerk.
Dated a oe Co aoe oe
, No. 1214-Civil DOCKET ©
: TitleofCase ‘Attorneys
CoastaL CHEem-caL CorporaTioS, PLyINTIFF " ForPlaintiff Bi Ghigo tS
+. gree : _ John C. Satterfield~—
Date °° coe ’ Filings- ‘Proceedings NS
ans
*
» 5-14-68 DEPOSITION of ¢ Walter c. Verlander, Jr., Presiient, New
‘ ; Orleans Bank for Cooperatives, taken by Defendant on April 39,
: . 1968, filed in Civil Action? No. 1218, * | x
ll- 6-68 Stipulation as to Facts ang Documents = Exhibits (In Rox)
ail _. attached, filed.. ra
11-11-68 EXHIBITS: P-1 tlir gh P-5.; D-1. throu h D6, filed. . =
1-17-69 Court Reporter's transc ript of. hearing before Hon-Hirold Cox on
November 7, 1968, filed. (Transe —_ placed in Civil an No.
1218) .° - : '
2-14-69. Finding of Facts and Conclusions of Law : . . “4 separate fade.
; - -ment accordingly may be presented for entry in accordance w ith
thi¥ opinion in each of these casés,’ ’ filed.
2-14-69 Copy of above mailed to. attorneys Hauberg and Satterfield.
[yt] 2-18-69 At direction of Judge Cox, 1st page of above Opinion ~
' subgtitited. ,
y, 38-2469 J UDGMENT: Ordered and adjudged that nlainiit: Coastal Chem-
ical Corp. ‘ecover from defendant U.S.A., the sum. of
$265,044.35, plus interest thereon. as pévided by law; no costs
be assessed herein, filed and enterpd. | CAR. 1969, Page 41. (Copy
. .: mailed attorneys of record.) _ .
3-24-69 Final JS-6 Card. filed. :
21-69 Deféndant’ s Notice of Appeal to’ the U'S. Court of Soaeiia for the
eo.
= Fifth Circuit from J udgment entered herein on Mar¢h 24, 1969,
__ with Certificate of Service, filed. .
5-22-69 Certified copy of abovegNotice of oo mailed: to Clerk of the
Fifth Circuit..- . 8
6-23-69 Order: extending time for filing record on appeal to 90 day s tees
. dateé of filing first notice of ik sis anand and entered OB, 1969,
Page ———— °-
6-23-69. Copy of above order forwarded to Fifth Cireuit Court of Appeals
ws
A true copy, I hereby certify. . a . . to
Rear C. THoMa . ; - -
Clehk. : . ™~ : e* . s ~ ‘ . .
"Xe 4 By: /s/ B.\Price,
. ce 4 Deputy Clerk. +
(SEAL) oh 2 a a oo
, a
. \
© @ 7 - . ‘
Me . “= Rtas
Court.
‘In the United States District Chit for + the Southern Judicial
District of Mississippi, Western Division :
- Civil Action No. 7213-. ~ :
: Mississ1PP1 CHEMICAL Corporation, PLAINTI?
7 U8.
. “THE Unrrep STATES OF AMERICA, DEFENDANT ©
eee - COMPLAINT: a
_ (Filed Dec. 15, 1967) -
. ‘Count I
Comes Mississippi Chemicat Corporation, a corporation ' or-
ganized under the laws of the State.of Mississippi, and files this-
‘suit against The United States of Ameri¢a and for cause, of
action says: | fe. .
| : ‘“ i
- 8 es ° |
Plaintiff js a corporation: organized under thé laws of the
State of Mississippi with ‘its domicile and principal place of
business in’ Yazoo City, Mississippi; in the Southern District :
Of Mississippi, — Division, of the United States District, .
\ I. 7 a
Defendant is The United States of America upon whom serv-
ice of process may be had by service of simmons ‘upon the
United States District Attorney of Jackson, Mississippi, and _
by sending a copy of the summons and complaint to the Attor-
. ney General of the United States at Washington, D.C.
III.
This is an action of a civil nature for the recovery of United
States income taxes and interest paid thereon, which income
taxes and interest were erroneously or illegally assessed and
wrongf ae collected.
(5)
c Pre ee a ee
Plaintiff is organised urider the General Corporate Laws. of °
the State &f Mississippi bit is’a:cooperative qualified to receive
- financing under the Statutes of the. United Statés of America
as a cooperative. It is and since the beginning of its operation
has been engaged in manufacturing fertilizer and distributing. ;
‘same primarily to its stockholder-patrons. ‘ P -
. V.
-
~ (a) Plaintiff duly filed its Federal income tax return for its .
fiscal year ending June 30, 1961, om or before the due date
thereof with the District Director of Internal Reveriue at Jack-
son, Mississippi. On said tax return, plaintiff deducted from its °
gross income the amount of $18,464.09 which plaintiff had been
required to pay during such fiscal year to the New Orleans Bank ©:
for Cooperatives under the ‘provisions of Section 1134d(a) (3).
-: ‘af Title 12, United States Code. On or about March:14,, 1966,
an Internal Revenue Agent's report: (dated January 10, 1966): _
was submitted to plaintiff and in said report the Revenue |
Agent erroneously disallowed the deduction of $18,464.09 wHich _
plaintiff had been. required to pay to the New Orleans Bank
for Cooperatives under the’ provisions of on 1134d(a) (3)
of Title 12, United States Code.
(b) In said Revenue. Agent’s report Gime January 10,
1966), the Revenue Agent erroneously included in plaintiff's —
incorne for the fiscal year ended June 30, 1961, the sum of
$28 630.64 as the alleged value 6f Class C stock of the New
. Orleans Bank for Cooperativ es, which Class C’stock had been
receiv ed- by plait? ff from the New Orleans Bank; fer Coopera-.
- tives'as patronage dividends in accordance with’ Section 1138
| ned of Title 12, United States Code.
The Farm Credit Act of 1955 (Section 1134d (a) (3).of Title
12, USC) requires a borrower from a Bank of Cooperatives to
purchase quarterly Class C. stock, of such Bank in an amount.
~ equal to not less than ten per cent nor more than twenty-five
per cent of the amount. of interest payable by it to the Bank
during such calendar quarter. The Board: of Directors of the
New Orleans Bank for Cooperatives has provided for a pay-
Py
"fiscal yéar ended. June 30,.1961:
’ Code. Plaintift would show that'sajd: payments. werg properly |
- deductible from its gross income for fiscal. year ended June 30° ss
' 1961, either as additional interest paid to said New Orleans
hereinafter set forth.
ee |
ment of fifteen per cent of the amount of interest payable to —
said Bank by organizations borrowing from it. During the fiscal_,
year ended June. 30, 1961, plaintiff paid the New Orleans Bank~’
for Cooperatives $18,464.09 for such Class C stock and plaintiff -
deducted said amount from its gross income. Plaintiff -was re-
quired, to pay. said amount to the New Orleans Bank for Co-
operatives in confection with interest payments ‘under the
provisions.ef Section -1134d (a)(3) of Title 12, United States -
<
Bank for Cooperatives, or as ordinary and necessary business .
expense, or as a loss on & transaction entered into for profit, f.
and that the Class C stock received’ by the plaintiff from said ~
Bank for said payment had no market value for the reasons
en sco
- Section 1134 1(b) of Title :12, United States Code, provides
«for the issuance by a Bank for Cooperatives of patronage re-
funds to organizations borrowing from such Bank. During fiscal
year ending June 30, 1961, plaintiff borrowed’money from the
New Orleans Bank for Cooperatives and plaintiff received Rie.
Class C stock from the New Orlean$*Bank for Cooperativesas © ~~
patronagé dividends in the stated"hmount,of $28,630.64. The
Clasg¢ stock received by plaintiff from said Bank as patronage,
. refunds has nq market value (as-hereinafter set forth) and the
taxpayer included same. in its income tax seturn for said fiscal
year at $1.00 per share for identification purposes only. Plain- —
tiff would show that said $28,630.64 received as Class C stock
- of said Bank should not be included. in its taxable income for «=. «
Se. cont AV A das
(a) That the amount: paid by plaintiff to the New Orleans
Bank for Cooperatives for the fiscal year ending June 30, 1961,
. for the privilege of borrowing from said Bank is a proper, de-
ductible expense either as additional interest .paid, or as an.
ordinary and necessary business-expense, or as a loss on a trans-
action sap into for profit; that at the time of such purchase,
the Clats C-stock of the New Orleans Bank for Cooperatives
‘2
. ~
was not.actually corporate stock at all and was entirely worth-
less; that no certificates of any nature were issued therefor; °
that no dividends were or could be payable thereon; that ne
“voting rights were incident thereto; that.there was no possi-"
bility of appreciation in value; that such Class C stock could
not be sold or transferred and the issuer thereof-refused to
consider it as collateral for:loans; and that as a result. said so-
called Class @ stock had no fair market value. ° .
- (b) That*the Class C stock received’ by plaintiff from the
~ New Orleans Bank for Cooperatives as a patromage dividend
for the fiscal year ending. June 30, 1961, should not be included
in plaintiff's income sinee.such Class C stock had no market -
value; that at. the time of such purchase, the Class C stock
was 1é®Actually corporate stock at all and was entirely worth-
less: that no certificates of any nature were issued therefor;
that no dividends were or could be payable thereon; that no_
voting rights were incident thereto; that there was no possibil-.
ity of appreciation in vahie; that such Class C-stock could
* ngt be sold or transferred and the issuer thereof refused to con-
sider it as collateral for loans; and that as a result said so-
called C lass C stock had. no fair market value. :
&
9 IX. . - bd
Le
As a result of the herein described adjustments to plaintiff's.”
‘taxable income for fiscal year ending June 30, 1961, plaintiff —
- - paid additional income_taxes-of $24:489.26 plus applicable in- -
terest of $7,728.69 thereon for its’ fiscal year ending June 30,
1961. The aforesaid determination by defendant of, a deficiency
in plaintiff's income tax of $24,489.26 was erroneous. :
XxX.
| On’ or about October 12, 1967, plaintiff filed its Claim for
Refund forfiseal year ending June 30, 1961, said-Claim ‘being
“for a refund of income taxes erroneously. assessed and paid in _
the amount of $24.489.26,plus applicable interest of $7,728.69. —
Said Claim for Refund (including all Exhibits ‘attached
_ thereto) is attached hereto as Exhibit A and made a-part hereof
as if copied herein.
-
> XI.
. That by Certified letter dated December 13, 1967, plaintiff
was notified that its Claim for Refund for fiscal year ending
o. °
vr.
June 30), 10G@% had been denied. Thefe is attached:hereto as -
Exhibit B letter front the District Director of Internal Reye-
nue, Jackson, Mississippi,’ denying plaintiff's said. Claim. for
Refund for fiscal year ending June 30, 1961.
, WHEREFORE, "plaintiff prays judgment against the deferfftant
in the amount of $24,489.26 and applicable interest.paid of
$7,728.69 and interest thereon as allowed by law; and for costs
- of this action, and for such.other and further relief as. to the .
Court may seem just anid proper. _
Count II = .
a re ar ee
Plaintiff re-alleges and re- avers each and every allegation of
paragraphs | I through IV of Count I above.
Om. |
(a) Plaintiff duly filed its Federal inconte tax return for its
°
fiscal year ending June 30, 1962, on or before the due date
thereof with the Djstrict Director of Internal cs i at Jack- -
son, Mississippi. On said taxfreturn, plaints cted from its
gross income the amount of $16,421.75 which: lai tiff had been-
» required to pay during such. fiscal-yearto the New Orleans .
” Bank -for-Cooperatives under the provisions'of Section 1134d
(a)(3) of Title 12, United States Code. On or about March 14,
1966, an Internal Revenue Agent’s report ‘(dated January 10,
1966) was submitted to plaintiff and in said report the Revenue
_ Agent erroneously disallowed the deduction of $16,421.75 which
plaintiff had been required to pay to the New Orleans. Bank
for Cooperatives under the -provisions of Section eee ets)
of Title 12, United States Code,
. .(b) In said. Revenue ‘Agent’s report (dated January 10, eT
1966), the Revenue Agent erroneously included in plaintiff’s
income for the fiscal year ended June 30, 1962, the’ sum of
$27,489.40 as the alleged value ‘of Class C stock of the New
Orleans Bank for Cooperatives, which Class C stock had been
received by plaintiff from the New Orleans Bank. for Coopera-
tives as patronage. dividends in accordance with Section 1134
__1(b) of Title 12, United Statés Code.
- 10 2 =-
-* 3 ye Oe. 7, -
The Farm Credit Act of 1955 (Section 1134d (a) (3) of Title
12, USC) requirega borrower from a Bank of Cooperatives to.»
_ purchase quarterly Class C stock of sueh Bank in an amount
* equal to not less than ten per cent nor more than. twenty-five
per cent of the amount of interest payable by it to the Bank
during such calendar quarter. The Board of Directors of the |
New Orleans Bank for Cooperatives has provided for a pay- —
-- ment of fifteen percent of the amount.of interest payable to
said Bank by organizations borrowing from it. During the fiscal
year ended June 30, 1962, plaintiff paid the New Orleans Bank
for Cooperatives $16,421.75 for such Class C stock and plain-
tiff deducted said amount from its gross income. Plaintiff was
required to pay said amount to- the New Orleans Bank for - _
' Cooperatives i in-connection with interest payments under he- —. ss
provisions gf Section 1434d (a)(3) of Title 12, U nited States
‘Code. Plaintiff would showathat said payments were propetly
deductible from its gross income f& fiscal year ended J uneé 30,
_ 1962, either as adgitional interest paid to said New Orleans
\ Bank for Cooperativ es, or as ordinary and bene tran
- expense: or as a loss on a transaction entered inf for profit,
and that the Class C stock received by the plairitiff from said ©
- Bank for said. payment had -no market value for the reasons —
hereinafter set forth:
is
&
; IV.
Section 1134: 1(b) of Title 12, U aited States Code, provides «©
for the-tSsuance: by a Bank for Cooperatives of patrojiage re-.
fands to. organizations borrowing from such. Bank.’ During
fel yeat ending June 30, 1962, plaintiff borrowed money from
e New Orleans Bank for Cooperatives and plaintiff received
Class C stock from the New Orleans Bank for C ooperatives as
patronage dividends in the stated. amount of $27,489.40. The
Class C stock received by plaintiff from said Bank as patronage
_refunds has no market value (as hereinafter set.forth) and the
taxpayer included same in its income tax return for said fiscal -
year at $1.00 per share for identification purposes only. Plain-
tiff would show. that said $27,489.40 received ag Class C stock
’ of said Bank should not be ineluded in its taxable 1 income for
fiscal year ended June 30, 1962.
- 3
of
(a) That the amount said by plaintiff to the New jew Orleans
Bank ‘for Cooperatives for the fiscal year ending June 30, 1962,’
‘for the privilege of borrowing from said Bank is a proper de- .
. - ductible expense: -either as additional interest paid, or as an
ordinary afid 7 necessary business expense, or 4s‘a loss on a trans- -
actron entered into for profit; that at the time of such purchase, .
, the’Class C stock of the New Orleans Bank for Cooperatives
was not actually corporate stock at all and-was entirely worth-
“Jess; that no certificates of any nature were issued therefor;
‘that no dividerids w “could be payable thereon; ‘that no
a ere incident thereto; that there was no.possi- _
i of appreciation in value; that such Class C.stock could
not be sold or transferred and the issuer thereof refused to. |
consider: it as collateral for loans; and that as a result sald So-
called: Class C stock had no fair ‘market value.
(b) That the Class C stock received by plaintiff ‘from the .
Lis New Orleans Bank for. Cooperatives as a patronage dividend - -
a for the fiscal year ending June’30, 1962, should not’ bé included
in plaintiff's income since such Class C'stock had no market
"value; that at the time of such purchase, the Class C stock was
not actually corporate stock at all and was entirely worthless; .°
that no certificates of any nature were issued therefor ; that no
dividends were or could be payablé thereon; that no voting
rights were incident thereto; that there was no possibility of
appreciation in value; that such Class C stock could not be sold .
or transferred and the i issuer thereof refused to consider it as
collateral for loans; and that as a result said’so-called Class €
' stock had) no fair market value. °
. 7 =
4
“*
ee oe :
wo sé ——
VI :
4. S t
4 As: a eeaule of the herein described sAjcetienta to plaintiff's ae ©
| taxable income for fiseal year. ending June 30, 1962, plamtiff ==
.paid ‘additional income taxes. of $22;798.79 plus applicable in- .°
— terest of $5,504.76 thereon for its fis¢al year ending June 30,
' - 1962. The aforesaid degermination by defendant of a deficiency
in plaintiff’ s income tax of $22,798.79 was erroneous.
VIL. -
On or about October 12, 1967, plaintiff filed its Claim for Re-
fund.for. fiscal I year endinig June 30, 1962, said Claim apne for
12.
a refund of income taxes ¢rroneously assessed and patd in the |
amount of $22,798.79 plus applicable interest of $5,504.76. Said
-* Claim for Refund for fiscal year ending June 30, 1962, (includ--
_ ing all Exhibits attached thereto), is attached hereto as Exhibit
C and made a part hereof as if copied herein.
SWI.
| That by Certified letter. dated Desenber 13, 1967, plaintiff
was notified that its Claim for Refund for fiscal year. ending
* June 30, 1962, had been denied. 4 here is ; attached hereto as Ex-.
hibit D letter fromthe District’ Director of Internal Revente, :
Jackson, Mississippi, denying plaintiff's said Clainr for Refund
for fiscal year ending June 30,1962. e
- WHererorg, plaintiff prays judgment, against the defendant.
- in the amount of $22,798.79 and applicable -interest paid of-
$5,504.76 and interest thereon as allowed:by law; nd for costs *
of this action, and for such other and further relief as to the
. Court may seem just and proper. |
| ~ CounrIll ° >
Q I |
paragraphs I through F¥ of Count I abov e.
