Maryland & Virginia Milk Producers' Ass'n v. District of Columbia , 119 F.2d 787 ( 1941 )

GRONER, C. J.

(dissenting in part).

I am unable to agree in so much of the opinion as holds petitioner liable for taxes assessed on “accounts receivable”, or assessed on the entire “gross receipts” from sales for “the privilege of doing business in the District [of Columbia].”

Petitioner is a non-profit association of farmers incorporated under the “Co-operative Association” Laws of the State of Maryland, with its statutory principal office at Hyattsville, Maryland, and its operating office during the years in question in the City of Washington. "All of petitioner’s eleven hundred members are residents of Maryland, of Virginia, or of West Virginia, operating dairy farms in one or another of those States. All market their milk products through the association under uniform membership contracts, and only the products of members are marketed in this manner. The Maryland statute provides : “Any association organized under this Act, as agent to sell the products of members, may operate upon a non-profit basis by contracting to pay the members, for products sold by said members to or through the association, the resale price minus a uniform charge to cover the expenses in the handling of said products; resale price to be the actual resale price or to be based upon the average price during any period for products of the same type and quality; the uniform charge for expense to be specified in the contract or made otherwise ascertainable or left for determination by directors.” Art. 23, Sec. 441.

The record shows that the business of petitioner was conducted in all respects in accordance with the laws of the State of its incorporation. Petitioner agreed to exercise its best efforts to sell at a fair price all the milk or cream produced by its members and to receive for its services a uniform deduction of one cent per gallon from the sales price to distributors. By the terms of its membership contracts petitioner guaranteed ultimate payment to the producer for milk delivered and sold to a distributor designated by petitioner and for which the distributor failed to pay. This guaranty was discharged out of a fund created by the deduction of one cent per gallon, which experience had shown was sufficient not only to pay operating expenses but also to pay any losses through defaulting ven-dees. What is left in the fund, after a fixed period of years, is returned to the producer in the proportion which the milk delivered by him bears to the whole amount received from all producers for the particular period.

The plan of distribution to milk distributors was that the farmer delivered his entire production of milk daily, as directed by petitioner, to a particular distributor and the distributor would pay petitioner on the 10th day of each month for the milk received the preceding month. Petitioner in turn remitted to the farmer on the 15th of the month for the milk furnished by him, less the one cent per gallon commission. For the years 1935, 1936, and 1937, the aggregate of uncollected accounts shown by the books of petitioner as of July 1 of each of those years (the taxable period) for milk delivered to distributors, was $1,153,923.51. Taxes amounting to $5,769.62 were assessed on this amount on the theory that these receivables were taxable assets of petitioner. The opinion sustains this assessment. In my judgment, these items were not then and never were the property of petitioner, but actually belonged to the farmer members, less only the one cent per gallon which petitioner could retain for expenses and the accumulation of its protective fund. I am, therefore, of opinion the assessment was erroneous. The question in this aspect of the case turns, as I think, upon the relation between the producing farmers and petitioner.

Did the farmer sell his milk to petitioner for resale, as to a merchant, or did he turn it over to petitioner for sale for his own account through the efforts of petitioner, as through a factor or broker?

