1986 U.S. Tax Ct. LEXIS 128">*145 Of particular importance to the disposition of this case is the language requiring that the distribution be made out of earnings from "business done with or for patrons." The parties do not dispute that petitioner has complied with the other provisions of section 1388(a); they disagree as to 86 T.C. 627">*636 whether the payments to SNS resulted from business done with or for a patron.

Section 1388 does not explicitly define the term "patron." Looking to the regulations, however, we find that:

The term "patron" includes any person with whom or for whom the cooperative association does business on a cooperative basis, whether a member or a nonmember of the cooperative association, and whether an individual, a trust, estate, partnership, company, corporation, or cooperative association. [Sec. 1.1388-1(e), Income Tax Regs.]

During the years in issue, SNS was a corporation and, as such, qualified as a "person." SNS was also a person "with whom" petitioner did business, in that SNS purchased fertilizer products from petitioner and petitioner delivered the products by shipping them to destinations designated by SNS. The business was done with SNS on a "cooperative basis" in that SNS was a stockholder1986 U.S. Tax Ct. LEXIS 128">*146 of petitioner and thus was contractually entitled, pursuant to petitioner's articles of incorporation and bylaws, to receive patronage dividends based on the value of its business done with petitioner. It is clear that the patronage dividends paid to SNS on its purchases did result from business done with or for a patron. It is also clear that the patronage dividends on the purchases by SFA and MFC were a result of business done with or for patrons for the same reasons we have articulated with respect to SNS.

Our result is not affected by the assignment agreements existing between SNS and SFA, and SNS and MFC. In Land O'Lakes, Inc. v. United States, 675 F.2d 988">675 F.2d 988, 675 F.2d 988">989-990 (8th Cir. 1982) the Eighth Circuit indicated that patronage dividends were deductible at the cooperative level, despite the fact that the right to receive these dividends was, in effect, assigned by patrons of the cooperative to nonpatrons. Here, an even stronger case exists for recognizing the assignments because the parties to the assignment agreements were all shareholder-patrons. Petitioner's bylaws, moreover, specifically provided that the patronage rights were assignable. 1986 U.S. Tax Ct. LEXIS 128">*147 Assignment of the resulting patronage dividends was also allowed, provided, as was true at least with respect to SNS, SFA, and MFC, that the patronage dividends were not allocated by petitioner to persons who were not shareholders at the time the purchases were made. 86 T.C. 627">*637 Thus, in our opinion, the assignment agreements do not affect the deductibility of the patronage dividends by petitioner. If A owes money to B, and the latter directs that the money be paid to C in discharge of B's debt to C, it is a payment to or for the benefit of B, and is still B's income in the first instance. See Old Colony Trust Co. v. Commissioner, 279 U.S. 716">279 U.S. 716, 279 U.S. 716">729-730 (1929); Huff v. Commissioner, 80 T.C. 804">80 T.C. 804, 80 T.C. 804">814-815 (1983). We note further, that petitioner was not a party to the agreements between SNS and SFA and MFC, respectively, but simply honored the requests of the latter as to payment.

Petitioner thus argues that SNS, SFA, and MFC were patrons with whom petitioner did business during the years in issue. Respondent disagrees with petitioner and directs us to a case where he believes a court was faced with a similar problem, Mississippi Valley Portland Cement Co. v. United States, 408 F.2d 827">408 F.2d 827 (5th Cir. 1969),1986 U.S. Tax Ct. LEXIS 128">*148 cert. denied 395 U.S. 944">395 U.S. 944 (1969) (MVP Cement).

Respondent's reliance on MVP Cement is misplaced. In MVP Cement, virtually all of the patronage rights to buy the taxpayer-cooperative's cement were assigned to Valley Sales, as sales agent for the cooperative and for its shareholders. As a result of this arrangement, all of the cement produced by the cooperative was delivered to Valley Sales to be sold to the general public. At the conclusion of each tax year, the net receipts from sales of cement over and above production costs were then allocated and distributed to the cooperative's shareholders of record, in proportion to each person's stock ownership as of the year's end. On these facts, the Fifth Circuit held that the cooperative's profits were not from business done with or for its shareholders, and therefore the payment of its margins to its shareholders were not excludable from its income as patronage dividends.

MVP Cement is not dispositive of the facts here primarily for two reasons. First, in MVP Cement, the Fifth Circuit was clearly faced with a situation where the cooperative's product (i.e. the cement) went one way, and1986 U.S. Tax Ct. LEXIS 128">*149 the so-called patronage dividends went another. There, almost all of the cement was delivered to Valley Sales and then sold to the general public, yet the alleged patronage dividends were 86 T.C. 627">*638 paid directly to the cooperative's shareholders, in proportion to each person's stock ownership at the end of the year. Valley Sales, acting as sales agent, could not be considered the true patron of the cooperative, nor could the cooperative's shareholders, who bought no product. The true purchasers of the product, and thus the true patrons, were the purchasers who bought from the taxpayer through Valley Sales as agent, yet those patrons received no patronage dividend.