(a) Plaintiff duly filed its ‘Federal income tax return for its
- fiseal. year ending June 30, 1963,‘on or before the due date
thereof with the District Director of Internal Revenue at Jack- |
“son, Mississippi. On said tax return, plaintiff’ deducted from —
_. its gross income the amount of $18,863.35 which plaintiff had
-. been nequired to pay: during such fiscal year to the New Orleans
_Bank*for Cooperatives under the provisions of Section 1134d
(a) (3) of Title 12, United States Code. On or about March 14,
1966, aiiInternal Revenue Agent’s report (dated January 10,
1966) was submitted to plaintiff and in said report the Revenue
Agent erroneously disaHowed the deduction of $18,863.35 which
plaintiff had been required to pay to the New Orleans Bank for
Cooperatives under the provisions of Seotion 1194d(2) (3). of
Title 12, United States Code.
Plaintiff re-alleges and re-avers each aud every allegation of —
®
—— @
Cs
13
- (b) In said Revenus ‘Agent’s report (dated . January 10,
1966), the Revenue: Agent erroneously included -in plaintiff's
income for the fiscal year ended June 30, 1963, the sum of
$25,152.83 as the alleged value of Class C stock of the New
‘Orleans Bank for Cooperatives, which Class C: stock had been
“Teceived by plaintiff from the New. Orleans Bank for Co-
: ‘operatives as patronage dividends in accordance with Section
~ 1134 A(by of. Title 12, United States Code. . a
UII. .
oe .
The Farm. Credit Act of 1955 (Section 1134d. d (a) (3). ‘of Title
‘12; USC), requires a borrower from a Bank of Cooperatives
to purchase quarterly Class C stock of such Bank in an amount
equal to not less than ten per cent nor more than twenty-five _
per cent of the amount of interest payable by. it to the Bank
. during such calendar quarter. The ‘Board of Directors of the |
New Orleans Bank for Cooperatives has provided for a payment .
of fifteen per cent of.the amount of interest payable to said -
_ Bank by organizations borrowing. from it. During the fiscal year
ended June 30, 1963, plaintiff. paid the New Orleans Bank
“for Coopératives $18, 863.35 for such Class C stock and plain-
. tiff deducted said amount from its gross income. Plaintiff was.
‘required to pay said amount to the New Orleans Bank for
Cooperatives i in.conne¢tion with interest payments under the ~
provisions of Section 1134d (a) (3) of Title 12, United States
Code. Plaintiff would show that said payments were properly.
deductible from its gross income for fiscal year ended June 30,
1963, either as additional interest paid to said New Orleans Bank
‘for Cooperatives, or as ordinary and necessary business expense,
or as a loss on a transaction entered into for profit, and that the.
’ Class © stock received’ by the plaintiff from said Bank for said
_ payment had no market value for the reasons s hereinafter set
| forth.
IV.
. Section 1134 tb) of Title 12 United States Code, provides
_ for the issuance by a Bank for: ‘Cooperatives. of patronage re-
funds wo organization borrowing from such Bank. During
figcay year ding June 30, 1963, plaintiff borrowed money from
the New Orleans Bank for Cooperatives and plaintiff received hg
Class C stock from the New. Orleans Bank:for proses: as
&
14 7 | ~. «
patronage dividerids i in the ea amdunt of $25, 152.83, ‘The
Class © stock received by plaintiff from said Bank as patronage’.
refunds has no market value (as hereinafter set. forth) and the’
” taxpayer included same in its income ‘tax return for said fiscal
year at $1.00 per share for, identifigation purposes only.. Plain- —
tiff would show that said $25,152.93 received as Class Q stock .
of said Bank should not be included in its taxable income for -
- fiscal year otter June 30, 1963. :
; | VY. -
(a) That the amount paid by plaintiff to the New Orleans .
¢ Bank for Cooperatives for the fiscal year ending June 30, 1963, .
for the privilege of borrowing from said-Bank i is a proper‘de-
ductible expense either as. additional interest paid, or as an °
ordinary and necessary btisiness expense, or’ds a loss on 4 trans-_
.’ action entered into for profit; that at,the time ‘of such purchase,
the Class C stock of the New Orleans Bank: for Cooperatives
was not actually eorporate stock at all aid was entirely worth- ,
__less; that i certificates of any’ nature were issued therefor;
“that no dividends were-or could be payable thereon; that no |
; voting sights were incident thereto; that there was no possi-
" bility of appreciation in value; that stich Class © stock could
not be sold or transferred and the issuer thereof refused to con- _
sider it as collateral for loans; and’that as a result said so-called _
Class C stock had no fair market v alue. ‘
(b) That the Class C stock received by plaintiff from the
. New Orleans Bank for Cooperatives as a patronage dividend for.
| the fiscal year ending June: 30, 1963, should not be included in
plaintiff's income since such Class C stéck had no market value;
that at the time of such purchase, the C®ss‘C stock was nat
aetually. corporate stock at all and was entirely worthless;
that-no, certificates of any nature weresissued therefor; that no —
dividends were or could be payable thereon; that’ no voting.
rights were incident thereto; that there was no possibility of
appreciatjon. in value; that such “Class © stock -could not . |
be‘ sold: or transferred and the issuer-thereof refused to con-
sider it as collateral for loans; and that as a result said. so-called
: Class C stock had no fair market value. i -
VI.
- Asa result the herein described dilecnente @ claintiff’s |
iazable’ incapue for fiscal year eniging a 30, 1963, plaintiff
. - age
‘eae:
‘ >
¥ . . tl : CJ
“ . . . — . < ‘
a» *
‘“
Ui !
fa @
a4
'- Eand made: a cei hereof as if oe herein. *
- Of Counsell; ie re }
- _ ‘J. Dudley Buford. : ae
—* P.O.Box 1172, _ ae
‘ . 3 ° .
“ ° “ re
ee 15 . “Pe ot. 52 z a Oo
. a ‘ 3 6
_ he ;
terest of $3,664.14 theteon for its ‘fiscal. -year ending June 30,
9
. paid additional income ‘iit of $21, 113, 87 plus applicable js in- | 4
On‘or about October 12, 1967, plaintiff filed its Claim for Re-
_.fund for fiscal. year ending June 30, 1963, said Claim being for
. a refund Of income taxes erroneously assessed and paid in the
* amount, of $21,113. 87 plus applicable interest of $3,664.14. Said
Claim for Réfund for fiscal year ending June 30; 1963, (includ- -
ing all Exhibits attached thereto), is attached hereto as Exhibit
- eo
ae | ME :
‘That =m certified ‘letter’ dated December 13, 3, 7967, plaintiff,
: ‘was notified that its Claim for Refund for fiscal year ending
_ June’ 30, 1963, had: béen denied. Fhere is. attached hereto as
_ Exhibit F letter from.the District Director of Internal Revenue, ,
Jackson, Mississippi, denying plaintiff’s said Claim for Re- .
fund for.fiscal year, ending June 30, 1963.
WHEREFORE, plaintiff prays judgment Sgainst the jefe d
anti in the amourft. 6f $21,113.87 and applicable interest paid of
$3,664.14 and interest thereon as allowed by law; and for costs
‘of this action, and for such. other and’ further relibf as. to the
Court may seem ad and pFoper.
[sf J@hn C. ‘Satterfield
JoHN G. SATTERFIELD
Attorney for Misswsippi Chemical Corporation,
_ P.O. Box $66, Mqsonic Building, —°
Yazoo City, ss ioaniai ith
Jackson, Misgissippi. - y ‘. |
Hollaman M. Raney . oe he
P.O. Box 388 — : % e% oe BS ; : i
; | a aera x S. | nc . .
*. . * me ¢° eE
P ‘ S
. d 2
,
~.
meen
€2 ,
:
"1963. The aforesaid determination by defendant of a. deficiency Peg i
in plaintiff's: i income tax of. $21, 113.87 ‘was erroneous.
- ey _
ATTACHMENT TO AND Mave A Part oF CiaIM::(Form 843)
‘Filed by: Mississippi. Ghemical Corporation, P.O. Box 388,
Yazoo City, Mississippi
For the fiscal year ended June 30, 1961
In Revenue Agent’s report dated January 10, 1966, submitted
~: to the above named taxpayer under date of March 14, 1966,
@e .
<a
said report covering the period set. out above, excepeonh were
taken as follows: — . os
~ (d)- Interest. $18,464. 09
The taxpayer acquired one share of class-C stock
* in the New Orleans Bank for Cooperatives ($100
- par value) in order to obtain loans from the Bank.
Each, .borrower must also: ‘purchase: additional “C”
stock in an amount equal to 15 per cent of interest
paid on its loan. The taxpayer claimed the cost: of
acquiring the additif6nal “C@” stock as interest in
the above amount.
a
’ Cost- incurred in purchasing class C stake are-not — 7
ae deductible. See Rev. Rul. 65-241. *
-(e) Patronage Dividend «on “C” stock $28, 630.64
"= 4 The taxpayer-received class C stock from the New
‘Orleans Cooperative Batik as patronage dividends
in the amount, stated above. The ammount was pot
-. included in ineome as having no value. _
. The Bank, in its: notification of patronage refund
‘to its shareholders, recommends that.the amount be
» reflected at- face value and a, credit to ‘operating -
income. °
—. The “C” stock is aed as collateral against
loans, and in the event of default: and/or fore-
closure of a loan, the stock is utilized in the face
-amount—the same as any other collateral having
face value. The amount above, is therefore includ-. |
able in income under section 61 of the 1954 Code.
‘The i income tax related to (d) above amounted to $9,601 33 -
aitd was paid as shown by attached copy of letter accompany-
ing the remittance.
The income tax related to (e), amounting to $14, 87. 93, was
agreed to in Form 870 whch was sent to My. Julian W. Johnson,
Appellate Conferee, Internal Revenue Service, U.S. Treasury
Department, 711-2421 Building, 2121—8th. Avenue, North, Bir-.
17
L .
ccitiglinne ‘Alabama 35203. The above ‘mount of income tax
» was paid June 29, 1967 as part of a check for $20, 006. 11, which.
included applicable interest. ,
_ It was understood with Mr. Johnson that the sesontion and
- filing of the foregoing Form 870 would not preclude the filing
of a Claim (Form 843). In-fact it was understood that a claim
would be filed as a basis of a in the applicable US.
District Court.
The total income tax represented by: (d) -and (e) above
aiounts to $24,489.26 shown as (g) on Form 843.
_ It is claimant’s position that the‘interest represented by (d)
was deductible and further that the class C stock referred. to
-. was not worth $100.00 per share during the fiscal year’ ended
June 30, 1961. ,
An expeditious handling of this claim i is requestes ; a confer-
ence with 4rrimant’s attorney is requested, and will be arranged :
for promptly on request, in which event JohnC. Sattérfield,
Attorney-at-Law; Box 466; Yazoo City, Mississippi should be
_aecordingly notified.
Similar claims are being: filed by claimant for the fiscal years
1962 and 1963. . | _ —
a ” MissrssrPrr CHEMICAL Corporation,
Post. Office Box 388, Ya az00 City, Mississippi 39194, .
April 4, 1966.
Mr. J.G. Saati Jr., " District Director, 7
Ikte al Revenue Service, US: Treasury Department,
301 North al Street, Jackson, Mi tesissippt 1 $9202.
Re Your File Form: L-191B—430: VBH:mnm, Gwinn: .
Chemical Corporation, Yazoo City, Mississippi.
_ Dear Sir: We have examined copy of an examination report
explaining proposed adjustments to. the tax liability of Missis-
sippi Chemical Corporation, lettér of transmittal being dated .
March 14, 1966. This includes the items hereinafter described
representing the amounts paid by the taxpayer as one of the
- requirements to enable it to obtain loans from the New. Or- |
leans Bank for Cooperatives for which said Bank has agreed to
issue Class C stock at par value of $100 per share. In each of
the years stated the taxpayer deducted the amount involved as |
‘ interest upon or cost of acquisition of such loans, such stock
/
ae
being: without market value. Deficiencies are’ proposed based
upon the disallowance of such items under Rev. Rul. 65-241.
Because of the existence of such ruling we are‘not including
these items in the protest we are filing in behalf of the taxpayer
requésting’a hearing as to the items other than those here listed
- and the items included in “Computation of Income Tax for
Partial Agreement”, as to which.you are‘handed a check today.
Such items are as follows: :
Fiscal year ‘ending 6/20/61 page 7 (explanation page 9) “Interest”
$18,464.09 — |
Fiscal year ending 8/30/62—4nige 13 “(explanation page 15) “Interest”
$16,421.75 “4 .
Fiscal yer ending 6/20/63— page 20 eae page 22) “Interest’’
$18,863.35 + .
We have computed the additional tax and interest arising
from such items as follows: ; a
Fiscal year 6/30/61. : - OE . s
MAR. Gacenueenexssucnnneeedee ous eh ede age eee $9, 601. 33
Interest __--_- Se aiciseeans Shiwegh beatae patenenaees, 010-51
Fiseal year 630/62 7
RE i een eee ce eeectedeces «SG SI
Interest __-____- beeen Gtttn nde eens eeeeeedooy “oe. a0
Fiseal year 6/30/63 . - a? * .
5, ee puepucdeeesGenenaenaeadeteae. 0) 08. 00 *
Interest ____2_--__-__-_-_-_- ee ods eaeeeen eee 1, 489. 89
Total _-_-_-- eel ecen eee en se nnn See gee ee te enna == $33, 859, 37
In accordance with our discussid with Mr. Broom, we are en-
closing check of the Mississsippi Chemical Corporation in the
sum of $33,859.37 and will expect to file claim for" refund i in
that.amount within'the next few days.
Yours very truly,
‘ MISSISSIPPI CHEMICAL CoRPORATION,
By, Joun. C. SATTERFIELD, General Counsel. °
JCS: md . - | ; . _
Enclose. Check | 7 ;
e
STATEMENT CONCERNING PATRONAGE REFUNDS RECEIVED FROM
THE New ORLEANS BANK FOR COOPERATIVES IN THE Form
OF Crass “C” Srock or SucH BANK .
You are handed herewith the following items which are e made
a part of this statement by reference: : .. :
‘
19
1. Letter from Mississippi. Chemical Corporation and Coastal
_Chemical Corporation to the Examining Agent, Mr. John J.
Koch, dated ‘November 1, 1965.
2. Letter; of Honorable D. R. Stump, Vice Preadent of the :
New Orleans Bank for Cooperatives, dated March 22, 1966,
including “Statement of Policy of New Orleans Bank for Co-
‘ operatives. on Retirement of Government Capital’ adopted
June 20, 1959 and reapproved February 25, 1966; and state- -
ment by years.of the amount of Class “— stock issued by the
New Orleans Bank fof. Cooperatives.
3. Letter from N. F: Pendleton, President of the Rew Orleans a
Bank for Cooperatives : (now deceased), ‘dated December 22,
1965, with eight attachments. . - ES"
The facts which may be material are delineated bg Regula- |
tion Sec. 1.61-5 implementing TIR No..69, effective Decem-.
ber 3, nae It provides that non-cash patronage refunds are. ,-
‘includableé in the gross income of patrons to the extent of the
fair market value of the document notifying the. patron of the.
amount of the allocation made to him at the time of its receipt _
‘by the patron. The provision particularly in point is as follows:
Any: document which is payable only at the discretion -
of the cooperative association or which is otherwise sub-
‘ject to the conditiens beyond the control of the patron
shall be considered not to have any fair market. value
at.the time. of its receipt by the patron, unless it is
clearly established to the contrary. ~
The enclosures demonstrate conclusively that the Class “C”
stock: of NOBC is payable only at the discretion of\ that ‘co-
operative association and also is otherwise subject to conditions
beyond the control of the patron. No facts here “clearly estab-
lish to the contrary”, i.e., that such stock had any market value
or, particularly, that ite market, value was the full amount of :
7 the par value thereof. .The proposed adjustment is in the full
amount of the par value of such patronage refunds,
As ‘detailed in our letter of November 1, 1965, the law pro-
hibits the payment of dividends on Class “C” stock and, of ~~
course, no interest is payable thereon. It is in effect non-voting —
stock in the hands of the corporation after such corporation
has acquired one share thereof. The Bank was established under
the statute on the basis of “one member one. vote” regardléss
of the amount of stock which the member may thereafter re-
; ceive as patronage refunds or " otherwise. ;
8
MO 8 vin
‘ The change in the action by the NOBC concerning the pay-
‘ment-of Class,“A” stock owned by the-:government which oc-
curred after December. 22, 1965, when Mr. Pendleton wrote his
— letter, and before March 22, 1966, when Mr. Stump wrote his
* letter, conclusively establishggthat the “document .. . ispay- .
able only at the discretion, df the cooperative association”, No
payment of Class “‘C” stock on a revolvigg fund basis.can begin
until all Class “A” stock is paid in full, as well as outstanding
. Class “B” stock of the year affected. On December 22, 1965, -
the Board of .Directors of thé NOQBC expected to issue de-
bentures obtaining. sufficient funds to acquire all outstanding
Class “A” stock on June 30, 1966. On February 25, 1966, the
Board of Directors reconsidered such action, deferred any such
payment “until such tithe as the officers of the Bank determine
‘it will be advantageous to the Bank and its borrowers for the
‘ Board to’ reconsider this subject”, and readopted the original
schedule attached to the letter of Mr. Stump, under which all
Class “A” stock would be retired in 1976. The actual experience
through 1965 shown in the attachment indicates that such re-
. tirement could be completed under the schedtfte in 1975. Hence,
the commencement of retirement of any Class “C” stock has
been deferred for an additional nine years, through the exercise
of the discretion of thé cooperative association involved, i.e., =
_ the New Orleans Bank for Cooperatives.
+ Subject to the “conditions beyond control. of the patron”
which are mentioned below, if the revolving retirement of the __
NOBC Class “C” stock begins in 1975, and if the earnings of the
. cooperative bank continue to be comparable to those 6f recent
years, it appears that the revolving basis of payment may be
sought to be accomplished within ten or fifteen.years from the .
date of the beginning of such process. Hence, optimistically, it
appears : that the Class “C” stock received * he taxpayer dur-
ing the fiscal year ending June 30, 196) ay be paid between’
1980 and 1985; such stock received. for the fiscal year ending
Junie 30, 1962, may be paid between 1981 and 1986; such stock
received for the fiscal year ending June 30, 1963, any be paid
between, 1982 and 1987.
