WHAT

Patronage Dividends

are patronage dividends? They are not dividends at all in the sense in which that term is ordinarily employed, but are refunds or savings. The aim of a cooperative association, whether marketing or purchasing, is to operate on a cost basis, or as near thereto as practicable. Patronage dividends are simply a means of enabling associations the better to achieve this result.

Patronage dividends were held in a Mississippi case not to be a part of the gross income of the cooperative, as it was obligated to return these amounts to the persons to whom they were paid.65

Generally speaking, any business concern, whether cooperative or otherwise, may pay patronage dividends. Statutes ordinarily bar the payment of refunds or rebates by railroads and public utilities, but those engaged in private businesses may ordinarily make such payments.66 In a case arising in Oklahoma, the proprietor of a commercial cotton gin opposed the granting of a license to a cooperative association that desired to engage in the cotton ginning business because, he contended, the cooperative association was specifically authorized to pay patronage dividends by the statute under which it was incorporated, while he was barred from doing so. The commercial operator, therefore, contended that he was denied the equal protection of the laws. The Supreme Court of the United States found, however, that inasmuch as no law or regulation of the State had been adduced, which prohibited the commercial operator from the payment of patronage dividends, no discrimination was involved. Patronage dividends are dependent on the success of the enterprise and are subject to its hazards. They should be distinguished from rebates.68

67

The question of patronage dividends arises principally, if not solely, with respect to associations that have a fixed schedule of charges for the handling of products and associations that pay at the time of receipt for products to be handled. For instance, some

State v. Morgan Gin Company, 186 Miss. 66, 189 So. 817. See also Gallatin Farmers Company v. Shannon, 109 Mont. 155, 93 P. 2d 953; Uniform Printing and Supply Company v. Commissioner of Internal Revenue, 88 F. 2d 75.

66 But see Midland Cooperative Wholesale v. Ickes, 125 F. 2d 618 "Corporation Commission of Oklahoma v. Lowe, 281 U. S. 431, 50 S. Ct. 397, 74 L. Ed. 945. See also Guthrie Cotton Oil Co. v. Farmers' Custom Gin, 156 Okla. 16, 9 P. 2d 32; Southwestern Cotton Oil Co v. Farmers' Union Co-op. Gin Co., 165 Okla. 31, 24 P. 2d 658; Chickasha Cotton Oil Company v. Cotton County Gin Company, 40 F. 2d 846; Choctaw Cotton Oil Company v. Corporation Commission of Oklahoma, 121 Okla. 51, 247 P. 390.

68 Bunn, Charles. CONSUMERS' CO-OPERATIVES AND PRICE FIXING LAWS. 40 MichIgan Law Review 2-165, 1941.

cooperative elevators have a fixed charge per bushel for the marketing of the grain they handle, generally the same as the going rate charged by private operators, whereas others aim to pay the current price therefor. In each case it is contemplated that at the end of the year, or of a fixed period, the expenses and costs of operation of the association will be ascertained and that the amount remaining will be distributed among the members on the basis of the quantity of product, or the value thereof, marketed by the association for each of them.

When associations have a schedule of charges, it is contemplated that the returns therefrom will more than cover all expenses of the association, but obviously it is unknown in advance what the exact amount of the expenses will be. Likewise, in the case of associations that pay the current price for the products handled, it is contemplated that the products will be sold for prices that will leave a balance after meeting all expenses; but the amount of this balance also is unknown in advance. At the end of the year, or of a fixed period, the expenses of the association are ascertained; and this amount, together with any other deductions such as for working capital or reserves, is subtracted from the total amount which has been received by the association for handling charges or from the total sale price of the product. The balance, or such portion thereof as the board of directors of the association deems advisable, is then returned to the members of the association on the basis of the volume, or of the value, of the products each marketed through the association.

It is apparent, therefore, that patronage dividends are a means of returning to members savings effected by cooperatives in marketing their products or purchasing their supplies. Manifestly, this is fundamental to cooperation, because there would be less incentive to cooperate if the savings effected in marketing expenses, or otherwise, could not be returned to members. Patronage dividends are based primarily upon products delivered and sold or upon purchases made and not upon the money invested.

The amount of the patronage dividends to which a member is entitled is ascertained, by some associations, in substantially the following manner: The total amount available for distribution among the member patrons at the end of the year or other period is determined. This amount is then divided by the volume of business handled by the association in terms, for instance, of cars, bushels, pounds, head, or the value of the product handled in dollars, or the amount paid to the association as handling charges. The figure thus found, when multiplied, for example, by the number of bushels handled for a given member, gives the amount of his patronage divi

dends." In other associations the patronage dividends are ascertained by dividing the total amount available for distribution by the total sale price of the products handled and then multiplying the resulting percentage by the price received for the products of each member.

Patronage dividends, it may be assumed, would not be paid in many instances if, at the time the members of an association delivered their products to it or at the time of their sale, the association knew the exact amount it would cost to market the products of its members and provide for expansion purposes. It is apparent that patronage dividends are the result of necessity, in many instances at least, and that they simply furnish a medium by which the undertaking of the association to operate on a cost basis, or as near thereto as possible, may be carried out.

A novel case involving patronage dividends arose in Kansas 58 in which the plaintiff, who was not only a farmer and a stockholder in the defendant corporation but was also engaged in the grain business, was held not to be entitled to patronage dividends on grain that he had purchased from the corporation, but that the other shareholder patrons were entitled to the amount involved. The statute of Kansas under which the elevator company was incorporated, provided that, after the payment of a fixed dividend upon stock, the remainder of its earnings should be prorated to its several stockholders upon the basis of their purchases or sales, or on both. The court was of the opinion that the purchase by the plaintiff of grain from the elevator on a commercial basis was not such a purchase as was contemplated by the statute and, hence, that he was not entitled to patronage dividends.

