LEGAL PHASES OF COOPEBATrVE ASSOCIATIONS. 53 
turning back to them the proceeds of sales, less the necessary selling ex- 
penses, on the basis of the quantity of produce furnished by them ; or organized 
and operated as purchasing agents for the purpose of purchasing supplies and 
equipment for the use of members and turning over such supplies and equip- 
ment to such members at actual cost, plus necessary expenses. 
Article 522 of the regulations referred to reads as follows : 
Cooperative Associations : (a) Cooperative associations, acting as sales agents 
for farmers, fruit growers, dairymen, etc., and turning back to them the pro- 
ceeds of the sales, less the necessary selling expenses, on the basis of the prod- 
uce furnished by them are exempt from income tax. Thus cooperative dairy 
companies, which are engaged in collecting milk and disposing of it or the 
products thereof and distributing the proceeds, less necessary operating ex- 
penses, among their members upon the basis of the quantity of milk or of butter 
fat in the milk furnished by such members, are exempt from the tax. If the 
proceeds of the business are distributed in any other way than on such a pro- 
portionate basis, or if the association deducts more than necessary selling 
expenses, it does not meet the requirements of the statute and is not exempt. 
The maintenance of a reasonable reserve for depreciation or possible losses or a 
reserve required by State statute will not necessarily destroy the exemption. A 
corporation organized to act as a sales agent for farmers and having a capital 
stock on which it pays a fixed dividend amounting to the legal rate of interest, 
all of the capital stock being owned by such farmers, will not for that reason 
be denied exemption. 
(5) Cooperative associations organized and operated as purchasing agents for 
farmers, fruit growers, dairymen, etc., for the purpose of buying supplies and 
equipment for the use of members and turning over such supplies and equip- 
ment to members at actual cost, plus necessary expenses, are also exempt. In 
order to be exempt under either (a) or (&) an association must establish that 
it has no net income for its own account. An association acting both as a 
sales and a purchasing agent is exempt if as to each of its functions it meets 
the requirements of the statute. 
If a cooperative association, otherwise exempt, deals with non- 
members on the same terms as members, including the payment to 
nonmembers of patronage dividends on the same terms as members, 
it is exempt from Federal income taxes. 
Article 511 of the regulations referred to states how an associa- 
tion may establish its right to exemption. It reads in part as 
follows : 
Proof of exemption. — In order to establish its exemption and thus be relieved 
of the duty of filing returns of income and paying the tax it is necessary that 
every organization claiming exemption, except personal service corporations, 
file an affidavit with the collector of the district in which it is located, showing 
the character of the organization, the purpose for which it was organized, the 
sources of its income and its disposition, whether or not any of its income is 
credited to surplus or may inure to the benefit of any private stockholder or 
individual, and in general all facts relating to its operations which affect its 
right to exemption. To such an affidavit should be attached a copy of the charter 
or articles of incorporation and by-laws of the organization. Upon receipt of 
the affidavit and other papers by the collector he will inform the organization 
whether or not it is exempt. If, however, the collector is in doubt as to the 