Here, however, the product was bought by SFA, MFC, and SNS (even though later perhaps resold by them), and the resulting patronage dividends were required to be paid to these same shareholder-patrons, and they were. As we previously indicated, the fact that SFA and MFC assigned their patronage dividends to SNS is wholly irrelevant. More importantly, the dividends were not paid in proportion to SNS, SFA, and MFC's stock ownership in petitioner, as was the case in MVP Cement, but instead were paid based on the dollar1986 U.S. Tax Ct. LEXIS 128">*150 value of the purchases by them. Thus, unlike the pseudo-cooperative in MVP Cement, petitioner here was clearly in compliance with the provisions of sections 1388(a) and 1382(b).

Second, in MVP Cement, the arrangement between the taxpayer-cooperative and Valley Sales was one of principal-agent. Here, on the other hand, SNS, SFA, and MFC were each independent entities, purchasing from petitioner for their own accounts. They were true patrons. It follows that, because SNS, SFA, and MFC acquired title to the product, unlike Valley Sales, they could make various contractual arrangements between themselves without the assent of petitioner, including the terms upon which they bought and sold preferred patronage rights. ¹³

1986 U.S. Tax Ct. LEXIS 128">*151 As we have stated, the patronage dividends paid by petitioner were a result of, and in proportion to, the value of 86 T.C. 627">*639 the purchases made by SNS, SFA, and MFC. They were also paid in full compliance with the provisions of sections 1388(a) and 1382(b). This is where our inquiry should and does end. We cannot agree with respondent that, as a result of the various assignment agreements, MVP Cement somehow controls the facts here. Petitioner was never a party to these agreements, and to yield to respondent's argument would place an extreme hardship on petitioner. By holding for respondent, we would, in effect, be requiring petitioner not only to comply with the statutory requirements of subchapter T, but also to control the activities of its shareholder-patrons. The law does not require this.

We accordingly hold that the payments by petitioner to SNS, SFA, and MFC were properly classified as patronage dividends, and as such, were deductible from petitioner's gross income under section 1382(b).

The second issue for decision is whether, for the taxable year ending June 30, 1976, the amount paid by petitioner to SNS, as a result of the purchase of fertilizer by Pro Rico, 1986 U.S. Tax Ct. LEXIS 128">*152 was deductible or excludable from petitioner's gross income.

The facts regarding petitioner's sales to Pro Rico are the same as the facts regarding petitioner's sales to SFA and MFC, with one vital difference: Pro Rico was not a shareholder of petitioner at the time the fertilizer was purchased.

Petitioner's articles of incorporation did not address the payment of patronage dividends to nonshareholders at the time of said purchase, but its bylaws provided that "The excess of the selling price over the cost of products sold to nonshareholders shall not be allocated to such non-shareholder-patrons." Thus, as petitioner admits on brief, because Pro Rico was not a shareholder at the time of its purchase, and because neither petitioner's bylaws nor its articles of incorporation created a preexisting obligation between petitioner and Pro Rico, the payment by petitioner of "patronage" resulting from said purchase was not deductible from gross income under the provisions of 86 T.C. 627">*640 section 1382(b). See sec. 1388(a)(2); sec. 1.1388-1(a)(1), Income Tax Regs.¹⁴

1986 U.S. Tax Ct. LEXIS 128">*153 Petitioner nevertheless maintains that the payment to Pro Rico qualifies for exclusion as a refund of the purchase price of the fertilizer. As authority for this proposition, petitioner cites Dixie Dairies Corp. v. Commissioner, 74 T.C. 476">74 T.C. 476 (1980); Haas Bros., Inc. v. Commissioner, 73 T.C. 1217">73 T.C. 1217 (1980); Max Sobel Wholesale Liquors v. Commissioner, 69 T.C. 477">69 T.C. 477 (1977), affd. 630 F.2d 670">630 F.2d 670 (9th Cir. 1980); and Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707">26 T.C. 707 (1956).

In each of the aforementioned cases, the Court indicated that a purchase price refund was excludable from the taxpayer-vendor's gross income. A common thread runs through each of these cases, viz, in each case there was an agreement between the taxpayer and its customers, entered into prior to the sale of the product, providing for the refund of some part of the purchase price. ¹⁵ In this case, the common thread does not appear.

1986 U.S. Tax Ct. LEXIS 128">*154 In its search for a purchase price refund agreement, petitioner points to the assignment agreement between Pro Rico and SNS. Petitioner argues that this agreement, which was presented to petitioner prior to the purchase of fertilizer by Pro Rico, shows that there was a purchase price refund agreement between petitioner and Pro Rico.