The Grain Futures Act of September 21, 1922,59 provides that the Secretary of Agriculture may designate any board of trade as a "contract market," if among other things—

the governing board thereof does not exclude from membership in, and all privileges on, such board of trade, any duly authorized representative of any lawfully formed and conducted cooperative association of producers having adequate financial responsibility which is engaged in cash grain business, if such association has complied, and agrees to comply, with such terms and conditions as are or may be imposed lawfully on other members of such board: Provided, That no rule of a contract market shall forbid or be construed to forbid the return on a patronage basis by such cooperative association to its bona fide members of moneys collected in excess of the expense of conducting the business of such association.

57 Mooney v. Farmers' Mercantile & Elevator Co., 138 Minn. 199, 164 N. W. 804. 68 McClure v. Co-operative Elevator & Supply Co., 105 Kan. 91, 181 P. 573. 50 42 Stat. 998, 1000, 1001,

The Supreme Court of the United States in passing upon the constitutionality of the Grain Futures Act 60 referred particularly to the paragraph of the statute in part quoted above and upheld the same, and in doing so said:

Nor do we see why the requirement that the relation between them and this representative, looking to economy of participation on their part by a return of patronage dividends, should not be permissible because facilitating closer participation by the great body of producers in transactions of the Board which are of vital importance to them. It would seem to make for more careful supervision of those transactions in the national public interest in the free flow of interstate commerce.

61

The State of Kansas passed a statute 1 requiring boards of trade in that State which were not operating under the Federal Grain Futures Act to admit cooperatives. This act specifies that the making of refunds by a cooperative shall not be a cause for exclusion. This statute was passed upon and upheld by the Supreme Court of Kansas, and in the opinion the court said:

62

The sole objection is that plaintiff sees fit to distribute its profits in a manner objectionable to defendant. One is tempted to inquire: What concern is it of defendant what plaintiff does with its profits, whether it retains them for additional working capital, or disburses them to its stockholders? And if it does disburse them to its stockholders, why should defendant be concerned with the basis of such disbursement, so long as it is satisfactory to plaintiff and its stockholders, and in conformity with the statute under which it was created? It may be doubted whether plaintiff's method of disbursing profits is correctly construed as a violation of defendant's bylaws against rebating or refunding commissions.

The Packers and Stockyards Act, 1921,63 recognizes the right of cooperative livestock market agencies to pay patronage dividends to their producer members. This statute was upheld by the Supreme Court of the United States.64 The Robinson-Patman Act permits associations of producers or consumers to pay patronage dividends." In addition, there are certain other Federal statutes which recognize the right of cooperatives to pay patronage dividends.6

Where a marketing agreement obligated a grower to deliver a certain percentage of his products to an association and the bylaws

Board of Trade of the City of Chicago v. Olsen, 262 U. S. 1, 43 S. Ct. 470, 67 L. Ed. 839.

61 Laws of Kansas 1925, ch. 6.

62 Farmers' Co-op. Commission Co. v. Wichita Board of Trade, 121 Kan. 348, 246 P. 511, 513, 54 A. L. R. 295, writ of Error dismissed in 275 U. S. 584, 48 S. Ct. 17, 72 L. Ed. 433.

63 42 Stat. 159, 7 U. S. C. A. 181.

Stafford v. Wallace, 258 U. S. 495, 42 S Ct. 397, 66 L. Ed. 735, 23 A. L. R. 229.

Quality Bakers of America v. Federal Trade Commission, 114 F. 2d 393.

See Federal Statutes Mentioning Cooperatives, p. 307.

provided that patronage dividends were payable only to those growers who fulfilled their marketing contracts, a grower who failed to deliver the required percentage of his crop was not entitled to receive a patronage dividend.67

A nonmember patron of an association cannot compel it to pay him patronage dividends where its organization papers and procedure do not provide for doing so."

68

As pointed out in the discussion regarding the liability of associations for Federal income taxes 69 an association is not exempt from the payment of such taxes unless it deals with nonmembers on the same basis as that on which it deals with members so that if an association pays patronage dividends to its members it must likewise pay such dividends to its nonmember patrons if it is to be exempt from the payment of Federal income taxes.

In some respects the practice of paying patronage dividends is analogous to that followed by many commission men and brokers who, upon receipt of products consigned to them and before their sale, make advances to their shippers and then, on the sale of the products, deduct their charges and the amount of the advances, and return any balance to the shippers.

It is a fact frequently overlooked that virtually all persons who carry life insurance in a mutual company receive what amounts to patronage dividends. It is true that these dividends are not referred to as patronage dividends, but in essence they are practically the same thing. The undertaking of a mutual insurance company may be said to contemplate the furnishing of insurance on a basis. that will enable it to meet all of its obligations, including current and prospective expenses incident to maintaining and operating the company. At the end of a year or other period it is the practice for mutual insurance companies to ascertain the amount of the items referred to (due consideration being given to the risks and hazards involved) and then to return to the patrons or policyholders sums of money called dividends which are based upon the amounts paid by the policyholders and found unnecessary for the purposes specified. An insurance company cannot determine in advance the precise amount which should be charged for insurance to cover the items in question, nor can a cooperative association determine in advance the precise amount necessary to meet its expenses and any other necessary

7 Rusconi v. California Fruit Exchange, 101 Cal. App. 750, 281 P. 84.

* Farmers Truck Association v. Strawberry & Vegetable Auction, Inc. (La. App.), 163 So. 181.

70 Williams v. Union Central Life Insurance Co. 291 U. S. 170, 54 S. Ct. 348 78 L. Ed. 711, 92 A. L. R. 693.