The question here should be determined “at the ane of its
receipt by the patron”. At such time the stock was and it still
is ‘payable only at the discretion of the cooperative assecia-
tion”; it now appears that such payment may occur some
; .
go
o
- 4H
tiventy years af ter its receipt, subicdt to the unertaintics men-
tioned below; with no interest or-dividends payablé on the
stock, ‘we cannot see-how the: same can be consideréd to have |
market value: If it had any market value, the same would be |
nominal.
In addition to.the legally established fact that this stock is
payable only at the discretion of the cooperative association, the
same is likewise “subject to the conditions beyond a control
of the patron”. This includes the followi
1. The amount of future earnings of the Bank.
Fe 3)
2. The st state of the | law and regulations relating to banks for -
cooperatives in the years succeeding 1980. If, for-example, the:
law were amended to require the payment of all current earn-
ings in cash (as'is now advocated by some parties), no Class “cr
‘stock could be retired.
3: The discretion of the Board of Directors of the. cooperative
association, i.e., the Bank. The change that occurred in early
1966 is a complete and perfect illustration thereof. Many fac-
tors affect the earnings of the qooperative bank. For instance,
it has attempted to maintain a “spread” between the cost of
money borrowed by it and the rate Of interest paid to it of at
least 100 points. Several years @go it was maintaining a spread
of from 150 points to 170 points. Recently this has dropped to
. a range of between 70 points and 100 points,.and the, last de-
bentures of the Bank were sold at an interest rate of 5.4 percent
while it is lending money .at an interest rate of 5.5 percent, only
a 10-point spread. ‘It will be necessary for the. Bank to take -
action to assure itself of a proper spread and its effect upon the’
business of .the Bank is necessarily unknown.
In our letter of November 1, 1965, a copy of whieh is attached _
hereto, we went into more detail concerning the facts affecting
the fair market value at the time of receipt by the paffon of the
right to receive Class “C” stock of NOBC.
With reference to the statement: in the examination report -
that Mississippi Chemical Corporation*and Coastal Chemical
Corporation are the only cooperatives enterihg Class “C” stock
received aS patronage refunds as having no market value, we call
attention to the letter dated December 22, 1965, signed by the
' President of the New Orleans Bank for Cooperatives, stating, .
“We do know specifically of one other cooperative in this dis-
trict, other ate whey writes the stock off for tax
‘
. ; y,
s %
g 22
purposes and, actording to information given to us,‘there are
cooperatives in other districts which do likewise.” In fact, we
have found that there are numerous cooperatives throughout
the country which follow the same procedure employed by the ~
_ taxpayers here in dealing w ith Class “C” stock of the numerous
. banks for cooperatives throughout the country. -
In this connection, it should be Tidtectustlisenssedin.theletter
‘from Mr. Pendleton that most of the coopératives receiving
such patronage refunds seem to be exempt cooperatives under .
Section 521, and hence the entry-of such stock at face value
or any other value would not affect their income tax. It is also
stated by Mr.:Pendleton in said letter with reference to “ex-
~—~ empt cooperatives” and non-exempt cooperatives that, “In.
either case, if the cooperative sets the stock up at face value,
the corresponding i income would normally be credited to pool, .
.- earnings but also deducted by the cooperative as a patronage
refund except for the nonmember portion, in the case of 3 non-
exempt cooperatives.”
However, the action of other cooperatives is immaterial. The.
. . Tegulations apply specifically to this re qd stock patronage :
refund asoutlinedabove. |. .
II.
- STATEMENT Concernina Crass “C” Stock IN THE NEw
. . ORLEANS BANK FoR CooPERATIVES PURCHASED AS AN “IN-
. TEREST OVERRIDE” AS A CONDITION. PRECEDENT Tio OBTAIN-
ING AND MAINTAINING Loans From SucH BANK
The Farm Credit Act of 1955 revised the capital structure of
the twelve Banks for Cooperatives and the Central Bank for
Cooperatives by providing for three classes of stock. See 12
USCA See. 1134d. Class “A”’ stock is government capital and is
held by the Governor of the Farm Credit Administration on ~
behalf of the United States. Class “A” stock was issued in ex-
’ change for stock held in the Banks for Cooperatives by the ©
- Governor on the effective date of the Farm Credit Act of 1955. |
Class “B” stock is investment stock and provision is made
for the payment of dividends not to exceed 4 per cent per
. annum. It is non-voting stock and it is owned principally by
_ cooperative associations.
Class “C” stock is issued to farmer-cooperatives which bor-
_ Tow from the’ Banks for Cooperatives. A farmer-cooperative
Loe
‘\or mae
Ko.
23
‘ .
“Acquires Class “C” stock in two ways in: doing business with a — |
Banks for Cooperatives:
(1) As a pafronage dividend. 12 USCA Sec. 1134e(b).
(2)’ Required purchase as a condition to a loan. 12 USCA
Sec. 1134d(a) (3).
So long as a Bank for Cooperatives has Class “A” stock -
' .. Outstanding, all i. ae (after the payment of a franchise tax,
setting aside of required reserves and dividends on Class “Bp”
- stock) must, be allocated to patron-cooperatives as patronage
dividends in the form of Class “C” stock. 12; USCA Sec. 1134e
(a). When -all government capital (Class “A” stock) in a
Bank for Cooperatives has been. retired, it loses its exemption
from income taxes. See 12 USCA See. 1138c. : :
In 1964 Congress passed P. L. 88-528,.which amended the |
- law pertaining to patronage dividends of Banks for Coopera-
tives to provide that. for any fiscal year that a Bank for Coop-
eratives. is subject to Federal income. taxes, it-shall pay in
_ money rather than Class “C” stock such portion of its taxable
income as is necessary to permit it to issue qualified written
notices of allocation for the balance: See 12 USCA Sec. 1134e
(b).
The Farm Credit Act of 1955 also requires a borrower from
‘a Batik for Cooperatives to invest quarterly in Class “C”
stock.in an amount equal to not less than 10 percent nor more
than: 25 percent of the amount of interest payable by it to |
the Bank during such calendar quarter: The Board of Directors
-of the New Orleans Bank for Cooperatives has prescribed 15
percent. Payments for ‘such “C” stock are made quarterly or
when the regular interest payments of the borrower are made.
See 12.USCA Sec. 1134d(a) (3). It is this required ames of - |
Class “C” stock that is involved here. .
It is. important to note that*the purpose of issuing Class -
- “C” stock in both cases is identical—retirement of Class “A’”’
~ stock. For every dollar of-Class “C” stock issued either by
way of patronage dividend or by way of required purchase, a
~ dollar of Class “A” stock is retired. 12 USCA Sec. 1134d(a) (1).
‘ * 'Thé concept of Class “C” stock'was created by the Farm Credit
Act of 1955 for. the sole and express purpose of retiring gov-
erhment capital. - |
For the reasons outlined herein; ‘we believe that the required
purchase of such Class “C”’ stock should not be capitalized as an
myn
. 24 °
‘asset but should be charged off as an expense for both book
and tax purposes. In part, this view stems from what we heljeve
to be the proper treatment for the receipt of ‘Class “ " Gock
as patronage dividends. .
The Internal Revenue Service issued Technical Information
_ Release No. 69 on February 14, 1958, in which it announced that
it would conform with the. principles enunciated by court déci-
sions in connection with the tax treatment of allocations of
patronage divid dends by cooperative associations-to its patrons.
The cases referred to were the Long Poultry Farms case (249
F.2d 726) decided in 1957 and the/Carpenter case (219 F.2d
635) decided in’ 1955. These cases had held that a patron was
required to report non-cash patronage dividends received from |
cooperative associations as income only to the extent that such
non-cash patronage refunds had fair market value. Where such |
. patronage refunds had no fair market value, the patron was
not required to include them in his gross income in the year the |
. notice of the non-cash refund was received.
- Regulation Sec. 1.61-5 implementing TIR No. .69 becane
ae effective Deeember 3, 1959. It provides that non-cagh patron-
age refunds are includable in the gross income of patrons to.
the extent of the fair market value of the document notifying
‘the patron of the amount of the allocation made to him at the |
time of its receipt. by the patron: Any document which ‘is ©
payable only at,the discretion of the cooperative association —
or which is otherwise subject to the conditions beyond the con-
trol of the: patron shall be considered not to have any fair
market value at the time of its receipt by the patron, unless
it is clearly established to the contrary. |
Required Purchase of Class “C” Stock is Deductible: The
reasons “for our position that the. required purchase 8f Class
“C” stock is a deductible expense are that such amount is.
~ either—
(1) An additional interest expense under Sec. 163 of the
Internal Revenue Code, or |
(2) An ordinary loss under Sec. 165 of the. Internal Revesue
Code.
Required purchase.of Class “C” stock-is deductible as an in-
terest expense: Sec. 163, IRC provides as follows: “There shall
be allowed as a deduction all interest paid or accrued within the -
taxable year on indebtedness.” The courts have said that the
i °
Ry .
a
term ‘ ‘interest i is the amourit which one tes contracted to pay .
< . for the use of borrowed money. Where a borrower is required to
pay something in addition to what igdenominated as “interest”,
in order to obtain the loan, the additional payment may also
.
: deducted as an interest expense. See Wiggin Terminals, Inc.
-. v. U.S. (Ast Cir.-1929) 36 F.2d 893; Court Holding Company,
2 TC 531 affd. 324 U.S.-331 (1945) ; L. R. Heating Co., ‘Te i
' "894.
Loan agreements with the New Orleans Bank. for Besse |
- tives required Mississippi Chemical Corporation and Coastal
Chemical Corporation to pay the interest charges specified plus.
an additional payment equal to 15 per cent of the total interest
paid each quarter. This 15 per cent interest override paid dur- :
ing the years in question in. the form of required purchase of
Class ‘“C” stock was required as a condition of the loan, the
same as a& a basic, interest charge. When this 15 per cent interest -
~ override is added to the basic rate charged by the New Orleans
Bank for Cooperatives, the total combined rate is still reasori-
able and typical for a total interest charge. In order to prove that
this total payment is deductible as interest, we have demon-
strated that Class“C” stock is not: really “stock” in the normal
~ -sense of the word. |
_ .We content that Glass «Q” stock is not actually stock for
either atcounting or tax purposes.‘ What it is, is a euphemisgtic ©
term for an additional interest charge imposed by the Bank for
Cooperatives for the use of money. What-are the normal at-
tributes of stock? Stock will'normally have one or more of the 24
following characteristics: —
_ (1) Aright todividendg, _
(2) One or,more votes per share. p>
(3) Astock certificate to evidence its issue.
(4) Possibility of Appreciation i in value...
(5) Transferability. —
(6). Market value.
(7)*Collateral value. : : :
See letter of November 1, 1965, to the Bhamining Agent, Mr.
Koch, fora full discussion of each of the above items.
.
A fundamental rule in Federal Income Tax law is that the -
substance of a transaction rather than mere form controls tax
liability. This rule is most frequently asserted bythe govern-
ment against the position taken by the taxpayer, \often with,
. =
~..
: great success. Certainly’ ‘the- rule should be equally applicable
‘ when applied by the taxpayer against the contention of ‘the
government.
* Cases are legion where soniething called pre by. the tax- .
“payer i is held to be something else, such as ‘a bond or note, for ..
the purpose of federal income taxation. These cases mnake it
quite clear that the name by. which an instrument is called
may be rélapively uniniportant for. tax purposes. W hat is im- -
portant are the characteristics of the ‘instrument in question:
An instrument may be stock within the meaning of State Cor-
poration Law, yet it may be considered as a debt instrument for |
*/the purpose of income taxes. As noted above, when the charac-
teristics of Class.“C” stock. are carefully, analyzed, it.beconies—
_/ evident. that while. the law relating’ to Banks for Cooperatives -
‘|. calls this instrument “stock”, it is clearly not stock ome, the
meaning of F ederal Income Tax law. _
'»*Required puréhases should be treated consistent wit patron-
: age. dividends: The record shows that Class “C”’ .stock is like-
wise issued as a. patronage dividend. Under Reg. Sec. 1.6]-5 -
non-cash dividends received from a cooperative are ineludable ’.
only to the extent of fair market value, and this is presumed to
be lacking where redemption rests in the discretion of a board
of directors. We believe that it is not open to serious question
/Athat Class “C”” Stock received as. a patronage dividend should .
not be taken into ificome because of its lack of fair market value.
: Incidentally, we\ see no-reason for doubting that Reg. Sec.
- 1.61-5 and the: Sections 1381 through 1388, IRC. (Subchap-
ter T) pertaining to cooperatives and their. patrons applies to
the Banks for Coopératives and ‘their patrons. Reg. ; ‘Sec. _
_ 1.1381-1. provides that Subchapter T applies “to any corpora-
tiort operating on & cooperative basis and allocating amounts
to ‘patrons on the basis of the: business done with or for such
patrons.” Reg. Sec. £:1388-1(e), defines the term “patron” to _
include cooperative associations. Reg: Sec. 1.65-1 contains no —
definitions, but we believe the above definitions are etearly 4
applicable.’ © — ?
This being the’ case, it oertaiady 1 is not logieai to conclude that
Class “Cc stock which is ‘purchased is somehow ‘different, and ©
should be’set up as an asset at full face value. If “C” stock has.
no nts when received as a patronage dividend, it-seems in-
contf6Vvertible that it likewise has no value when purchased. In .
- both cases.it is exactly the same thing, and is issued for exactly
. @ . > : ‘ ne Oe °
A
ll
LE : ee 0) he
te ; .
J
27
~ the same purposes. Bank officials tell us that it is treated ihe /.
.. same on.the books of the B :
_ Redft?ed purchase of Clas “ce stock ¢ 18 Fouls different from
“other Federal Agency stock pugchases: The next feature that’
‘should be noted is that the amount of the required purchase of
* Class “C” stock is tied directly:to the amount of interest paid. per
~ During the years involved, the amount of required purchase —
: . established by the New Orleans Bank for Cooperatéves was 15
“per cent. In any event, this is different from the required pur-
-chase of stock in the Federal National Mortgage Association —
and Production Credit Associations, which also require certain
stock purchases as # condition to doing business.
In the case of the Federal National Mortgage Association
(“Fannie Mae”) the law requires that when a mortgage is sold
a. to Fatinie Mae, they ‘seller must purchase stock in Fannie Mae
. in an amount equal to 3 per cent of the mortgage sold. How-
ever, Fannie Mae stack has a market value and may be and is’
frequently sold. This is in contrast to Class “C” s stogk ina
Bank for Cooperatives, which has no marketvalué and in which -
there ate no known instances of its ever having been sold to
_ another purchaser. - = +
Likewise in the case of PCA, the cas is required. to have
“invested ini Class “B” ‘stock an amount equal to 5 percentof
_ the, principal borrowed, but this Class “B” steck has a very °
‘ . definite market value and as a matter of practice we understand
that PCA’s repurchase that stock at cost when a-loan is retired.
Again this'is in sharp contrast to Class. “C” stock. in a Bank
for Cooperatives, which.has no economic value but is merely ;
| imiposed by way of additional interest cost.
It. is significant to note that in the case of both the required ;
"purchase ‘of Fannie Mae’ stock and PCA stock, the-amount of
stock required to be purchased is based on principal and thus
i¢-needs to be purchased only once. Class “C” stock purchased
it¥@ Bank for Cooperatives is based on interest paid by the bor- -.
wér 4nd it is thus in the nature of an‘additional and recurring
oe: bts: ‘of éxpense. This distinction is very important.
Provisions on guaranty find equivalents indicates that true
| stock is not involved: Another reason for concluding that Class
“C” stock is not teally stock is the fact thatthe law creating the
Banks for Cooperatives provides that where-a cooperative asso- ,
, ciation i is 3 not authorized under the laws of the state in which
od
OR @ . <i
3 SS
it is organized to hold stock in a Bank ‘for Cooperatives, the
Bank shall,in lieu thereof require the association to pay into ~
or have on depgasit in a guaranty fund of the Bank a sum equal
to the amount of the Class “C” stock which the association
would otherwise. be required to purchase. See 12 USCA Sec.
1134d(b).-It is interesting to note that the holder of guaranty
_ fund equivalents of Class “C” stock have the same rights and
‘status as ‘a holder of Class “C” stock and that the rights and
_ obligations of the Bank as respects such guaranty fund: equiv-
alent are identical to the rights and obligations as respects Class
_“C” stock. This further tends to support the view that Class
~ “@” stock is in reality not stock but merely an ‘additional pay-
ment which must.be made to the Bank for Cooperatives in order
that it. might have a greater net.income, which in turn might be -
used. to retire government capital.
‘Tax treatment on redemption of Class “C” stock: The statute
provides that. on retirement of Class “C” stock: “After retire-
ment of all Class ‘A’ stock, Class ‘C’.stock also may be retired
at par by calling the oldest. outstanding Class ‘C’ stock, but
Class ‘C’ stock that was issued for a fiscal year period shall not
be called for retirement:until all Class“B’ stock that was issued
»,. during or prior to that fiscal year has been called for retire-
Ncanent. ” 12 USCA See. 1134d(a) (3).
hen the Bank for Cooperatives retires this Class “eq” stock,
' will the transaction be viewed as a true stock redemption result-
ing in no taxable income to the holder because redeemed:at par,
or will the: proceeds properly be treated as ordinary. income to
| the recipient because.jt is in.the nature:of a dividend? Settion
- 302, IRC relates to the Matter of distributions and redemption
‘of stock and provides that the redemption shall be treated_as
an ‘exchange only if it falls within one or more of the categories . -
listed in sub-section (b), which includes: |
(1) Redemptions not equivalent to dividends.
(2) Substantially disproportionate redemption of stock...
(3) Termination of a shareholder’s interest.
By the express terms of 12 USCA Sec. 1134(d)(a) (3), any
redemption of Class “C” stock would be proportionate and
- would not terminate ‘a shareholder’s interest.
Would'a redemption of Class “C” stock be essentially equiv-
alent to a dividend and thus fall outsitle the pale of Sec. 301?
The: cases hold that a redemption of em is: equivalent. .
>
Re nee” ee = we
+
— 28
@ 2 dividend when the practical result of the transaction is —
to distribute accumulated earnings essentially pro rata among -
the shareholders while leaving the ownership of the corpora- si,
- tion basically the same ‘and when the distribution is not con-
nected with a:partial liquidation of the assets of the corporation?
