76 T.C. 637">*638 OPINION

Respondent determined a deficiency of $ 255,028 in petitioner's Federal income tax for 1973. The sole issue for decision is whether, for the purpose of computing the alternative tax under section 1201, ¹ a cooperative's section 631(a) gains1981 U.S. Tax Ct. LEXIS 139">*142 are excludable or deductible to the extent that the cooperative distributes those gains to its stockholders through patronage dividends.

This case was fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and attached exhibits are incorporated herein by reference.

At the time its petition was filed and at all times material herein, petitioner, a Washington corporation, had its principal place of business at Stevenson, Wash. A corporation Federal income tax return for 1973 was filed on behalf of petitioner at the Internal Revenue Service Center, Ogden, Utah.

Petitioner, Stevenson Co-Ply, Inc. (hereinafter Stevenson or petitioner), incorporated on August 17, 1955, produces and markets plywood and plywood byproducts at its plant in Stevenson, Wash. The basic raw material used in its production is soft wood in the form of logs1981 U.S. Tax Ct. LEXIS 139">*143 from various species of timber found in the forests of the Pacific Northwest.

Stevenson secures its logs either by purchasing the logs on the open market or by purchasing stumpage, harvesting the timber, and transporting the logs to its mill. Stevenson buys its timber principally from the U.S. Forest Service, the Bureau of Land Management, and the States of Oregon and Washington.

During 1973, and at all times material herein, Stevenson's stock was held either by its employees or by the corporation as treasury stock. All sales and exchanges of the corporate stock by individual shareholders are subject to the approval of the corporation's board of directors.

On September 25, 1965, petitioner's corporate bylaws were amended to provide that after December 31, 1965, petitioner 76 T.C. 637">*639 would operate as a cooperative within the meaning of sections 1381 et seq.

The principal amendment to petitioner's bylaws consisted of an addition designated as article III and containing six sections. The purpose of this article was to provide rules for the computation of petitioner's net income attributable to work done by stockholder employees and for the allocation and distribution of such net income1981 U.S. Tax Ct. LEXIS 139">*144 among the stockholder employees. The rules for the computation and allocation of the amounts distributed to the stockholder employees as patronage dividends, as contained in section 2 of article III, provide:

Total patronage dividends shall equal that part of the net income of the corporation, computed before taxes on income and without deduction for patronage dividends, which is attributable to work done for the corporation by the stockholder employees. Such part shall bear the same ratio to such net income as the total actual hours worked by stockholder employees during the calendar year bears to the total actual hours worked by all employees. * * *

Stevenson's taxable income for 1973 was $ 1,353,160. ² Petitioner's net income for 1973 attributable to work done for the petitioner by all employees (before deduction for wages of all employees and patronage dividends) was $ 7,122,236. ³1981 U.S. Tax Ct. LEXIS 139">*146 In that year, the value of work done for petitioner by its stockholder employees was 82.37 percent of the total value of all work performed by all of petitioner's employees. Petitioner computes that the value of the work done by its stockholder employees in 1973 was $ 5,866,586 and that the1981 U.S. Tax Ct. LEXIS 139">*145 balance of $ 1,255,650 was attributable to work done by nonstockholder employees. During 76 T.C. 637">*640 1973, petitioner paid wages of $ 2,279,036 to its stockholders and $ 513,458 ⁴ to its nonstockholder employees. Additionally, petitioner declared, on behalf of its stockholders patronage dividends of $ 2,900,763. The patronage dividends were paid by petitioner in the form of cash and written notices of allocation and were includable in the incomes of its stockholders.

Stevenson computes that it paid, as patronage dividends, 80.86 percent of the total income available for patronage dividends after deduction of wages paid to its stockholders.

Petitioner's 1973 tax liability is the lower of the amounts computed under section 11 and section 1201(a). Both parties agree that Stevenson's tax liability computed under section 11 is $ 627,087 after tax credits are allowed. ⁵

In 1973, petitioner realized1981 U.S. Tax Ct. LEXIS 139">*147 long-term capital gains under section 631(a), i.e., gains from the cutting of timber, of $ 2,428,428. Respondent determined that petitioner must recognize this amount as gain and calculated petitioner's alternative tax under section 1201(a), after allowable credits are taken, to be $ 728,528. Because this figure is higher than petitioner's tax liability computed under section 11, respondent determined that petitioner's tax liability for 1973 was $ 627,087, resulting in a deficiency of $ 255,028.

Petitioner, however, determined its section 631(a) gains to be $ 528,668 after reducing $ 2,428,428 by the portion of those capital gains attributed to petitioner's stockholder employees and included in the patronage dividends paid to them.

In calculating its section 1201(a) liability, Stevenson reduced the $ 2,428,428 by $ 1,617,439 ⁶ to take into account the proportion of such amount included in patronage dividends paid to its stockholder employees. After taking into consideration agreed audit adjustments, petitioner determined $ 810,989 was subject 76 T.C. 637">*641 to tax as a capital gain under section 1201(a). Petitioner, therefore, computed its tax liability under section 1201(a) to be1981 U.S. Tax Ct. LEXIS 139">*148 $ 481,109, an amount lower than the tax under section 11. After taking into account agreed audit adjustments, petitioner determined its tax deficiency to be $ 109,050.

Petitioner argues that, for the purpose of computing the alternative tax under section 1201(a), its section 631 gains which are distributed to cooperative stockholder employees in patronage dividends are excludable from the cooperative's gross capital gains because patronage dividends are properly characterized as exclusions from a cooperative's gross income under the conduit theory of cooperatives and under the theory that patronage allocations represent an increase in the cost of goods sold. Alternatively, petitioner asserts that, for section 1201(a) purposes, failure to1981 U.S. Tax Ct. LEXIS 139">*149 deduct a cooperative's patronage distributions of section 631(a) gains from its gross income would subject both the cooperative and its shareholder employees to tax on the same earnings and that such double taxation is contrary to the legislative intent of section 1382 and other tax measures governing cooperatives.

By contrast, respondent contends that, for the purpose of computing the alternative tax, petitioner must include the entire amount of section 631(a) gain because no statute or regulation authorizes the deduction which petitioner seeks; rather, section 1.1382-1(b), Income Tax Regs., expressly requires the inclusion of all of petitioner's long-term gain in the alternative tax computation. Additionally, respondent maintains that when petitioner's taxable income for 1973 is computed under section 11, patronage dividends are not taxable income to petitioner, so that petitioner cannot argue that respondent's position violates the "single tax concept embodied in the Internal Revenue Code (Code).

Section 631(a) provides for an election to treat the cutting of timber for sale or use in the taxpayer's trade or business by a taxpayer who, for more than 6 months, owned or had a contract1981 U.S. Tax Ct. LEXIS 139">*150 right to cut such timber, as a sale or exchange.

Section 1201(a) provides:

(a) Corporations. -- If for any taxable year a corporation has a net section 1201 gain, then, in lieu of the tax imposed by sections 11, 511, 821(a) or (c), and 831(a), there is hereby imposed a tax (if such tax is less than the tax imposed by such sections) which shall consist of the sum of a tax computed on the taxable 76 T.C. 637">*642 income reduced by the amount of the net section 1201 gain, at the rates and in the manner as if this subsection had not been enacted, plus --

(1) in the case of a taxable year beginning before January 1, 1975 --

(2) in the case of a taxable year beginning after December 31, 1974, a tax of 30 percent of the net section 1201 gain.