The assignment agreement in question provides, inter alia, that "All patronage refunds will accrue to Southern Nitrogen Supply Company." This language, contends petitioner, indicates that a refund of the purchase price equal in amount to a patronage dividend was anticipated by Pro Rico, and that petitioner accepted Pro Rico's order and purchase price knowing this to be the case.

The burden of proving the existence of the purchase price refund agreement is on petitioner. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933); Rule 142(a). We do not believe that 86 T.C. 627">*641 this burden has been met. The only evidence petitioner has introduced is that of the assignment agreement between Pro Rico and SNS. Petitioner was not a party to the assignment agreement, and thus it cannot be held that this defined petitioner's obligations1986 U.S. Tax Ct. LEXIS 128">*155 with respect to Pro Rico. If anything, the agreement suggests that the payment to SNS, at the direction of Pro Rico, was treated by petitioner as a patronage dividend.¹⁶ Accordingly, we conclude that the payment in issue was not deductible or excludable from petitioner's gross income, either as a patronage dividend or as a price rebate.

The third issue for decision is whether the dealer credits granted by petitioner to SNS during the taxable years ending June 30, 1978, and June 30, 1979, were ordinary and necessary business expenses within the meaning of section 162.

Section 162 allows a deduction for all "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Whether expenditures are directly related to a business and whether they are ordinary and necessary are usually1986 U.S. Tax Ct. LEXIS 128">*156 questions of fact. Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, 320 U.S. 467">475 (1943); Henry v. Commissioner, 36 T.C. 879">36 T.C. 879, 36 T.C. 879">883 (1961). For business expenditures to be "ordinary," the payments must be normal, usual, and customary in size and character; they must arise from transactions which were of a common or frequent occurrence in the type of business involved. Lilly v. Commissioner, 343 U.S. 90">343 U.S. 90, 343 U.S. 90">93 (1952). For the expenditures to be "necessary," within this context, they must be appropriate and helpful. 320 U.S. 467">Commissioner v. Heininger, supra at 471. The taxpayer is ordinarily the best judge as to whether the expenditures were "necessary." 36 T.C. 879">Henry v. Commissioner, supra at 884.

With these well-established principles in mind we turn to the facts before us. Petitioner argues, and we agree, that the primary functions of a dealer for petitioner, which would 86 T.C. 627">*642 justify some price concession, were twofold: first, the dealer would be responsible for taking delivery of a substantial amount (i.e., at least 40 percent of its total acquisitions) of 1986 U.S. Tax Ct. LEXIS 128">*157 fertilizer during the off-season, ¹⁷ and second, the dealer would be responsible for prompt payment for the fertilizer. The former is important because, otherwise, petitioner would have to pay the high costs of storing the huge amounts of fertilizer it produced during the off-season, and the latter is an important source of working capital to enable petitioner to operate during this time period. It is these benefits to petitioner which justify the granting of a price concession of $ 5 per ton as a dealer credit or an "agent fee" and which makes such a concession an ordinary and necessary expense within the meaning of section 162.

The parties do not dispute that SNS purchased approximately 30,000 tons of fertilizer during each of the years in issue. For SNS to comply with the above-stated dealer requirements during the off-season, however, it would have had to acquire, and provide payment for, at least 40 percent1986 U.S. Tax Ct. LEXIS 128">*158 of 30,000, or 12,000 tons of fertilizer.

Petitioner relies on the testimony of its president, Thomas C. Parry, and certain invoices introduced in evidence, in order to show that it did meet these requirements.

Mr. Parry testified to the effect that SNS took approximately 50 percent of its fertilizer during the off-season. ¹⁸ We find this brief and very general testimony to be unconvincing, particularly where, as here, the time, the 86 T.C. 627">*643 amount, and the billing of SNS's purchases could have been precisely proved through petitioner's sales invoices to SNS. See Siegel v. Commissioner, 78 T.C. 659">78 T.C. 659, 78 T.C. 659">699 (1982).

1986 U.S. Tax Ct. LEXIS 128">*159 The sales invoices produced, however, are also unconvincing. Petitioner has provided us with only 13 invoices on which dealer credits were granted and only 4 of these invoices were actually billed to SNS. The pertinent facts of these 4 invoices may be summarized as follows:

As the above table indicates, petitioner has fallen well short of showing that SNS made the required purchases of 12,000 tons of fertilizer, and paid for them, for each of the years in issue in the off-season. The "ordinary and necessary" element of the claimed deduction has therefore not been shown. Because petitioner has failed to meet its burden of proof on this issue, Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933); Rule 142(a), respondent's disallowance of the claimed deductions must be sustained.

To reflect the foregoing, as well as concessions1986 U.S. Tax Ct. LEXIS 128">*160 made by both parties,

Decisions will be entered under Rule 155.