See Keefe v. Cote (1st Cir. 1954) 213 F. 2d 651 at 656. A re-
demption of Class “C” stock would be pro: rata and would: —
leave the ownership of the Bank for Cooperatives unchanged— .
each borrower would continue to have one vote.only. A partial
liquidation occurs under Sec. 346, IRC only when there is a
‘genuine business contraction. _ ,
Under 12 USCA Sec. 1134d(a) (3), Class ““C” ‘stock’ would
be redeemed out of earnings and would not.be the result: of a
business contraction. From the foregoing, it is manifest that
any redemption of Class “C” stock would be essentially equiva- .
lent to‘a dividend and should be treated as ordinary income
to the recipient. This tends to show the non-capital nature of. -
Class “C”’ stock. If Class “C” stock is redeemed, the Bank for
' Cooperatives must -have sufficient earnings to enable it to dis-
. tribute profits, which then can be called.a redemption of Class ©
~ “C” stock. .. fags :
-'* Purchase of Class “C” Stock is Déductible as an Ordinary ;
. . Logs: Even if a court’ rejected the foregoing arguments: and
_ denied a deduction for the required purchase of Class “C” stock °
as an interest exppuse under Sec. 163 IRC, nevertheless the
required purchasefof Class “C” stock is deductible as-a loss
under Sec. 165 IRG. oH °** |
. In order to make the purchase of Class “C” stock deductible
as an ordinary loss, it is necessary to establish two points: (1)
that any loss realized is an ordinary loss rather than a capital ~
loss, and (2) that the amount of the loss is equal to the pur-
chase price. In effect, we have shown that Class “C” stock
hasno market price or value when purchased. ° |
Any Loss on the Purchase of Class “C” Stock.is Ordinary
- Loss: There is no doubt about the fact that any loss suffered
on the purchase of Class “C” stock will be-an ordinary loss
‘Tather. than a capital loss. ‘This is for the réason that such stock -
is purchased by reason of business siecessity rather than for
‘investment. There are a number of cases to support this posi-
_ tion, and this point is conceded by IRS. See, for example,
Tulane Hardwood Lumber Company, 24 TC 1146; Western
NY . . ° ie
30°
Wine paad Liquor Company, 18 TC 1090: McMillan Mortgage a,
Company, 36 TC 924; Weather-Seal, Inc., TC Memo 1963-102;
Smith & Weldon Incorporated v. US., 164 Supp. 605.
Worthlessness of Class “C’” Stock: This has been demon-
strated in our submission Senne the patronage dividend :
in Class “C” stock.
‘Value ‘must be determined at time of issuance: One further
~ point.and this i is critical. Worthlessness of-Class ni Oe stock must
ten years later with the benefit of hindsight. Thus, worthless-
ness of Class “C.stock at time of its issuance in 1956 cannot
be measured by any value it might have in 1966 by reason of
anticipation of its redemption in a few. more years. This is fully
discussed i in our r original submissian. |
SATTERFIELD, SHELL, Witrams AND Burorp .
Attorneys at Law
_ 652 First National Bank Building
Jackson, Mississippi 39205
ae November 1, 1966
INTERNAL REVENUE SERVICE
Jackson, Mississippi
' Attention: Mr. John J. Koch co
GENTLEMEN: In connection with the examination of the.
returns of Mississippi Chemical. Corporation ‘and - Coastal -
Chemical Corporation, we are writing to call your attention
to the status of Class “C” Stock in the New Orleans pe for
Cooperatives.
-THe Farm Credit Act of 1955 revised the capital structure
of the 12 Banks for Cooperatives and the Central Bank for
Cooperatives by prov iding for three classes of stock. Ste 12
USCA See. 1134d. Class “A” stock ‘is government capital and
is held by the Governor of the Farm Credit Administration on ~
behalf of the United States, Class. “A” stock was issued in ex-
- change for stock ‘held’ in the Banks for Cooperatives by the -
Governor, on the éffective date of the Farm Credit Act of 1955.
Class “B” stock: is investment stock -and provision is made
for the payment of diyidends not to exceed 4 per cent per
annum. It is non-voting stock and it is owned principally by
cooperative associations. ;
3i
Class “C” stock is issued to farmer-cooperatives which bor-. —
row from the Banks for Cooperatives. A farmer-cooperative
‘acquires Class “C” stock in two ways in doing business with a.
Bank for Cooperatives: . ee =
(1) As a patronage dividend. 12 USCA Sec. 1134e(b).
(2) Required purchase as a condition to a loan. 12 USCA
Sec. 1134d(a)(3). ’
So long as a Bank for Cooperatives has Class.\‘A” stock out-
standing, all earnings (after the payment of a franchise tax,
setting aside of required reserves and’ dividends on Class: “B”
a
stock) must be allocated to patron-cooperatives as patronage . | ;
- dividends in. the form .of Class “C” stock. 12 USCA See.
- 1134e(a). When all government capital (Class “A” stock) in
a Bank for Cooperatives has been retired, it loses its exemption |
from income taxes. See 12 USCA Sec. 1138¢.
_ In 1964 Congress passed P.L. 88-528 which aménded the law
pertaining to patronage dividends of Banks for Cooperatives
to provide that, for any fiscal year that ‘a Bank for Coopera-
tives is subject to Federal income taxes, it shall pay in money
rather than Class “C” stock such portion of its taxable income .
as is necessary to permit it to issue qualified written notices of
allocation for the balance. See 12 USCA Sec. 1134e(b).
The Farm Credit Act of 1955 also requires a borrower from
a Bank for Cooperatives to invest quarterly in Class “C” stock -
_ in an amount equal to not less than 10 per cent nor more than
25 per cent of the amount of interest payable by it to the Bank
. during ‘such calendar quarter. The Board of Directors of the
NOBC has provided 15 per cent. Payments for such “C” stock
are made quarterly or when the regular interest payments of
the borrower are made. See 12 USCA Sec. 1134d (a) (3). |
The Internal Revenue Service issued technical information
release No; 69 on February 14, 1958, in which it announced that
it would conform with the principles enunciated by court de-
cisions if connection with the tax treatment of allocations of
patronage dividends by cooperative associations to its patrons.
_ The cases referred to were the Long Poultry Farms case (249
‘F. 2d 726) decided.in.1957 and the Carpenter case (219 F. 2d__
635) decided in 1955. These cases had held that a patron was
required to report non-cash patronage dividends received from
~ cooperative associations.as income only to the extent that such .
non-cash patronage refunds had fair market value. Whére such
LA
420-613 O—71——3
32
patronage refunds had no fair market value, the patron was
not required to include them in.his gross income in the year
the notice of the non-cash refund was received.
Regulation Sec. 1.61-5 implementing TIR No.. 69 hecaie
effective December 3, 1959. It provides that non-cash patron-
age refunds are includable i in the gross income of patrons to the
- extent of the fair market value of the document notifying the
patron of the amount of the allocation made,o him at the-time _
of its receipt by the patron. Any document which 1s payable.
only at the discretion of the cooperative association or which is
otherwise subject to the conditions. beyond the control of the -
patron shall be considered not to have any fair market vatue at
the time of its receipt by the. patron, unléss it 1s clearly estab-
'. lished to the contrary. *
The following are characteristics of Class “cr stock, which
‘are defined in 7 USCA Sec.1134d: (sic) -
Right to dividends: The law prohibits the payment of divi-
‘+ dends on Class “C’)stock. °
Voting rights: In effect, Class “C” stock is nonvoting. Each
holder of one or more shares of Class “C” stock which is eligible
to borrow from a Bank for Cooperatives is entitled to one vote; .
provided, however, that any holder which within the period of
2 years next preceding the cut-off date for voting has not been
a borrower from a Bank in which it holds Class “C”’ stock shall -
not be entitled to a vote. From this it is clear that it is not the -
ownership ‘of Class “C” stock which gives a right to vote, but
the borrowing from a Bank for Cooperatives. Regardless of how
many shares of Class -“‘C” stock a cooperative owns, it still has
only one vote. \
Possibility of appreciation in value: There is no possibility |
of any appreciation in value of Class “C” stock since at most
it would be worth par at.such times as it might be redeemed.
_ Delivery of stock certificates: No stock ‘certificates have
- been delivered by the NOBC to MCC or Coastal to evidence
ownership of Class “C” stock. -
Transferability: Class “‘C” stock is not teicicterable, except
‘under very limited conditions. The only known instances of
transfers of Class “C” stock.in NOBC have been pursuant to a
dissolution or merger and then the stock has been transferred.
at no value.
Market value: "Fhere is no oinares value for Class “CO stock
since it has not been sold nor can it be sold for all practical’
ne ne
é
33
"> purposés, “Certainly so long as the holder is indebted to the
~~ issuing bank, “C” stock would not be marketable because it is
‘impressed with .a lien in favor of the Bank. 12 USCA Sec. .
1134d(c). The lack of:market value will -be discussed in more
detail later. _ -
Collateral value: Obviously, “C” stock would have no value
as collateral with any lender other than the issuer because of
the foregoing characteristics. It is important to note, however,
‘that it has no value as collateral even with the issuing Bank. ©
_ In fact, we have been informed by officials of Banks for Co-
_ operatives that in evaluating the financial position of an appli-
cant for a loan, any value assigned to Class “C” stock by the
applicant is disregarded and is not considered an ‘asset.
Class “C” stock is issued as a patronage dividend. Under. -
~ Reg. Sec. 1.61-5 non-cash dividends received from a coopera- _
tive are includable only to the extent of. fair market value, |
and this is presumed to be lacking where redemption, rests in
the discretion of a board of directors. We believe’ Mat it is
‘ not open to serious question that Class “C” stock received as
“a patronage dividend should not be taken into inconie because - -
of its lack of fair market value. : | : _*
. What will happen when all government capital has been
retired? It is my understanding that the: Banks for Coopera- :
-tives at Berkeley and Houston recently completed the retire-
ment of all government capital and thus will be in a position
to begin retirement of Class “C” stock. The NOBC expects -
to have the last of its government capital retired during the -
".’ -next two or three years. Here is what the law says on retire-
ment of Class “C” stock: “After retirement of all Class “A” -
stock, Class “C” stock also may be retired at par by calling
the oldest outstandifig Class “C” stock, but Class “C” stock that
was issued for a fiscal year period shall not be called for retire-
~ ment until all Class ‘B’ stock that was issued during or prior
to that\ fiscal year has been called for retirement.”°12 USCA
Sec. 1134d(a) (3). , - -
Under 12 USCA Sec. 1134d(a)(3), Class “C” stock would
be redeemed out of earnings and would not be the result of a
business contraction. If Class “C’’ stock is redeemed, the Bank
for Cooperatives must have sufficient. earnings to enable it
to distribute profits, which then can be called a redemption
‘ of Class “C’* stock. | _ | |
34
Whether or not there is a redlemption ‘of. Class “C” stock.
and to what extent depends upon the following factors:
(1) Future Se of the Bank. Past or accuniulated
earnings will not provide funds to retire such stock.
(2) The state of the law relating to Banks for Cooperatives
at the time. If, for example, the law were amended quire
the payment of all current earnings in cash, no Cl “C”
stock could be retired,
(3) The discretion of the Board of Direc
As to the worthlessness of Class “C" stock, we submit the
following:
1., Class “C” stock has no ‘vied value. It has ao simi heet :
value because no market is maintained in it, and, because the
owner ‘is virtually prohibited from disposing of it, as was dis- -
cussed earlier. As mentioned above, the only known instances —
of transfer of such stock have been at no value. Regulations -
Sec. 1.61-5 which govern the receipt of Class “C” stock’ as
patrongZe dividends provide that any document which is
payaWie only at the discretion of the issuer, or which is other-
wisé subject to conditions beyond thé control of the patron,
shall be considered not to have any fair market value at the
time of its receipt by the patron. The law provides that “C”
_stock is redeemable only at the discretion of the Board of _
. Directors of the Bank for Cooperatives, and redemption is
contingent on future earnings of the issuer and on the state
of the law at the time. Moreover, there i is ‘a special’ ‘situation
in the case of Banks for Cooperatives regarding control of:
. thé patrons. The greatest number of directors which patrons ~
of a Bank for Cooperatives can elect is two out of a total of © ~
seven. See 12 USCA’ Sec. 1134, Sec,.640b and 640d. Thus, the |
patrons of a bank for cooperatives have very little control over . -
its Board of Directors. In the case of most cooperatives, the
patrons elect the entire Board of Directors. Thus, we believe
~ wecan show conclusively’ by the government’s own regulations
that Class “C” stock has no market value.
2. The law prohibits the payment of dividends on Class
“C” stock. Fhe most it.could-ever be worth is its issue price °
"many years later, and this is contingent on factors over which
_ the holder has. virtually ne control. No voting rights attach
-to the issuance of additional Class “C” stock. These factors
all point-to worthlessness.:
va
~ ¢
AC, .
'
;
2 :
;
3
ee obs:
re sxsrep Pymom page I i ial a ES A et a Cn
: <
3. It has. no valine as splat for loans. As. mentioned
shove; even the issuing Bank disregards any value assigned to
it on the balance sheet of a borrower in analyzing. the financial
positfon of the borrower. .
We understand from the NOBC that whee the government
“A” stock is: paid up, the outstanding “C” stock is expected
to be put on a 13-year or 14-year revolving fund basis.
Value must be determined at time of issuance: Oné further —
point.and this is critiéal. Worthlessness of Class “C”: stock -
must be determined by its value at time of issuance—not nine
_ or ten years later with the benefit of hindsight. |
Thus, worthlessness of Class “C” stock at the time of its
issuance cannot be measured by any value it might have in of
1965 by reason of anticipation of its egies daira in a few more |
years. —_ ®
~ Yours very truly, ;
_ Joun C. SATTERFIELD, “ ion
| General Counsel
| Mi ississippi Chemical Corporation
7 | - Coastal Chemical Corporation
JCS :md:rf. .° er 4" |
New OrLEANs BANK FoR Cooperatives 3
' 2M, Box 50072, New Orleans, ‘Louisiana 70150
"March 22, 1096
Mr. Jonn C. SATTERFIELD, General Counsel ,
. .. Mississippi Chemical Corporation
P.O. Box 388. |
Yazoo City, Mississippi 39194 ~
Dear JoHN: Yesterday in our conversation over the tele-
phone you requested that I write you with reference to the
policy of the bank in regard to the retirement of class A (U.S.
Government) stock in the bank. In réviewing our files I find —
that: Mr. Nettles in. his letter? to you of December 22, 1965,
covered this subject very thoroughly and pointed out that the
‘retirement of this stock prior to June 30, 1968, was very
doubtful.
"Subsequent to Mr. Nettles’ letter, ‘the staff of the bank again.
“reviewed this subject; ‘and a memorandum covering it was
presented to our board at its meeting held on February 25,
— A copy of this memorandum i 1s attached. You will observe
re)
that it was Fad cabana iat the prepayment of thie class A
stock through the sale of debentures be deferred until such ~
time as the officers of the bank determine that it will be ad- -
., Vantageous to the bank and its borrowers for the board to
“< econsider this subject. It was also recommended that the pro-
gram of retiring class A stock adopted on May 20, 1959, be con-.
tinued. The goals under this program are set out on the first
page of the memorandum. ~~
_ As we now stand the class A stgck will be retired annually i in
the amounts required by law, and under our calculations it
will take six or seven years more to retire all of the stock. Should
_ the cost of money decline, it is altogether possible that the board
‘will again consider retiring any vriaiteabinis A stock through - .
the sale of debentures.
As requested, I am attaching a schedule of the C stock in
_ the bank issued by years. © .
Sincerely yours, | co
/ . — /s/ D.R.Stump
: r _ : -- DR. Stump
ca Jo, % a oe Vice President.
-DRS:ceml te?
Enclosures
-Pouicy OF > New ORLEANS BANK. FOR COOPERATIVES ON Rovine-
MENT OF GOVERNMENT CAPITAL *}
"It is deemed. advisable at this time for the board to recon- - °
sider and restate the bank's policy regarding the retirement of
_~ Class A stock in the bank. At the meeting.of the board held on
May 20, 1959, a program of retiring class:A stock over a period
of 20 years with full retirement on June 30, 1976, was approved. |
The goal and actual retirement, of stock under this program. is
presented below. »
* . . , -
. . e- . .
a ed
1957_........° 181,300 6,746,800 181,300: 6,746,800 __________
1958_.______. 229,800 6,517,000 -229,800 6,517,000 ___..____-
1959... 247,000 6, 270,000 - 247;000 6, 270,000 -_._.___--
1960_-..____- 270,000 - 6,000,000 300,009 5,970,000 __..______
1961__._...__ 275,000 5,725,000 © 350,000 5, 620;000 _._.-___--
1962__..____. 275, 600 . 5,450,000 350,000 5,270,000 ____._.___
4063 .....:2.. 3007000 © 5, 150,000 . 390,000 4,880,000 _-_.-_____
1964.._______ 300,000 4,850,000 450,000 - 4,430,000 _.______ I.
1965_________ 325,000 4,525,000 660,000 3,770,000. $755, 000
1966____-___- 350,000 4,175,000 _-.....-.-------2- Lee 2
1967______°__ 375,000 3,800,000 ___..-_._-_-___-_22_____-___ ee
1968... -.__- 400,000 3,400,000 _..._._-__.___-_-___ Le Lee
1969________- : 400,000 3,000,000 _-_-._______- tales ececciace :
1970_________ ' 400,000 2,600,000 -._._-_22-_--- 22-2 LL eee
1971_____- _./ 400, 000 ~ 2, 200, pie eetene beh ee gece ence viene
1972_._______ 400,000 1,800,000 __._--._____-___-_______.._ ee
1973__._____- 400,000 1,400,000 _.__.____-______:______-_ 2. __
1974_-___:___ 400,000 1,000,000 _________-_-_____-_-.-________ Le
1975________- 400,000. 600,000 __________.________-___1___- LL
> 1976 (20 . ’
- years)...:.. | 600,000 -.....(---- ete eee
od a =
‘This schedule of class A stoek retirement, was aineored by
the board as a general objective with the understanding that,
under very high interest rate conditions or in the event of sub-—
stantial losses on loans, deviations from the schedule would be
_ , necessary.