The main opinion answers the question on the theory that petitioner in its business relations with its farmer members in the distribution of their milk acted as principal and as such owned the accounts receivable. But the record wholly fails to support this conclusion. The fact that the Washington distributors of milk made their contracts with petitioner without any mention of agency is, I think, immaterial. It is a rule of commercial law that an agent may sell goods of his principal in his own name. Slack v. Tucker & Co., 23 Wall. 321, 330, 23 L.Ed. 143; 22 Amer.Jur., Factors, Sec. 14. Although the relation between producers and association might not be strictly within the ancient category of factor, nevertheless, in view of all the circumstances, especially the written marketing agreement described below, I think the manner in which the business was transacted brings the relationship clearly within that rule. The case of People v. Shoemaker, 228 App. Div. 314, 239 N.Y.S. 71, affirmed per curiam 254 N.Y. 567, 173 N.E. 869, on which the majority rely, is not in point. That case involved a penalty on a man for not registering as a purchaser o f milk from producers, and the point was whether purchase from a co-operative was purchase from a producer, within the meaning of this penal provision. The New York court held it was not, because the purchaser customarily bought from the co-operative and dealt directly with it. The question involving the relation of the purchaser and the property interests of producers and co-operative, respectively, did not enter the case, as in the present controversy. In fact, the court could hardly have decided otherwise. Here the proceeds of the milk sold by petitioner both at law and by the custom of the business belonged to member producers, and the producer was legally entitled to the proceeds of sale. United States v. Villalonga, 23 Wall. 35, 23 L.Ed. 64. This is particularly the case here, because the member and the co-operative agreed that all milk produced by all members might where necessary be commingled and sold and the sales price collected by petitioner and the net proceeds accounted for according to quantity and quality as ascertained by certain established classifications. In such circumstances, there was no change of title or ownership. “The assignment would not in law transfer [title to] goods and merchandise entrusted to them, as factors, to sell”. Chesterfield Mfg. Co. v. Dehon, 5 Pick., Mass., 7, 16 Am.Dec. 367. Nor is the rule changed by reason of the fact that petitioner guaranteed payment to the member-producer. Such a guaranty made petitioner a del credere agent. The fact of guaranty proves the agency relationship, for there would be no point in petitioner’s guaranteeing its own obligations. If petitioner was buying milk rather than acting as agent or factor for its members, the obligation to pay would have been its own and the guaranty would have been meaningless. The manner of operation or co-operation is more clearly disclosed in two instruments —petitioner’s charter and the contract of membership. In neither is there any mention of title passing to petitioner. All members signed a “standard marketing agreement”, in which the producer “agrees to consign or to have consigned to the association in accordance with its instructions” all milk or cream produced on farms operated by him during the continuance of the contract. The word “consign” does not mean sell, but does have a definite commercial meaning. In Sturm v. Boker, 150 U.S. 312, 326, 14 S.Ct. 99, 103, 37 L.Ed. 1093, the Supreme Court said: “It is too clear for discussion, or the citation of authorities, that the contract was not a sale of the goods by the defendants to Sturm. The terms and conditions under which the goods were delivered to him import only a consignment. The words ‘consign’ and ‘consigned,’ employed in the letters, were used in their commercial sense, which meant that the property was committed or intrusled to Sturm for care or sale, and did not, by any express or fair implication, mean the sale by tbe one, or purchase by the other.”

Here there is every indication that the word was used in the sense referred to in the Sturm case. The agreement clearly points to the relation of factor or agent. It provides that the association shall sell or dispose of the milk. If the milk belonged to it, there would be no reason or necessity for promising anything with regard to its disposal. The agreement provides not only that petitioner shall sell, but shall sell milk consigned to it and shall remit the proceeds to the member on the 15th day of each month, less only the agreed commission. It clearly creates a del credere agency, and the proceeds of sales, in the form of accounts collectible on July 1, being the money of the producer as owner of the milk, is not property of petitioner and is therefore not taxable as intangible assets of petitioner. And for the same reason the gross proceeds of all milk sold for members in the year in question is not the basis on which taxes for license purposes may be assessed as “gross proceeds of operation”. And this is obvious from the language of the business privilege tax section,^* in which it is expressly provided that the license tax shall be computed and be payable only, in the case of a broker or agent, upon gross commissions and shall not be taxable or payable upon funds of the principal of which the agent is the mere conduit. Here, if I am correct, the milk never having belonged to petitioner, its sale by petitioner with the obligation to pay the proceeds to the producer made it a “mere conduit” (as to the sum so transmitted by it.

I am, therefore, of opinion that so much of the decision of the Board of Tax Appeals as found petitioner liable for taxes on account of receivables from dealers and so much as imposed taxes under the Business Privilege Tax Act on the entire gross proceeds of farmer-milk sold by petitioner in the year 1938, is erroneous and should be set aside and annulled.

I have not discussed the question whether petitioner’s stocks and bonds comprising its “revolving fund” are taxable, but considering that petitioner is a Maryland corporation and its stocks and bonds were always outside the District of Columbia, and on my theory of the case were the property of the individual member-farmers and not petitioner, I have grave doubts whether any of these securities ever had a taxable situs in the District.

* Sec. 970(5), Title 20, D.C.Code, Supp. III, in force at the time: “Provided, however, That the tax imposed by this section shall be payable only upon the gross commissions of any person engaged in the business of a broker or agent, and shall not be payable npon the funds of his principal, of which he is a mere conduit.”