
    Selby Equity Union Exchange, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 13133.
    Promulgated July 17, 1928.
    
      Charles Kershenbaum, Esq., for the petitioner.
    
      Harold Allen, Esq., and IF. R. Lansford, Esq., for the respondent.
   Siefkin:

This is a proceeding for the redetermination of deficiencies in income taxes for the fiscal years ended June 30, 1921, and June 30, 1922, in the respective amounts of $74.28 and $391.65. The error alleged is that the respondent erred in refusing to permit deductions from income in the respective years of $1,226.25 and $1,283.75, alleged to be interest paid on capital stock.

FINDINGS OF FACT.

The petitioner is a South Dakota corporation operating under chapter 145 of the laws of South Dakota, with its office at Selby. The by-laws of the petitioner, so far as here material, are as follows:

AbtiUle One.
Sec. 1. — Name. The name of this corporation shall be The Selby Equity Union Exchange.
See. 2. — Object. This Exchange is organized to buy and sell all products of the farm, also farm machinery and merchandise o-f all kinds.
Sec. 3. — Capital Stock. The capital stock of this Equity Exchange shall be Fifty Thousand ($50,000) Dollars, divided into two thousand shares of Twenty-live ($25.00) Dollars each.
Sec. 4. — Seal. The corporate seal shall contain the full name. The Selby Equity Union Exchange.
ARTICLE! Two.
Sec. 1. — Directors. The business of this corporation shall be conducted by a board of five directors elected for one year, who shall serve till their successors are elected.
Sec. 2. — Manager and stockholders in the Selby Equity Union Exchange must be members of the Farmers’ Equity Union.
Sec. 3. — The stockholders shall elect five directors at their annual meeting the first Saturday of July, each year. These directors shall elect one of their own - number president, one vice president and one Secretary-Treasurer, and these officers shall be the Local Union officers, and shall serve until their successors are elected.
Sec. 4. — -Vacancies in the board of directors shall be filled by the stockholders at special meetings called for that purpose, or at the annual meeting.
Sec. 5. — The directors are authorized to employ a manager, bookkeeper and all necessary help to carry on the business successfully. They shall fix the compensation of all officers and employees, provided the members of the board shall only be paid for actual service at the rate of forty cents per hour.
Article Three.
Sec. 1. — Duties of Officers. The president shall preside at the meetings of the directors or of the stockholders. He shall sign all certificates of stock, call special meetings of the directors or of the stockholders when he deems it necessary or when twenty per cent of the stockholders petition for a meeting. He shall sign all bonds, contracts or other instruments in behalf of this Exchange when so ordered by the directors.
Sec. 2. — Vice President. In case of the absence of the president, or when called upon to serve, the vice-president shall perform the duties of the president. He shall be a member of the Board of directors.
Sec. 3.- — Bond. All officers and employees handling the money of this Exchange shall be sufficiently bonded, and the bookkeeper’s books shall be audited regularly as often as the directors deem necessary.
gee. 4. — The Secretary-Treasury shall keep correct minutes of the directors and stockholders meetings, have charge of seal, records, books and assets of the corporation, subject to the order of the directors. He shall sign all certificates of stock and attach the seal thereunto.
Sec. 5. — All checks shall be signed by the manager of this Equity Exchange.
Article Four.
gee. 1. — Not over five per cent Dividends on gtock. The Board of Directors are authorized to pay the running expenses and all necessary repairs out of the gross earnings of the company, and to use the capital to make necessary improvements. They are prohibited from declaring over five per cent dividends on the stock subscribed. Out of the gross earnings they shall take running expenses and necessary repairs and also the national dues of each stockholder in the Farmers’ Equity Union and not exceeding five per cent dividends on the stock subscribed. All earnings over this shall be net earnings and shall be prorated back to the stockholders according to patronage. The net earnings or profits shall be figured as a per cent of the business furnished by the stockholders during each year.
Sec. 2. — No money shall be drawn from this Equity Exchange by any member of this Equity Exchange until his stock is fully paid up. Provided he may give his note for one share of Twenty-five ($25.00) Dollars, and when he has paid same he shall be given credit for what he buys and sells and shall be paid proportion and stock dividends and all coming back to him must be applied on any balance due this Equity Exchange until fully paid.

The petitioner paid the sums of $1,226.25 and $1,283.75 for the fiscal years ended June 30, 1921, and June 30, 1922, respectively, as 5 per cent dividends based on its capital stock outstanding at the end of such fiscal years and in pursuance of the provisions of article 4, section 1 of the above by-laws.

The petitioner contends that because the amounts of its dividends are fixed by law, such amounts become a deduction. Paragraph 11 of Chapter 145 of the 1913 Session Laws of South Dakota, cited by the petitioner as requiring such dividends, does not, and can not, go to the extent of changing the character of such payments, as we have repeatedly held. The latest case of this Board, considering the question and deciding it adversely to the petitioner’s contention here, is Farmers’ Co-operative Milk Co., 9 B. T. A. 696. Other cases are cited in that opinion.

Judgment will he entered for the respondent.  