- At its meeting held on Januaky 2 23, 1964, the board was in-
formed that, with the approval of the Governor of the Farm
Credit Admisistration and the Federal Farm Credit’ Board, the’
- class A stock might be retired ahead of the above mentioned
schedule with funds obtained through the sale of debentures. «
The officers of the bank at that time felt that the prepayment of
class A stock would be advantageous to the bank and its bor- |
_ rowers, and the board unanimously approved such retirement as /
of June 30, 1966. The Federal Farm Credit Board at, its Febru- '
ary 5, 1964, meeting approved and sathorized Tetirement of
|
/
Fe at oR ean tae eae, Te ee meprres art en =
ess = S :
oo *
oy’
\ ‘
38
the class A stock of the bask ouletanding as of i 30, 1966,
or at the close of any subsequent-fiscal ‘year. U pon such retire-
ment the bank was authorized to call and retire the class B
stock then outstanding and the oldest class C stock. with the
‘ provision that the maximum amount of class C stock retired -
shall not exceed the net cash*available from earnings and sale
ig class C stock for any year.less patronage dividends and divi- :
dends oni capital stock paid ih cash.
Although not specifically stated in the minutes. of the meet- _
ing of -the board at ‘which the prepayment of class.A stock
through the sale of debentures was approved, it was under- |
stood by.the board and the bank’s officers that a substantial
increase in interest rates on debentures would make the pre-
_ payment of a large amount of class A stock uneconomical and, |
~ insuch event, t prepayment shoutd be deferred.
Because of ur relations with the Central Bank for. Coopeta- 7
tives through- participations, it is not practicable’ to retire the
class A stock i in this bank until similar stock in the Central -
-Bank-has beer retired, which under the present program of. the 7
Central Bank Will be on J une 30, 1968.
Subsequentl
gested that consideration be given to a plan under which more
of the bank’s net\earnings could be distributed i in cash after the
class A stock has\been retired.. These borrowers: expressed in-
terest in a more flexible policy under which a district bank for.
cooperatives could develop a patronage dividend program de-
signed to fit the needs of its’ borrowers. It was the judgment of
. this group that the bank should be on a current eash refund
’ basis and the revolving of ¢lass C stock should be minimized
and that each borrower. be reqfiired to invest in class C stock
in an amount sufficient to capitalize its loans. This of -
permanent: capital and larger cash refunds, referred to generally
as the cash payment plan, has been approved ‘by over 90 per _
cent of the bank’s stockholders but is not considered favorably.
by most of the other district banks.’ K
A-special commitee appointed by the board to study the
capital program for the-bank reported to the board at-its meet-
_ing held on November.17, 1965, and recommended that, when t
“permitted by law, borrowers be given a choice bétween two ;
_ programs; namely, the cash plan with a type»of permanent —
- eapital.and cash rebates and the revolving plan as now provided
° °
several of the bank’s larger borowen sug-
bine whited bf ~ ae le we
‘by law. This committée also recommended .that legislation
‘necessary to implement this program. be sought. After fully ©
_ considering the recommendations of this commitee, the Sard
_ unanimously approved the.same.
From the foregoing it appears that the program for. the f
retirement.of class A stock as set out in the schedule attached .
to the mintites of May 20, 1959, meeting of. the board was ©
-. amended by the action of the board on January 23, 1964, which
'” authorized the prepayment of class, A stock on June 30, 1966, .
with funds obtained through the sale of debetitures. The officers 4
of the bank are of the opinion that. such prepayment — :
be deferred for the following reasons: ;
_.. 1. Th interest rates on debentures has decreased and. ‘the
gross interest spread on loans has declined to the extent that
retirement through the sale of debentures 4 is’ not now economi- 4
cally advantageous:
2. It will facilitate oaseilians of the Leith to defer retirement
‘of class.A stock to such’a time as the class A stock of the Central
Bank for Cooperatives is retired and the Central Bank begins.
. revolving its C stock or rebatihg its earnings in cash. it
3. The stockholders of the bank have expressed their desire
for a-cash payment plan, which, if adopted and implemented, -
- would probably affect the decision to repay class A stock.
In view of the-foregoing, it is recommended: |
1. That the prepayment of class A stock through the ‘sale of
debentures be deferred until such time as the officers of the bank -
determine that it will be advantageous to the bank and its bor-
_ rowers for the board to reconsider this subject.
_ 2. That, until otherwise detérmined by the board, the pro- ©
gram of class A stock retirement adopted on may 20, 1959, be
continued. = *
(Handwritten notation on botton of above dociment: This
policy approved by Board of Directors at-meeting held on Feb.
25, 1966, and. memo made a part of the minutes. ENED
ony
6
soe. ; : ° 7 =
; mo . /
° f / 40
Newo'Orleana hiek for Someruinas
bh. & en, 8 . "CO. Stock :
Year a “\. ' Tesued by ‘Year
; er ae wenden eee nn ele ceena---l--l- «= $86, 589. 66
et = ET cnn cunts riaticiocyin are) Reena vem neds <r ee eee - 201, 274. 78
. | ee acoteiinesiiesciasiastssstesseseaiesk os Bicnkeeshec ariel 249, 660. 36
1959 __-_--- Bene ee MERC nH a ese 343, 929. 40
0 FOOD occa ecennidbn enna centebtenwatinsndiimmtiianenin , 409, 598. 35
1961 °-+_---2----- Pitign desc Gasp wee ence ecann stance 438; 209. 60
I inn hen ee ok ree eaten ngeennh 429, 093. 95
OF, SU aca teidenkes een dhl aan eecneneentnn i inakomnitentats 523, 191. 86
Ea eeee niece ce tet ceancasn iemthesihel _ 613, 410. 35
* 1965 nnn nnnn asad wnat nda nn ein cnn nso c nein 883, 505. 43°.
Biba nach acta bc wncsmclicmateaniccnn mi +4, 178, 463. 75
"New ORLEANS BANK For COOPERATIVES |
PO. Bor 50072, New Orleans, Louisiana 70160— ©
, December 22, 1965
* Mr. JoHw C. SATTERFIELD en | .
— General\Counsel : Tg ew Be
_ Mississippi. — Corporation 3
Post Office Bor 388 . oo a ns
_ Yazoo City, Mississippi 39194
Dear Mr. SATTERFIELD: |
~ Subject: Mississippi Chemical Corparation:
-- Coastal Chemical Corporation. :
* *This refers to your letter of December 7 sditeeiudl to Mr. -
. Sturnp, and also your letter of December 18 addressed to me,
pertaining to the Internal Revenue Service examination of the
subject associations. You have raised certain questions in each
. letter. We will discuss the’ questions in _your letter of Decem- .
ber 7 first. (
As tothe agent’ s first reference “. i the honk in its notifica- - )
tion of patronage refunds to its shareholders. it is recommended ~*
- that the amount be reflected at face value and a credit to oper-
_ ating income . . .” and also his statement that other coopera-
tives give full value to the C stock, resulting in tax paid under ~
prior and ‘present law, our-recommendation tothe cooperative .
_ to reflect the stock at face value and credit operating income
“ appears on our annual notice of allocation. A specimen copy is
. enclosed herewith as-Exhibit A for your review.
. The purpose is statement, ineorporated i in our notice is
purely from a financial accounting: wandpdint. We recom- -
-
41
~ ” mended that. benroidin conperstives reflect the face value of
our stock on their accounting records simply to’show equity, as
’ to ownership in the bank. This statement has no significance
whatsoever from a tax standpoint as to the value of the stock .
‘and: was not intended for an opinion as to the value of the
stock. In any event the cooperative is free to set up a valuation
reserve against this stock upon advice of its attorney and tax
accountants. In general, our borrowing cooperatives record C
- stock (both purchased. and received as patronage refunds) at—
_ face value. We do know specifically of one other cooperative in
. this district, othér than yourselves, which writes the stock ‘off
for tax purposes and, according to information given us, there |
are cooperatives in other districts which do likewise. Some are
purely exempt, i.e., Sec. 521 cooperatives, and the remainder are
corporations operating on a cooperative basis. In either case, if
the cooperative sets the stock up at face value, the correspond-
ing in¢ome would normally be credited to pool earnings but -
also deducted by the cooperative as a \patronage refund except -
for the nonmember portion, in the case of nonexempt coopera-
tives. As.a result,- the cooperative (whether exempt or non-
exempt) pays.no tax as such on the stock, with the exception
_ noted, but the: reporting falls to the patron’ on a single tax level.
As you know, prior to the adoption of the Revenue Act of |
; 1962, members of ceoperatives were not required to report
‘paper patronage refunds at face value but only.to the extent of
the fair market. value of the paper. Until the 'U.S. Government
capital is-retired in full; the bank for cooperatives i is not subject
to the Revenue Act of 1962, and the consent provisions therein,
since we are not subject to-the payment of income-tax until the
class A: stock is retired. Patronage refunds paid by the bank
prior to’ becoming taxable would apparently come under Regu-
lation 1.61.5 which provides that noncash refunds are includa-
ble in the income of patrons to the extent of their fair market
~ value, since the borrower has not consented to report patronage
refunds at face value.
-With respect to the agent’ g. statenient that the stock’ is
| utilised i in the full amiount, in the event of default or foreclosure,
just the same‘as.any, other collateral having face’ value, we sub-
mit for your review a copy of our letter dated November i,
' 1965 to revenue agent John Koch i response to his letter re-
questing advice’. as to the. collateral value assigned to C stock,
ee :
GR ae
Saas
a |
|
a)
and the — procedure i in the event of default. You will note
that our regulations require the offset of stock.in the event of
default and/or foreclosure only under certain conditions. These
are set out in that letter. Generally speaking, the stock is
applied only in event of an anticipated loss and only to the ex-
>.
tent. of the anticipated loss. Any stock in excess of the antici- .~
pated loss would be left. for normal revolving.-The barik could
refrain from offsetting the stock against the loan account and
“wait until the stock is revolved and then apply the proceeds as -
a reduction of the loss in the year of. revolving. This would be
more. cumbersome accounting and the mere offsetting of the
stock against the loan does not in itself give, any value to the
stock.
With regard to iia letter of December 13, your first request
is for information pertaining .to official action taken by the
board of directors and the bank-with regard to payment of C:
stock after all the A stock has been retired. The bank is. not
-.permitted to revolve any class C stock, of course, until all class
A (US. Government) is retired. With respect to this, we enclose
acertified copy of an excerpt from the board minutes of May 20,
1959, along with the proposed schedule of class A stock retire- |
ments. You will notice that at this meeting, the district board,
’ at the request of the bank’s president, approved a goal for final —
retirement of class A stock as of June 30, 1976, or over a period
’ of 20 years from June 80, 1956. This policy was reaffirmed dur-
ing the intervening\years from 1959 up until January 1964, at:
which time the board approved. the recommendation of bank
, Officials to prepay the Government capital by issuance of con-
~ solidated debentures, but not earlier. than Juwe 30, 1966. We .
enclose a certified copy of an excerpt from these minutes for
your review. Following that meeting, the Federal Farm Credit
board approved the’ bank’s request to retire all class A stock
outstanding as Aprly as June 30, 1966 by issuance of debentures.
However, this approval provided that the maximum amount
of class C-stock to be revolved in any fiscal year is limited to
the net cash available from earnings and sale of class C stock
for that year. A-copy of a letter from the Farm CrédityAdmin-
istration evidencing this approval is enclosed. Subsequent to
. that time, however, it was brought to our attention that the
Central Bank would not retire its class'A stock-any earlier than
June 30, 1968. Beeause of the fact that revolving all C stock
of the district bank. i in cash i is generally. contingent on the re-
se
a)
43
volving of the Central Bank, and because of the recent rise in
" interest costs and reduction of interest spread, and because most
of our cooperatives prefer a cash rebate plan of operations and
> permanent capital, the banks’ executive committee’s feeling at
‘this time is that it will not recommend the’ prepayment of class
A stock any earlier than June 30, 1968, or possibly later.
As an observation; I might point out to you that since our
official plan was a 20-year plan up until 1964, it would appear —
that. this factor would be of primary significance in determining.
valuations of Mississippi Chemical Corporation and Coastal
Chemical Corporation owned class C stock of the bank acquired °
prior to 1964. . ,
You have requested information pertaining to any action that
the directors of the bank .have taken concerning C stock in-
volved in a situation. where.a cooperative is going out of busi-
ness or there is a foreclosure of a loan by NOBC. The procedures
for retirement under a foreclosure unre been discussed previ-
ously -in this letter.
As to retirements for a cooperative going oat of business, the |
manual permits the bank in the case of liquidation or dissolu-
tion of any present or former borrower to retire and cancel the.
_association’s stock at the fair book value thereof, not exceeding
‘par, under certain conditions as follows:
_ I..The retirement of ‘such stock would not unduly»
affect the financial position of the bank.
2. There is reasonable assurance that the business of
the borrower. has not been continued: under circum-
- stances. in which it would be proper and feasible for the
successor’ to acquire and hold the -interest of its
> precedessors in the bank. — | .
However, any such retirements are subject io certain limita-
tions and authorizations. The manual states that the board may
_ give. blanket approval for the bank’s executive committee. to
retire up to $5,000 of C stock without consulting the.board as
.to each such request. Any retirements from $5,000 to $25,000
- can be made only by prior approval of the board of directors.
If the retirement exceeds $25,000 it has to be approved by the — .
Farm Credit Administration. .
Regarding these manual provisions our bead. in ‘its meeting
of November 15, 1961, approved a policy that it would reserve
the right to review each individual case. before approval of re-.
la
44
tirement of stock or any other equities of such borrower rather
than give the executive committee blanket approyal to retire
any amount up to $5,000. A certified copy of these minutes is
_attached for your information. ; q
The executive committee as a matter of inoliey a never rec-
ommended to the board to retire any C stock out of order for a
liquidating co-op on the basis that this would establish a dan-
- gerous precedent and could result in inequities.
We trust this covers all of your questions in each letter, and
if we can be of further assistance, let ‘us know.
Very truly yours,
/ s/ N. F.. Pendinian
ea 'N. F. PENDLETON |
, oat. _ ; President
NFP:fm © |
New ORLEANS a FOR COOPERATIVES .
P.O.. Box 50072, - New Orleans, Louisiana 70150
July 16, 1965
GENTLEMEN:
Subject: Notification of or refund for fiscal year
June 30, 1965, -payable in ‘Class C stock.
For the year ended June 30, 1965, the benk’ S ncrnings after
_provision for franchise: tax, dividends on Class B stock, ‘and
transfers to allocated surplus, amounted-to $480,742.77. In ac-
cordance with, our bylaws, these earnings are to be. distributed
*- in Class C stock to borrowing associations in proportion to the -
total gross interest earnings. Since ‘our gross interest for. this
period amounted to $2,677,084.49, this patronage refund
amounts to 17.9577 per cent of the gross interest.
We accordingly wish to. officially notify you that your class
C stock. patronage refund for the year ended June 30, 1965,
amounts to$ . , and has been set up on the records of the
bank. It is our recommendation that this amount be reflected
in your records by a debit to investments in C stock in the bank -
and a credit. to your operating income at face value.
For your general information, we present below a statement —
_~ .of your cooperative’s investment in the capital accounts of this
- bank as of the close of business June 30, 1965, after giving eect
to the above class C stock. — dca
~~ Class C stock?
s
Balance at a - Balance at
* June 30, 1964 ~During Year Jung 30, 1965 .
Class B stock: ----.-_-.--,---------- or er Snes 3
’ Qualifying share_.______- ane ee ae b . $ “$
From quarterly investment by co-.
operative associations (15% of
interest)_._._._-.-____.__._____- $ $ §$
From earnings distributed’ as a: _
aoe: refund in C stock - Sondeen .$ $ . $
Total C stock...:-..---------- $ $ $
‘Your very erulpi
“ wyg/ J.C. Boras
| - J.C. Buras
Assistant Treasurer
Exhibit A
| ° -Novemser 17, 1965
Mr. Joun J. Roce fo.
Internal Revenue Agent .
_ U.S¢Freasury Department
P.O. Box 1659 | oo
Meridian, Mississippi . . ; ‘
Dear Mr. Kocu:
‘Subject: Mississippi Chemical Corporation, Coastal Chemical
Corporation, Yazoo City, Mississippi . ~
Reference is made-to your letter of November 9 to the are
concerning examination of the income tax returns of the sub-~~
ject cooperatives. = «' ~ ¥ ”
You have inquired cobtane of™ot the. hank assigns any
collateral value to borrower-owned class C stock. The policy:
of this bank is to assign no value for collateral purposes to class.
C stock owned by a borrower in determining the loan-base of
the applicant.
- In the event of default, and/ or foreclosure of a loan, the bank *
is authorized under Section 153 of the Bank for Cooperatives:
- manual to-apply the fair value (not exceeding face) of class C
46
stock owned by the’ defaulting borrower ony under. certain
conditions, as follows:
1. The borrower has been. iedaved bankrupt;: co
- 2. The»berrower has had &substantial part of its property
placed’in the hands of a receiver;
3. The borrower has ceased operation,or © ~
4, The indebtedness of the borrower is considered tacollecti- .
- blei in the judgment of the bank.
-If we.can be of further assistance on. this, awe advise.
| Very: truly. yours,
. DM. Nevins .
- Vice President and Treasurer -
DMN:fm ‘ |
ec: Mr. John C. Satterfield -
General Counsel
Mississippi Chemical Corporation
”
‘
U.S. TREaAsurY DEPARTMENT
‘INTERNAL REVENUE SERVICE
Office -of the District Director.
P.O. Box. 1659; Meridian, Mississippi
. Te November 9, 1965
Mr. Neat F. Penpieton, President :
The New Orleans Bank for Cooperatives . -
' P.O. Box 50072
New Orleans, Lotisiana 70150 — P 7
In Re: ‘Mississippi Chemical Corporation, Coastal Chemical
Corporation, Yazoo City, Mississippi .
Dear Mr. PENDLETON: In connection with the per i Pe
of the Federal income tax returns of the above-named — 2.
the following information is. requested: |
’ In granting the approval of the améunt loanable, is any value
assigned to the “C” stock. owned by the -borrower.-In oth
’ words, let us assume that. the facilities, forming the basis:o
appraisal and loan are not sufficient in value to cover the normal ,t
value\equired by your Bank, is tlte class “C” stock considered
in the pproval of the amount loanable.
47
* It is assumed, that in the case of default and foreclosure, the
face amount of the “C” stock is utilized and applied. against the
' indebtedness. :
- « Theinformation requested i is oniier authority of Section 7602
of the Internal Revenue Code of 1954. btu reply at an omy
date would be highly appreciated. :
, Yours truly
,
°
e
_ Joun J. Kocu
| | lef JJ. wd
‘Internal Revenue Agent
ExcerPr’ — THE Miwa OF THE: Masrie OF THE BoarD
.. OF DIRECTORS OF THE NEw 7” Bank FOR rarer,
" HELp May 20, 1959
In discussing interest rates, Mr. Chavanne wheationnd: the
desirability of having some goal for the rate of class A stock
retirement. Each director was handed copy of a schedule
(Exhibit 2) showing a proposed program for retirement of
class A stock over a period ‘of 20 years. After discussion, motion
was made, seconded, and unanimously carried approving this
schedule for class A stock retirement as a gentral objective with
' the understanding that, under very high interest rate conditions
~ or in the event of some substantial loss on bad loans, the bank-
would find it necessary to deviate from the schedule Tate of
retirement. - .
I hereby certify that the above isa true ‘ind ound excerpt from
the minutes of the regular meeting of the Board of Directors of
the-New Orleans Bank for Cooperatives held on May 20, 1959.
. Dated this 3rd iad of December, 1965.
| /s/- C. D. Powe
Assistant Secretary
420-6130—71—4 ~ =. - on
27 = 3
Pa
=o «A t
/ ° ‘ a ,
| 48
‘N.O.B:C. Program of Class A Stock Retirement
° Goal
Year Ended ° Actual 9 -—--—-—-—-—-*——--—_———-————_.
. Retire Balance
Original A Stock. _--___-- oe omune ene nenee Sn xe wn ee ore $7, 000, 000 |
- 6-30-56. eg ------ $71, 900 $71, 900 6, 928, 190
6-30--57_ : 181, 300° - 181,300 6, 746, 800 °
a a 229,800 229,800 ~ 6,517,000 .
6-30-50... 2-2 cee ee cee ... 247,000 — 6, 270, 000
6-30-60... ee Lou ak — - 270,000 6, 000, 000.
6-30-41 _. enee wauneenwewene 275, 000 5, 725, 000 -
6-30-62_.00 eee 275,000 — 5, 450, 000
6-30-63... eee ee eee 300,000 _—+5, 150, 000
6-30-64. ‘ . 300,000 - 4, 850,000 |
6-30-65... eee eee, 325,000 4, 525, 000°
6-30-66. ....... 2.22 eee eee 350,000 4, 175, 000
O~-BO-67 onan nnn en oe Se cence cect e ceed ene 375,000 3, 800, 000 ©
6-30-68. ___- 400,000 — 3, 400, 000
ca a eS. - 400,000 3, 000, 000
6-30-70... 2 bee 400,000 2, 600, 000
6-30-71... 2 Ee Suvstnnwocus 400,000 2, 200, 000
6-30-72... ee eee eee ee cee 400,000. _1, 800, 000 -
6-30-73... ...._...._..:.- scepanipecuccenmene 400,000° _—1, 400, 000
6-30-74... 2.2 ee sees iuicehich tines 400,000. —‘1, 000,.000 ‘
6-30-75. _- S ubdcetneecsmeuesace eo ee -2--25-. 400, 000 | 600, 000
* 6-30-76 (20 years) ____-_- ine ah 6c sain akin ace msee on aies 608, GOO ........ eee
EXCERPT From. THE . Minvtes OF THe MEETING OF THE ‘BOARD
oF DrrEcTORS OF THE NEw ORLEANS BANK FOR CooPEratives
_HEwb JANUARY 23, 1964 ae: fe
: Sedeeee of Government: ini class A stock outetanding
at June 30, 1966, by issue of tonsolidated ‘debentures was next
discussed. Schedules covering the subject were handéd to each
director. Mr. Pendleton mentioned that this topic was covered
at length by the Springfield Bank for Cooperatives at the Presi- |
dents’ conference in Houston,.Texas; and, as the Governor of
the Farm Credit Administration approved Springfield’s request,
it was the feeling of the executive committee that the bank
should submit a similar reeommendation to FCA. The president
then explained in detail what effects cashing out.the Govern-
ment owned stock by going into debt would have on the capital
structure of the bank and also the entire cooperatiye bank sys-
tem. He pointed out that ¢t September 30, 1963, the bank’s ratio
| | 49
of net worth to debentures was .9 to 1 oad under the law the
ratio could be as high as 8 to 1. It is.quite obvious that the bank
_ has more capita! than it really needs. If the present-program of
retiring Government capital is continued, the bank will have
by 1973 approximately. $13,000,000.00 of capital, considerably
more than the most optimistic projection of loan volume shows
will be needed. With regard to the system as a whole, he noted
_ that retirement under this plan in 1966 would reduce the maxi-
.. mum size loan that the system could make to a borrower. Mr.
" Nettles next presented the effect the proposed retirement would
have on the bank’s earnings. He noted that it would
affect income and earnings to the extent of' the ‘interest cost
on approximately $3,500,000. 00, the interest earned on Treas-
ury bonds held by the bank would also be taxable; and the bank
would be subject. to franchise taxes in the three states. Pro-
- jections indicated that-under the proposed plan net gs °
would be reduced by approximately $100,000.00 ann
- At the conclusion of Mr. Nettles’ remarks, Mr. Pendleton
_ stated that the executive committee had considered the various
+ aspects of the subject'and unanimously recommends that the
'. board approve the retirement of class A stock outstanding at
June 30, 1966, by issuance of. débentures, subject to the ap-.
proval of the Farm Credit Administration. After'further discus-
sion, motion was made, seconded, and unanimously carried °
approving the executive comimittee’s recommendation.
I hereby certify that the above is a true and exact excerpt.
from the minutes of the regular meeting of the Board of Direc-
tors. of the New Orleans Bank for Cooperatives held on Janu-
ary 23, 1964. _
_ Dated this 21st day of December, 1965. @
, | -/s/ CAM®. Powe *
Farm CREDIT ADMINISTRATION :
, _ Washington, D.C., 20578 —
tag ao , February 7, 1964
_ Mr. Nea F. PenpD.eton, President
New Orleans Bank for Cooperatives ee eee
P.O. Box 650072 se @
. New Orleans, Louisiana 701 60
cain mented =
@.
Dear Mr. Penpupron: This will confirm our telephone con-
versation.on February 6 in which we advised you that the Fed-
eral Farm Credit Board had approved the request of the New
Orleans Bank for Cooperatives for permission to accelerate the.
retirement of class A (Government) stock in the bank.
The, resolution adopted by the Federal Board ‘was as follows:
“RESOLVED that an exception be madé to the policy” .:
_ previously adopted by this Board ‘on retirement of class .
' A (Governmeng$capital stock in ‘the banks for coopera- _
’ tives to provide that the Springfield: ‘Bank for Coopera-.
tives and the New Orleans Bank for Cooperatives, with
_ -the approval of theit respective boards of directors and
‘the Farm Credit Administration, may:
a (1) Accelerate the retirement. of vars A.( sai
oa ment) stotk in the bank;
(2) Retire, as of June’30, 1966, or at ‘tei close of any
Subsequent fiscal year, any amount of class A ¢Govern- -
‘ ment) and class B:stock 1 then outstanding ; and + +
(3) Upon retirement of all class ‘A (Government) and —
‘class B stock each of the banks may call and retire the . '
oldest outstanding class C stock, in full-or on a pro-rata |
basis, in accordance with the provisidns of the Farm
Credit Act, of 1933, as amended by the Farin Credit.Act
of 1955; but the maximum amount of lass C stock. re-
tired‘as of the close of any fiscal year shall not exceed
the net cash available for such retirement from earnings
. ~° and sale of class C stock forthe year.”
“ou will observe that the maximum amount of class C stock
to be retired‘in any fiscal year is limited to the net cash avail- —
able from earnings and.sale of class C stock for the year. There-
fore, the sources of funds for such retirement would be sub- ©
stantially as-follows: a ee
1? Net earnings. ee eae ae
. 2. Required investment in class C stock paid in cash less the
/ amount of class G stock of’the Central Bank purchased on ac- |
court of particip&tions held by the Central Bank.
3. Cash received | from Central Bank in edempition of
equities.
Less: :
aed locations of Central Bank taken into earnings.
2: Cash distribution i current earnings—required by: law—
° e
4 ;
‘
.
20 percent of the sflocsted migylue. and patronage. refunds.
3. Income taxes and dividends- paid on capital stock, if any. :
We hope tliat the accelerated retirement of the stock as pro-
posed, which’ will enable the bank to begin paying 20 percent
of its current.refunds i in cash and revolvin horrowers’ equities —
in cash, will. aid bank in obtaining addjtional business
_ which it might not therwise get. ee SE
Very _— yours, | ; 3
ae,
Gunn E. HEITz;~._
- Director of Cooperative Bank Service. |
Excerpt From tHe MINUTES. OF THE MEETING OF THE BoarD
OF Directors OF THE NEw ORLEANS Bank FOR RC OOPERATIVES ts
HELp NoveMBER 15, 1961 . : Pos
_. The board fully discussed regulations issued by. the Farm °
Credit Administration pertaining to the cancellation and -re-
tirement of stock and other equities of a borrower in liquidation
or dissolution. The consensus was that forthe time being the |
board would prefer to review each individual case before ap-
. proving the retirement of stock and other equities of any such
borrower.
ae hereby certify that the above i is a true and exact excerpt .
from the minutes of the regular meeting of the Board of Di- « °
‘rectors of the New Orleans Banlé for eee held on No- _
vember 15, 1961. -
Dated this 21st day of December 1 1965. ti,
Js ©.D. Pe —
Assistant Secretary
* , e * . & e
ATTACHMENT’ TO AND Mave. A Pair oF Cuats: ( Form 843)
Filed by: Mississippi Chémical Co orporation, P.O. Box 388;Ya-.
| goo City, Mississippi,
"For the fiscal year endé@d Jane 30, 1962 . i
In Revenue Agent’s rep@rt dated January , 10, 1966, sub-_
mitted to the above namedqaxpayer under date of March: 14,
2 - 1966, said report covering*the pees set out above, exceptions .
- were taken as follows:
? 38
(ce) Interest an , $16,421.7 1
_ The taxpayer acquired « one shave of class C stock «.
_. ain the New Orleans Bank for Cooperatives ($100.
_** . °- par value) in order to obtain loans from the Bank?
2": -*, Each, borrower must alsa. “purchase additional _—
SN ‘stock in an amount equal’to 15 per cetit of itterest
aan. id. @n ité*loan. The ee: claimed the cost of.
a ‘Cost teckered in eae eee class C stock are
s . . ° ~ not deductible. See Rév. Rul. 65-241. «|
(d) Patronage Dividend on. “C”’ stock $27,489. 40
' The taxpayer recéived clas& C sto&k from the New-
-. Orleans: Cooperative Bank as patronagesdrvidends ze
in the amount stated above. The amount was not -
included in income as having‘no value.
| ~The Bank, in its notification of patronage re-
- ° fund to its shareholders, recommends that the
° amount be reflected at.face value and a credit to °
operating income. -
The “C” stock j is assigned as auttaineel against
~ loans, and in the event of default and/or foreclosure
of a loan, the stock is utilized in the face amount,—
the same as any other collateral having face value.
| a The amount .above, is therefore includable in ~~~
income urider section 61 of the 1954 Code. .
The income tax related to (¢) above amounted to $8,539.31. on™
| and was paid-as shown by ne acing Cony of letter accompany= \
_ ing the remittance. 2... J +
The income tax related to (d), wiedntion to. $14, 259.48, was
_agreed to in Form 870 which was sent to Mr. Julian W. John-
. son, Appellate Conferee, Internal Revenue Service, US. Treas-
_ ury Department, 711-2121 Building, 2121-8th Avenue, North,’
- Birmingham, Alabama 35203. The above amount of income tax
was paid July 21, 1967 as part of a sane for $17,954.84, which’
included applicable i interest,
It was understood. ‘with Mr. ‘thei that the execution and
-. filing of the foregoing Forfn 870 would not preclude the’ filing
. of a Claim (Form 848). In fact it was understood that a claim
would be filed as a basis of litigation in the appheable US.
7 ‘District Court.
ey
ff).
8 |
_ 53
“the total | income tax ccmaalsbid by (c) ond (@) above
- amounts to $22,798.79 shown:as (g) on Form 843.
-It.is claimant’s position that the. interest’ represented by. (d)
‘was deductible and further thatthe class C stock referred to
was not worth $100.00 per share during the. fiscal yéarcvended
June 30, 1962.
An expeditious handling of this claim’ is [oon a con-
ference with claimants attorney is ‘requested, and will be ar-
- ranged for premptly on:request, in which event John C. Satter-
. field, Attorney-at-Law, Box 466, Yazoo (ity, Mississippi should
be accordingly notified.
Similar claims are being filed by slitadint for the fiscal years |
7 1961 and 1963.
*. * 0%, ME *. r * °
ATTACHMENT 70 AND Mave a Parr or CLAIM: (Form 843)
Filed by: Mississippi Chemical ae, re 0. _ 388, -
Yazoo City, Mississippi
For the fiscal year ended June 30, 1963 8
“In Revenue Agent’s report dated January 10, 1966, submitted
tothe above fiamed taxpayer under date of March 14, 1966,
_ said report covering the period set out above, exceptions were.
taken as follows:
(jae 2 tS $18,863,365.
‘The taxpayer cael one share of class G stock
in the New Orleans Bank for. Cooperatives ($100.
par value) inorder to obtain loans from the Bank.
Each borrower must also purchase additional “C” .
stock in an amount equal. to 15 per cent.of interest -
. paid on its loan. The taxpayer claimed the cost of
_ acquiring the additional “©” stock as interest in 1 the
above amount. .
Cost incurred: in purchasing class C stock 1 is ‘ast
_ deductible. See Rev. Rul. 65-241.
(e) Patronage Dividend:on “C” ‘stock . $26,158.88 |
_-., The taxpayer — C stock from the New
' Orleans Cooperative Ba
in the amount stated above... The amount was not
included i in income as having no value:
’ The Bank, in its notification. of patronage refund
«to its shareholders, recommends that the amount be
nk as patronage dividends
yee
ORES A, Diab I Pita Y Sip wid htt
, “54
reflected at face value and,
- income..
-°. The “C” stock' is assigiyé
loans, and in the event of default and/or foreclosure
of a loan, the stéck is utilized in the face amount;—
the same as anyother collateral having face value.
' The amount’ above, is ‘therefore includable- in
income urfder section’ 61 of the1954 Céde.
The income tax related. to (¢d) above amounted to $9,808.93:
and was paid as shown by attached copy of letter —
the remittancé.
The income tax related to (e), ambunting. to. $11 304.94,
was agreed to\ii Form 870 which was sent to Mr. Julian W.
Johnson, Appellate Conferee, Internal Revenue Service,. U.S.
‘Treasury Department, 711-2121 Building, 2121—8th Avenue,
North, Birmingham; Alabama: 35208. The above amount of .
‘income tgx was paid-July 21, 1967 as part of e-check for
— $13,478.19, which in¢luded applicable interest. ~~
It was undérstood with Mr. Johnson that the execution
- and filing of the foregoing Form 870 would not preclude the:
-
__ years 1961 and 1962. a x ae
filing of,a Claim (Form 843). In fact it was understood that a
claim would: be filed as a basis of litigation i in 1 the es
CS. District Court.
The total income tax reprenentee by .(d). and. (e) abover
amounts to $21, 113.87 shown as (g) on Form 848.
- It is claimant’s position that the>interest. represented by
(d) was deductible and-furtherthat the class*C stock referred.
to was not worth ‘$100.00 per share ; .during the fiscal year—~-
ended June30, 1963. :
An expeflitious handling of this claim 1 is requested: ; a con-
ference with claimant’s attorney is requested, and will be
arranged for promptly on request, in which event John .C.
Satterfield, Attorney-at-Law, Box 466, Yazoo City, Mississippi, °
should be accordingly notified.- —
- Similar claims are being filed’ by claimant . for the fiscal
- + * . 9 ____ _ +
/
’ be}
credit te operating — |
collateral against:
\.
«
In the United States District Court for the Sqpthern Judicial ...
_ District of Mississippi, Western. DfVision .
“Civil Action No. 1214 - —
~ CoasTau. CHEMICAL CorPoRATION, PLAINTIFF —
ft 5 US. 7
THE UNITep StaTes or AMERICA, DEFENDANT.
_,COMPLAINT’
(Filed Dec. 15, 1967)
../ - ‘Count E
8 . ° : / . :
. Comes Coastal Chemical Corporation, a corporation orga-
nized under the laws of the State of Mississippi, and files this
‘Suit against The United States of America and for cause of
_ action says: ee eee =
Plaintiff is a corporation organized under the laws of the
State of Mississippi with its domicile and principal place of
business in Yazoo City, Mississippi, in the Southern District
of Mississippi, Western Division, of the United States District.
‘ Court. - oe 75 .
& © ¢ I its
Defendant is The United States‘of America upon whom
service of press may be had by service of summons upon the ~
~-—_——_Gnited Statés-Distriet_A ttorney—of Jackson, Mississippi, and
. by ‘sending a copYrof the summons and complaint to the
Attorney General of the United States at Washington, D.C..
III. -
This is an action of a civil nature.for the recovery of United
— incpme taxes and interest paid: thereon, which income
taxes and ‘interest were erroneously or illegally, assessed and
wrongfully collected.
_
?
Le Wik 8
Plaintiff is organized under the General Corporate Laws
_~of the State of Mississippi but is a cooperative qualified to
receive financing under the Statutes of the United States. of
America as a cooperative. It is and since the beginning of its
go:
56
operation has been engaged in manufacturing fertilizer and
. distributing same primarily ‘to its stockholdef patrons. —
dl e e 4 ee oat
V 2 , /
hd -
°"(a) Plaintiff duly filed its Federal income terx return for its
‘fiscal year ending June 30, 1961, on or before the due date
thereof with the District Director of Internal.Revenue at Jack-
‘son, Mississippi. On said* tax’ return, plaintiff deducted from
'-its gross income the amount of $40,779,88 which plaintiff had — :
‘ bean required to.pay during such fiscal year to the New Orleans =”
- Bank for Cooperatives under the provisions of sir ae
* (a)(3) of Title 12, United States Code. On or about March
1966, an. Internal Revenue Agent’s report (dated January 10,
/ 1966) was submitted‘to plaintiff and in saidreport theRevenue ==> —
' Agent erroneausly di lowed the deduction of $40,779.88 = —°
which plaintiff ‘had been required to pay to the New Orleans ~— -
Bank for Cooperatives under the provisions of Section 1134 Py,
(a) (3) of Title 12, United States Code. | “
.(b) In said Revenue ‘Agent's report (dated January. 10,
1966), the Revenue Agent erroneously included in plaintiff's
income for the fiscal year ended June 30, 1961, the sunv of $51,-
689.59 as the alleged value of Class C stock-of the New ————e
‘Bank. for Cooperatives, which Class C stock had. been received:
by plaintiff from the New Orleans Bank for Cooperatives as
patronage dividends in accordance -with:Section 11341(b) of. in
Title 12,-United Stafes Code. ee
a O=
————— =
. The said Revenue Agent’s report reduced plaintiff's net oper-.
ating loss deduction by disallowing as-deductions amounts paid |
to the New Orleans Bank for Cooperatives under the provisions
of Section 1134d(a)(3)- of Title 12, United States Code (as
’ described in paragraph V(a), above), and by including in plain-
tiff’s income the face amount of Class C stock Tegeived as pa-
* ‘tronage dividends from the New Orleans FED operatives ©
___—(as deseribed in paragraph V(b) above), for the following fiscal oe
- years in the amounts stated, to-wit: - e
(a) Fiscal year ended June 30, 1958:
(1) Disallowed deduction’ of $11,670.19 in connection
ith pertagat of interest to New Orleans Bank for Co-
operatives under Section 1134d(a)(3) of Title 12, USC.
‘(b) Fiscal year ended June 30, 1959: By
‘, ac
a
“iN :
| 9
oy .
-(1) Disallowed dedygtion of $33,474.20 in connection
with payment of interest to New Orleans Bank for Co-
. operatives: under, Section’ 1134(a)(3) of Title 12, USC. |
(2) Included as income $14,345.04 received as patron-
“age dividend in Class C stock of the New Orleans Bank --
- for -Cooperatives. en a
4: Ss (c) Fiscal year ended Julien 30, 1960: |
a_i (1) Disallowed deduction of $46, 172.23 in connec-
| tion. with payment of interest to New Orleans Bank for
Cooperatives under Section 1134d(a)(3) of Title 12,
USC. °
/ 5 Includdd as income $47, 361. 32 received as alti
. age dividend in Class C stock of the pene Bank
- .for Cooperatives.
That as a result of the’ ‘above described adjantdhinste, plain-.
_ tiff’s net operating loss carry forward was reduced: and plaintiff
: for fiscal year ending June 30, 1961, paid additional income
taxes of $231.00 plus applicable interest of $63:34.
- Plaintiff alleges that its net operating loss deduction should.
not be reduced ag set forth in said Reyenue-Agent’s report and _
that plaintiff's net operating loss* deduction and-carry forward -
for fiscal yest ded June 30, 1957, June 30, 1958, June 30, - —
~~ 1959, June 30,/1960, and June 30, 1961, should he computed i in |
accordance with Exhibit A.whieh-is-attached he hereto and. made a
_.____ part-hereof as if copied herein and that said net operating loss
deduction carried forward should be $827,744.28 as of June 30,
- - 1960, and should be $244,681.92 as of June 30, 1961.
3 a eee | I a aa ;
The Farm Credit Act of 1955 (Section 1134(d) ta) (3) title
12, USC) requires a borrower from a Bank for Cooperatives to
purchase quarterly Class C Stock of such Bank in an amount.
e an ten per cent nor more than twenty-five
~ . per cent of the amount of interest payable by it to the Bank
' during such calendar quarter. The Board of Directors of the
’ New Orleans Bank for Cooperatives has provided for a pay-
ment of fifteen per cent of the amount of interest payable to _
said Bank by organizations borrowing from it. During the fiscal ©
year ended June 30, 1961, plaintiff paid the New Orleans Bank °
for Cooperatives $40, 779. 88 for such Class C stock and ‘plain-
tiff deducted said amount from its gross income. Plaintiff was -
R Me Oe,
required’ ne pay said amount to the New Orleans Bank for Co-
operatives in connéction With interest payments under the pro-
visions of Section 1134d(a) (3) of-Title 12, United States Code.
Plaintiff- show that said payments were properly deductible
frony its gross income for fiscal year ended June, 30, -1961,.
either. as: additional interest’ paid to said’ New Orleans Bank
Aor Cooperatives, or as ordinary and necessary business expense;
"or as a loss on a transaction entered into for profit, and that the |
Class.C stock received by the plaintiff from said bank for said .,
- payment had no market value for the reasons hereinafter set”
Sere . Eee ie Nee rae tr ) .
a \ vu eps i ee
Section 11341(b) ‘of Title 12, United States 2 Codes rSvides for.
the issuance by a Bank for Cooperatives: of patronage. refunds
to organizations borrowing from such Bank. During fiscal year.
ending 1, plaintiff borrowed money from the New
* -Osieane Bank he Cooperatives and plaintiff received Class C_
eS ~
stock from the New Orleains Bank for Cooperatives as patronage
_ dividends in the stated amount of $51,689.59 The Class C stock . |
included same in its:income-tax return for said fiscal year at:
NSL .00 per share for identification purposes only. Plaintiff would .
- show that said $51,689. 59 received as Class C stock of said Bank
should not be included in its taxable income for fiscal year ended
June 30 19a. _ oo 7
' « received by plaintiff from. said Bank as patronage refunds has se
- no market valuq (as. hereinafter set forth) and the taxpayer
| | “Ix. : | : Ss
(a) TRa ‘the saad paid by plaintiff to the New Orleans © .
; Bank for. Cooperatives for the fiscal years ending June 30, 1958,
through, June 30;°1961, inclusive, as hereinabove ‘set forth, for
the priydlege of borrowing from said Bank are proper deductible
expengfs either as additional interest paid, or’as an.;ordinary —
cand necéssary business ex ense, Or as a loss on a transaction
entered into for profit; that-at; the time of such purchase,. the
Class C stock of the New Orleans Bank for Cooperatives was
not. actually corporate stock at, all and was entirely worthless;
_ that no certificates.of any nature were issued therefor; that no
dividends were or could be payable thereon; -that no. voting
rights were incident thereto; that there was no possibility of ap-
preciation in — that such Class Cstock, could not be 0
g
e . _=
- -
s « - . - " . —
. . . —
-
=< - - .
. 59° a) . a : 7 - : > a oS . e —
or winsferred and the § issuer : theredf rebut to nuit
collateral for loans; and'that as a result said so-called Class Cc
stock had no fair market value.
ae (b) That the Class C stock fecei ved-ts7- laintifi from the a
og... New Orleans. Bank for Cooperatives as patronage Uividends -
for the fiscal years ending June. 30, 1958 through June 30, 1961, ©
inclusive, as heisinatiove set, forth, ‘should not be includéd i in
_ plaintiff's income siiice such Class C stock had no market value;
. that-at the time of such’ purchase, the. Class ,£ stock was not «
. _—~ actually corporate stock at all and was entirely wofthless; that |
i no certifidates of any nature were issued therefor; that no divi-
i’ Pa - dends were or could. be payable’ thereon ; that no voting rights
: were ineident thereto; that there was no possibility of aesaae
*. tion in value; that such Class C stock could not-be sold or trans-
ferred and the issuer thereof refused to consider it as collateral
_ efor loans; and that as a result said so-called Class C stock-had
‘norfair market value. , — .
: oo |
. rs a result of the heen described adjustments to plaintiff's
taxabl¢ income for fiscal year ending June 30, 1961, and the *‘
adju ments: to plaintiff's. net operating loss. carry forward,
. pla intiff paid additional income taxes of $231 .60 plus applicable _*
: iterest of $63.34 thereon: for its fiscal year ending June.30, . ~ F
1961. The aforesaid determination by. defendant of a deficiency .
in plaintiff’s income ‘tax of $231.00 was erroneous, and the
aforesaid reduction of plaintiff's net operating Toss for the fiscal
- years ending June 30, 1958 through June. 30, 1961, inchitive, .
was ane ;
<
\
: XI.
On or about October .12,°1967, plaintiff filed its Claim for
Refund for fiscal year. ending June 30, 1961, said Claim being”
for a refund of income taxes" erroneously assessed and paid in
| the amount of $231 00 plus applicable interest: of $63.34, and
‘ said Claim requested a computation of plaintiff’s net operating
_ loss for fiscal years ending June 30, 1958, June 30, 1959, June 30,
ees + 1960,:and June 30, 1961; in accordance with Exhibit A attached
a _. hereto-and made a part hereof. Said Claim for Refund (includ-
: . ° ing all Exhibits attached thereto) is attached hereto as Exhibit
B and made a | part hereof as if oopKe herein. \
»
Abe SMa
That by ¢ ‘ertified letter dated Dectanber 13, 1987, plaintiff
-was hotified that its Claim, for Refund for fiscal year ending :
- June 30, 1961-had be denied. There-is attached hereto as Exhibit
~C letter fromthe District Director of Internal Revenue, Jack- -
‘son, Mississippi, detiying plaintiff s said Claini for Refund for
ot fiscal year ending June 30, 1961. |
_.* Wnererors, plaintiff prays judgment against the defendant
__& .in'the amount of $2 231. .00 and applicable interest paid of $63.34
and interest thereon as allowed by law; and plaintiff prays that
its net. operating loss deduction be computed and allowed for
; * fiseal sears ending June 30, 1958 through June 30, 1961, inclu-
sive, in accordance with Exhibit A attached: hereto; and for
-- costs of this action, and for such “other and further relief as to ,
the Court may. seem just and proper. _ .
| Bee 1 8 te Re Be | _ ita es tg :
I. | |
Plaintiff Te-alleges gud resivers each: and every allegation
of paragraphs . cai iV of Count I above. . |
|; re o
(a) Plaintif duly filed ats Federal 3 income’ tax return: for *
its fiscal ‘year ending June 30, 1962, on ‘or before the due date
thereof with the District Director of Internal Revenue: at
Jackson, Mississippi. On said tax return, plaintiff deducted
from its gross income. the amount of $34, 116.16 which plaintiff -
had been required to pay during such fiscal year to the New
Orleans Bank for Cooperatives under the provisions of Séction
1134d(a)(3) of Title 12, United States Code. On or about
.” March. 14, 1966, an Internal Revenue Agent’s report (dated
- January-10, 1966) was submitted to plaintiff and in said report
" . the Rev enue Agent, erroneously disallowed the deduction of
. $34.116.16 which plaintiff had been required to’ pay to the Nesv
‘Orleans Bank for Cooperatives: under the provisions. of: Sec-
tion 1134d(a) (3) of Title 12, United States Code. -
(b) Tn said Revenue ° Agent’s report (dated ‘January 10,
1966), the Revenue. Agent erroneously included. in plaintiff's
income for thes fiscal yeas, ended June 30, 1962, the: sum of 7
>
-
- — $60,541.52-as the alleged value of Class C stock of the New
# Orleans Bank for Cooperstives, which Class C stock had been
received pita fyoi ‘the New Orleans Bank for Coopera-
-_ tives as patronage dividends ir accordance with Section 1134
" M(b) oFitle. 12, United States Code.
ees Aer we ay |
BEB en The said Revenue Agent’ s report reduced plaintiff ’s net oper-
NS "ating loss deduction: by- disallowing as deductions amounts
ce ar paid to the New Orleans Bank for Cooperatives tinder: the pro-
o- - visions of Section 1134d(a) (3) of Title,12, United States Code
| (as described in. paragraph II (a) above), and by including in |. :
_ plaintiff's income the face.amount of Class C stock. received -
as patronage dividends from tre New Orleans Bank for ‘Co-.
operatives (as described in. paragraph IT( b) above), f for the
following fiscal years inthe amount stated, to-wit: ca | te
(a) Fiscal year engled June 30;:1958: « . |
(1) Disallowed deduction of $11;670.19. in cennec- :
- tion with payment ion” to New" Orleans. Bank for, —
j ne oo hG Cooperatives. -under ection 1134d(a) vad of Title 12, i
- = SeeL My 7. 205th ct,
. (b). Fiseal year enided June 30, 1959:: oe
ff eed (1)* Disallowed. deduction of $33,474.20 in. eosnection
nie with payment of interest to New:Orleans Bank for Co-,
| +) + operatives under Section 1134d(a) (3) of Title 12; USC.
Pers (2) Included as income $14,345.04 received as patron- -
‘. age dividend-in Class C stock of ‘the Seated Orleans Bank ~
for Cooperatives. , erre
(c) Fiseal year ended June 30, i960:. |. _
ot (1) Disallowed deduction of $46,172:23 in connection’ © |
| with payment of interest to New Orleans Bank for Co-,-.
‘operatives under Section 1134d(a) (3) of Title 12, USC..
ade (2)- Included as income $47,361.32 received as patron-
: +. age dividend in Class C stock of the Néw Orleans Bank
Po. - for Cooperatives: dee |
a ae : (d) -Fiscal year ended June 30, 1961: Ww
, : (1) Disallowed deduction of $40,779.88 in connection . ; *.
. with: ayment of interest toNew Orleans. Bank for, ~
<eopeeatres: under Section ee i of . Title | 12,
. , $ .
Pe WAAR A SS OTS
.
-1961, should be computed in accordance with Exhibit A which - ee
_ is attached 1ereto and made a part hereof as if copied herein ;
-and that said net operating loss deduction carried forward
. should be $244,681. 92 as of Janes 30, 1961. :
62
(2) Inciuded as income $51,689.59 received as patron- ;
_ age.dividend m Class C stock of the New Orleans Bank.
for ‘Cooperatives. ~
- That as a result of-the above described adjustnients, “plain- Ne - 4
, tiff’s net operating loss carry forward to fiscal year ended ys
~
- June 30, 1962, was reduced. Plaintiff alleges that its net oper- . UNG
" . ating loss deduction should not be reduced as set: forth in said _ - 3
- Revenue Agent’ s report and that plaintiff's net. operating loss _
-deductionand carry forward: for fiscal years ended June 30,
1957, June 80, 1958, June 30,1959; June 30,.1960, and June 30,
The Farm.Credit Act of 1955 (Section 1134d(a)(3) of Title
. 12, USC) requires a borrower. frém «.Bank of Cooperatives to.
- purchase quarterly Class-C stock of such Bank in an amount | .
aS equal to not less than ten per cent;nor: moré than twenty-fiv | ¢
~ per cent of .the,amount of interest payable by it to the Banl
. + .during such lidar quarter..The Board of Directors. of the’
a
New Orleans Bank for Cooperatives has. provided for a pay-
‘ment ‘of fifteen per cent of the.amount of interest payable to
said Bank by organizations borrowing from it. During the fiscal
yedr ended June 30, 1962, plaintiff paid the NewOrleans Bank
for Cooperatives $34,116.16 for such Class C stock and plain-
tiff deducted said amount from its gross income: Plaintiff was
required to pay said amount to the New Orleans Bank for Co-
operatives | ‘in connection with interest- payments under the
provisions of Section 1134d(a)(3) of Title 13, United States
_ Code. Plaintiff. w ould show that said payments were properly —
‘deductible from its gros¢income for fiscal year ended June 30,
1962, either as additional i&terest- paid to said New Orleans \
Bank for Cooperatives, or agtordinary’ and necessary business
expense, or as a loss on a. trafigaction entered into for profit.
~ and that the Class Cc stock received by. the plaintiff from said
Bank for. said payment had ‘no’ market value for the reasons: .
e @e,
ous
- hereinafter set forth, oe -. -
e
-
. 3 : 7 a ; 63.
| ; Yy. | 7
Section 1134 1(b) of Title 12, United States Code, proffdes
for the issuance by a-Bank for Cooperatives of patroriage re-
funds to organizations botrowing from such: Bank. During |
fiscal year: ending June 30, 1962, plaintiff borrowed. money |
« . from the New Orleans Bank. for Cooperatives and_plaintiff re-
ceived Class C stock from the New Orleans Bank for. Coopera-
tives as patrdnage dividends in the stated amount of $60,541.52. -
.* The Class © stock received by plaintiff from said Bank as
patronage. refunds has no market value (as hereinafter set
forth) and the taxpayer included same in its income tax return - : a
. for said fiscal year at $1.00 per share for identification purposes ~: . -f—
only. Plaintiff would show that said $60,541.52 received as Class . =
C stock of said Bank should not be included in its. taxable i in- ~
_ come for fiscal year ended June 30, 1962. oe
ee 7 VI. ‘
(a). That the amounts paid by plaintiff to the New Ciedeatin
‘Bank for Cooperatives for the fiscal years ending June 30,
. 1958 through June 30, 1962, inclusive, as hereinabove set forth,
for the privilege of borrowing from said Bank. are proper de-
ductible expenses either as additional interest: ‘paid, or as an
ordinary and necessary business expense, or as-a foss.on a trans-
action entered into for profit; that at the time of such purchase,
~ the Class C stock of the New Orleans Bank for Cooperatives
was not actually corporate stock,at all and was entirely worth-
less; that no certificates of any nature were issued therefor;
. that no dividends were or could be payable. ‘thereon ; that no
| voting rights were incident thereto; that there was no possi-
2 — bility of appreciation in value; that such Class C stock eduld -
not be sold or transferred and the i issuer thereof refused to con-
_ pes it as collateral for loans; and that as a result said so-called ..
Class C stock had no fair market vajue.
(b) That the-Class C stock received by plaintiff from the New
Orleans Bahk for Cooperatives as patronage dividends for the~
fiscal years ending Jung 30, 1958 through June 30, 1962, in-
clusive, as hereinabove se ‘forth, should not be included in
plaintif’s i income since such Class C stock had no market value;
that at the time of such purchase, the Class C: stock -was not ‘
actually corporate stock at all and was entirely worthless; that
420-613 O—71——-+5
.
¥
x
q
ee hh eth ae ain tet
no certificates of any nsture were — therefor; that no divi-
dends were or could be payable thereon; that no voting rights
were iricident thereto; that there was no possibility of appre- .
‘ciation in value; that.such Class € stock could not be sold or ~
transferred and the issuer. thereof refused to consider it as. —
collateral far loans; and that \s a result said so-called Clase Cc.
stock had no fair market value. ae
LON
VII.
Asa ak of shic herein deseribed edjvodacente to plaintiff's
taxable income for. fiscal year ending June 30, 1962, and the.
adjustments to. plaintiff's net: operating loss carry forward, -
plaintiff paid additional income taxes of $174, 478.04 plus-appli-
cable interést of $39,605.60 thereon for its fiscal year ending ~
_June 30, 1962. The aforesaid determination by defendant of a
| deficiency in plaintiffs income tax of $174,478. 04 was erroneous,
and'the aforesaid reduction of plaintiff’s net operating loss for —
_ + ° the fiscal years ending June 30, 1958:through June 30, 1962,
inclusive, was erroneous. There is attached hereto.as. "Exhibit
Da computation. of the taxes for which refund is claimed.
VIII.
On: or about October 12, 1967, plaintiff filed its Claim for
Refund for fiscal year ending June 30, 1962, said Claim being
for a refund of income taxes erroneously assessed and paid in
the amount of $174,478.04 plus applicable interest of $39,605.-
60, and said Claim requested a computation of plaintiff’s net
operating loss for fiscal years ending June 30, 1958, June 30,
ae 1959, ‘June 30, 1960, June 30, 1961, and June. 30, 1962, in ac-
cordance with Exhibit A- attached hereto and made a part
hereof. Said Claim. for Refund for fiscal year ending June 30, | _
1962 (including all Exhibits attach@d thereto), is attached |
- » hereto. as Exhibit E and made a part metant 0 as if one herein.
IX. og
‘That by Certified letter dated December 13, 1967, plaintiff
was notified that its Claim for Refund for fiscal year ending
June 30, 1962, had been denied. There is attached hereto as
* . Exhibit F letter from the District Director of Internal Revenue,.
Jackson, Mississippi, denying plaintiff’s said Claim for ——
for fiscal year ending J une 30,1962.
Pie,
PECSUA.2702 0 eS
. 9 °
oe a s.
WHEREFORE, plaintiff prays jadgment against the defend- |
ant in the amount of $174,478.04 and applicable interest paid
. of $39,605.60 and interest thereon.as allowed by law; and |
plaintiff prays that its net operating loss deduction be com-.
' puted and allowed for fiscal years ending June 30, 1958 through”
June 30, 1962, inclusive, in accordance with Exhibit A at-
tached hereto; and.for costs of this action, and ‘for such other .
and further relief as to the Court may seem just and proper.
Count III -
+. Oe
| Plaintiff re-alleges and re-avers each and every allegation
of paragraphs I through IV of Count I above. - :
| ees : |
(a) \Plaintiff duly filed.its Federal income tax return’ for its
—
o (b) In said Revenue Agent’s repott (dated January 10,
_ 1966), the Revenue Agent erroneously included in ‘plaintiff's .
income for the fiscal year ended June 30, 1963, the sum of
"$52,305.05 as the alleged value of Class C. steck of the New
', Orleans Bank for Cooperatives, which Class C stock had been.
received by plaintiff. from the New Orleans Bank for Coop-
-eratives as patronage dividends*in accordance with Section
11341(b) of Title 12, United States Code.
eee ee on.
The. said Revenue Aj ent’s report reduced plaintiff’s net
operating loss deduction by disallowing as deductions amounts.
: ~~ .
¥..” * 6
| paid to the New Orleans Bank for Cooperatives under the pro-
“visions of Section. 1134d(a)(3) of Title 12, United States Code
~ (as described in paragraph II(a) above), and by: including in .
. plaintiff's income the face amount of Class C stock received
' as patronage dividends from the New Orleans Bank for Coop- ©
- eratives (as described in paragraph II(b) above) for the fol-
-“fowing fiscal years-in ‘the amounts stated, to-wit:
(a) Figcal year ended June 30, 1958:
(1) Disallowed deduction of $11,670.19 in sceneetine:
with payment of interest to New Orleans Bank for Coop- »
* eratives under Section 1134d(a)(3) of Title 12, USC.
(b) Fiscal year ended June 30, 1959: ;
(1) Disallowed deduction of $33,474.20 in connec-
' tion with payment of interest to New Orleans Bank for —
Cooperatives under’ Section 1134d(a) (3) of Title 12,
USC.. 7
(2) Included as income $14,345.04 received as patron-
, «age dividend in Class C stock of the New. Orleans Bank
: for Cooperatives. . ,
_“(c) Fiscal year ended June 30, 1960:
(1) Disallowed deduction of $46,172. 23 in connec-
tion with payment of .interest to-New Orleans Bank
for Cooperatives under Section 1134d(a}(3), of Title 12,
USC. .
tz) Included as income $47,361.32 received as aan
_ age-dividendin Class C stock of the New = Bank
- for Cooperatives. _ Se
(d) Fiscal year ended J June 30, 1961:
- (1) Disallowed deduction of $40, 779.88 in connection -
with payment of interest to New Orleans Bank for Co-
Operatives under Section 1134d(a) (3) of Title 12, USC.
(2) Included as income $51,689.59 received as pa-
tronage ‘dividend in Class C stock of the New Orleans
, Bank for Cooperatives.”. _ _
(e): Fistal year ended June 30, 1962:
.(1) Disallowed deduction of $34,]16.16 in connec-
‘_, tion with: payment of interest to New Orleans Bank
- for Cooperatives under Section 1134d(a) (3) of Title -
12, USC.
(2) Included as income $60,541. 5 received as patron-
age dividend in Class ack of the New Orleans Bank
re Cooperatives.
g
ote «RET om
REIT 7S
on ss
67
That as a result of th above described. adjustments, plain-
tiff’s net operating Wss forward to fiscal year ended
June 30, 1963, was reduced: Plaintiff alleges that its net operat- —
ing -loss. deduction should not-be reduced as set forth in ‘said
Revenue Agent’s report. and that plaiptiff’s net-operatirig loss
deduction and carry forward for fiscal years ended June 30, 1957,.
June-30, 1958, June 30, 1959, June’30, 1960, June 30, 1961, and
- June 36, 1962, should. be computed i in accordance with Exhibit
A which i is attached hereto and made a part hereof as if copied
herein and utilized : as set forth in Exhibits D and G attached |
hereto. :.
IV.
The Farr Credit-Act of 1955 (Section: 1134d(a) (3). of Title :
12, USC) requires a borrower from a Bank for Cooperatives
to ‘purchase quarterly. Class C stock of such Bank in an amount
equal to not less than ten? per cent,nor more than twenty-five
per cent of the amount. of interest payablg»by it to the Bank
during such calendar quarter. The Board of Directors of the _
New Orleans Bank for Cooperatives has provided forapayment |
_ of fifteen per cent of the amount of interest payable to said
Bank by organizations ‘borrowing from it,, During the fiscal ©
year ended June 30, 1963, plaintiff paid the New Orleans Bank
for Cooperatives $41,207.02 for such Class C stock an
__ tiff deducted said amount from its-gross'income. Plaintiff was |
required t6~ pay “said amount to the New Orleans Bank for.
Cooperatives i in connection with interest payments under“the ’
provisions of Section 1134d(a)(3) of Title 12, United: States
Code. Plaintiff would show that, said payments were properly
deductible from its gross income for fiscal year ended June 30, |
1963, either as additional interest paid to said New Orleans
_ Bank for.Cooperatives, or as ordinary and necessary business
expense, or-as a loss on a transaction entered into for profit,
°and that the Class C stock received by the plaintiff from said.
Bank for said payment had no market value for the reasons
hereinafter set forth. . ar
~ =
Section 11341(b) ‘of Title 12, United States Code, ‘provides -
for the issuance by a Bank for Cooperatives of patronage re-
funds to organizations borrowing from such Bank. During fiscal
year sea Ty June 30, 1963, vanes borrowed money from the
6
ELLE NBs LIE
=f 7 . =< . .
- . ° :
« : . *. :
. <é .
i | 68 ae
a < \ 34 ee
| a
Qu
New Orleans Bank for Cooperatives and plaintitt received Class
C stock from the New Orleans Bank for Cooperatives as pa-—
tronage dividends in the stated amount of $52,305.05. The Class —
C stock received by plaintiff from said Bank as patronage re-
funds has no market value (as hereinafter -set forth) and the
| _ taxpayer included same in its income tax return for said fiscal
year at $1.00 per share for identification purposes only. Plaintiff
.’ would show that said $52,305.05 received) as Class C stock of
-said Bank should not be ineluded in its taxable i income for ie! -
-_ year ended June 30, 1963. | ;
VIL |
(a). That the amounts oad by plaintif to the New Orleans
Bank for Cooperatives for the fiscal years ending June 30, 1958
through. June 30, 1963, inclusive, as hereinabove set forth, for
the privilege. of borrowing from said Bank are proper deduct-»”
ible expenses either as additional interest paid, or as an ordinary ©
and necessary business ‘expense, or as & loss on a transaction _
. entered into for profit; that at. the time of such purchase, the -
‘Class C stotk of thé New Orleans Bank for Cooperatives was
not actually corporate stock at all‘and was entirely worthless;
~~ that no certificates’ of any ‘nature were issued therefor; that
no dividends were or could. be payable thereon ;. that no voting. -
rights were incident thereto; that there was no possibility of ap- *
- .preciation in value; that such Class C stock could not be sold
or transferred and the issuer thereof refused to consider it as-
collateral for loans; and that ds. ‘a result said —— Class [
| stock had no fair market-value. |
/ |
(b) That the Class €“stock received by. plaintiff trom the
- - New Orleans Bank. for Cooperatives as patronage dividends for *
the fiscal years ending June 30, 1958 through June-30, 1963,
inclusive, as héfeinabove set forth, should not be included in
_ plaintiff’s income since such Class C stock had no market value;
‘that at the time of such purchase, the Class C. stock was not. -
actually corporate stock at all and was entirely worthless; that.
. no certificates of any nature were issued therefor; that no divi-’
' dends were or could be payable thereon; that no voting rights
- were incident thereto; that there was no possibility of apprecia- ..
tion in value; that such Class C stock could not be sold or
_ transferred and the issuer thereof refused to consider it as
’ collateral for loans; and that as aresult said so-called Claas c
stock had no fair market value.
¥
°
_ 3 ° oe ee ; . : Sine
¢
&
~~
VII. hecea “4
As a result, of the va described adjustments to plaintiff’
and income for fiscal year ending June 30, 1963, and the
ustnients to plaintiff's net operating loss carry forward,
plaintiff ‘paid additional ingome taxes of $41,422.10 plus ap-.
plicable interest of $7,718.62 thereon for ite fiscal year ending
June 30, 1963. The aforesaid determination by defendant of a
deficiency i in plaintiff’s income tax of $41,422.10 was erroneous,
and the. aforesaid reduction of plaintiff’s net operating loss for ~
_ the fiscal years ending June 30, 1958 throu
inclusive, was erroneous. There is
, 1963,
G-& computation of the for which refund is claimed.
oes yp VIIL.,
On or about. October 12, 1967, plaintiff filed its Claim for
. Refund for fiscal year-ending June 30, 1963, said Claim being
for a refund of income taxes: ‘erroneously assessed arid paid in
the amount of $41,422.10 plus applicable interest of $7,718.62,
and said Claim réquested a cdmputation of plaintiff’s net: op-
erating loss for fiscal years ending June 30, 1958, June 30, 1959,
June 30, 1960, June 36, 1961, June 30, 1962, and June 30, 1963,
"in avcordance with Exhibit A attached*hereto and made a part |
hereof. Said Claim for Refund for fiscal year ending June 30, .
_ 1963 (including all Exhibits attached thereto), is. attached
hereto as Exhibit H and made a part herent as if copied herein. -
"IX.
That b by Certified letter dated Dederbec 13, 1967, plaintiff
notified that its Claim: for Refund for fiscal year énding*
‘Jute 30, 1963, had been denied. There is attached hereto as.
Exhibit I lettet from the District Director of InternatRevenie,
~ Jackson, Mississippi, denying plaintiff's said Claim for Refund
for fiscal year ending June 30, 1963.
WHEREFORE, plaintiff prays judgment against the infestans
in the amount of $41,522.10 and applicable interest paid of
$7,718.62 and interest thereon as allowed*by law; and plaintiff’
prays that its net operating loss deduction be computed and
allowed for fiscal years ending June 30, 1958 through June 30, .
1963, inclusive, in accordance with Exhibit A attached hereto,
and as pepsin set forth, and for costs. of this action, and for
d hereto as Exhibit
PAS
70 7
such other and further relief as to the Court may seem ie
-- and proper. - .
/3/ John C. Satterfield
| : JoHn C. SATTERFIELD.
- Attorney for Coastal Chemical Corporation. a
P. 0. Box 466, Masonic Building
' Yazoo City, Mississippi
- Of Counsel: 3
- J. Duptey Burorp,
Satterfield, Shell, Williams and Buford
P.O. Box 1172 _ a eo,
Jackson, Mississippi . os oS
HotuaMaNn M. Raney. - a = 9
| P.O. Box 888 .2
' | Yazoo City, Mississippi ~
—
ATTACHMENT To AND Mabe a Part or CLAIM (Form 843)
Submitted by: Coastal Chemical Corporation, Box 388, Yazoo,
/ City, Missiasippi
” For fiscal year ended June 30, 1961 °
~ In Revenue Agent’s report dated January 10, 1966, submitted
to the above ‘named. taxpayer under-date of March 14, 1966,
‘xy. Said report covering the period set.out above, exceptions were
taken as follows: - . | | : ,
-(a) Interest = | _ .*$40,779.88
' “The taxpayer aeicivel one share of class C stock
- in the-New Orleans Bank for Cooperatives ($100 par
. . value) in order to obtain loans from the Bank. Each
';. .. ‘borrower must also purchase additional “C” stock
in an amount equal to 15 percent of interest paid
on its loan. The taxpayer claimed the cost of acquir- )
ing the additional “C” stock as interest in the |
amount shown above. ~~ . a
Cost incurred in purchasing class C stock is not 2 |
- deductible. See Rev. Rul. 65-241. : ;
. (b) Patronage Dividend on “C” stock. $51 689.59
_. The taxpayer received Class C stock from the |
: New Orleans Cooperative Bank as. patronage divi> ~~”
dends in the amount stated above: The dividend » ’
; was ‘not included i in income—as having no ) value. -
x»
——~ 9
| 4 1961 should be increased to allow for claimant’s position with
‘Wespect ‘to “Interest” and “Patronage Dividends” for prior
7
The New Orleans Bank, in its notification. of
patronage refund: to its shareholders, recommends °
that the amount be reflected at face velue anda =
_credit.to operating income.
The “C” stock is assigned as collateral antral
and/or foreclosure of a loan, the.stock is utilized
in the face amount—the = as any other -.
dividend above, .
_,.is therefore includable in income under section 61 _
collateral having face value.
of the 1954 Code.
w - outstanding loans, and in the event of default ._.
As the result of the Agent's ; adjnstinerits an income tax of
7 $231.00 was paid on April 7, 1966 together with $63.34 interest;
this was included in a check for $83,211.24 which included the
payment of other iterns related to the next fiscal year ended _
June 30, 1962. The small amount of income tax for the
year ended June 30, 1961 is due to the application of a net
operating loss deduction, all as set out in the Ageht’s report
_ referred to above. ,
It is claimant’s position , that the interest reprbeented by (a)
was deductible and further that the Class C stock referred to
' in (b) was not worth $100.00 per share during the fiscal year
ended June 30, 1961. It is also claimant’s position that the net
- operating loss deduction. allowed by the Revenue Agent in
his report and calculations for the fiscal year ended June 30,
“C2fiscal years as follows as shown by the Agent’s report:
Fiscal year ended June 30, 1960: (Schedule =, .
“(b) Interest |g IF 8
(c) Patronoge Dividend - 47,361.32 ©
Fiscal year ended June 30, 1959: (Schedule 3) |
(e) Interest ~ . "os $88,474.20 .
(f) Patronage Dividend : - | 14,345.04
- Fecal year ended June 301968: (Schedule 2)
(d) Interest? 7 —_ $11,670.19
On the basis of the foregoing bhcea: would be no income tax 7)
payable for the — year — June 30, 1961, and this claim
sty
>
fod
"ig simply for the amount paid, namely $281.00. See ren <*
copy of Exhibit A which is @ part of Claim for the-fiecal yeak “|
‘-° ended June 30, 1962; it shows the computations: indicating
- no taxable income for the fiscal year-ended June 30, 1961.
_ An expeditious handling of this claim is requested; a confer-
ence with claimant’s attorney is requested, and will be arranged _
for promptly on request, im which event, John C. Satterfield,
Attorney-at-Law, Box 466, Yazoo City, Mississippi, should
be accordingly notified. - “4
Similar claims are being filed by claimant for the fiscal years
i903 and mice -s
‘@.- : @ y > e “3 °@
ATTACHMENT TO AND Mabe A Parr oF -CuaIM (Form 843) .
, ‘Submitted by: Coastal Chemical Corporation, Box 388, Yasoo
City, Mississippi | ;
For fiscal year ended June 30, 962. - :
- In. Revenue Agent's re dated Jeicainy” 10, 1966, ‘ib-
mitted to the gbove named taxpayer | under date of March 14,
_ 1966, said report covering the saiten set out more, exceptions :
bapbaceeteln aie o ! ; aie |
“) Interest. = "Be $34,116. 6@°
* .« ' The above adjustment is the same as for
e. years* and represents the cos
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.