A cooperative association exempt under IRC section 521 may also deduct, in computing its taxable income:

Further, the dividends paid by an exempt cooperative on capital stock, may be deducted only in the year in which actually or constructively paid, without regard to when the earnings were derived. See IRM 4.44.1.1.2.6, for the definition of capital stock.

A tax-exempt farmers' cooperative may also deduct amounts paid to patrons, during the payment period for the taxable year, on a patronage basis, with respect to its earnings derived from business done with or for the United States or any of its agencies and from sources other than patronage (such as interest income).

In order that the deduction may apply to amounts paid with respect to income derived from business done with or for the United States or any of its agencies, or from sources other than patronage, it is necessary that the amount to be deducted be paid on a patronage basis in proportion, insofar as is practicable, to the amount of business done by or for patrons during the period to which such income is attributable. See Treas. Reg. 1.1382–3(c)(3).

For example, if capital gains are realized from the sale or exchange of capital assets acquired and disposed of during the taxable year, income realized from such gains must be paid to patrons of such year in proportion to the amount of business done by such patrons during the taxable year.

Thus, if capital gains are realized by the association because of the sale or exchange of capital assets held for a period extending into more than one taxable year, income realized from such gains must be paid, insofar as is practicable, to the persons who were patrons during the taxable years in which the assets were owned by the association in proportion to the amount of business done by such patrons during such taxable years. See Treas. Reg. 1.1382-3(c)(3). See IRC section 453(d) and Revenue Ruling 68-332 for application of the installment method to such sale or exchange.

Amounts representing unclaimed allocations of nonpatronage income paid over to a state by an exempt cooperative pursuant to the escheat law of the state are deductible by the cooperative under IRC section 1382(c), provided that the escheat law is custodial in nature. See Revenue Ruling 68-423.

A deduction for nonpatronage income earned by an IRC section 521 exempt farmers' cooperative and allocated during the taxable year to patrons is permitted, regardless of the year in which the nonpatronage income was actually earned. Allocations made after the close of the taxable year and on or before the 15th day of the ninth month following the close of the taxable year shall be considered as made on the last day of such taxable year to the extent that such allocations are attributable to income derived during the taxable year or prior thereto.

Generally, the nonpatronage source income mentioned above is the only difference between an exempt farmers' cooperative and a taxable farmers' cooperative (interest income, dividends paid on capital stock, and business with the U.S. government). All corporations filing as a cooperative under subchapter T must meet and follow subchapter T of the Internal Revenue Code. See IRC sections 6072(d) and 1381(a).

"Cooperative" is not defined in the Internal Revenue Code. However, a cooperative is a type of organization formed for the purpose of providing goods or services for its patron-owners, or selling their products. For the purposes of Subchapter T, the term "cooperative" includes:

For a cooperative to be described in subchapter T, it must be "operating on a cooperative basis" within the meaning of IRC section 1381(a)(2). It must have the three traditional characteristics of cooperative operation, namely subordination of capital, democratic control, and operation at cost. Any cooperative that meets these three requirements can file its tax returns under subchapter T (e.g., farmers' cooperatives, housing cooperatives, and wholesale cooperatives). See Trump Village v. Commissioner, T.C. Memo 1995-281, AOD/CC-1995-011, (Oct 30, 1995).

Subchapter T does not apply, per Treas. Reg. 1.1381-1, to:

A "patron" is any person, as defined in IRC section 7701(a)(1), with whom or for whom the cooperative does business on a cooperative basis (whether a member or a nonmember of the cooperative, per Treas. Reg. 1.1388-1(e)), and who bears some risk of loss from dealings with the cooperative. See Revenue Rulings 76-388 and 66-380 (a producer that purchases from the cooperative is not necessarily dealing with the cooperative on a cooperative basis).

The definition of patronage dividend includes a discussion of:

The term "written notice of allocation," whether qualified or nonqualified means: any capital stock, revolving fund certificate, retain certificate, certificate of indebtedness, letter of advice, or other written notice, which discloses to the patron the stated dollar amount allocated to him on the books of the cooperative organization, and the portion thereof, if any, which constitutes a patronage dividend.

A mere credit to the account of a patron on the books of the organization without disclosure to the patron, is not a written notice of allocation. A written notice of allocation may disclose to the patron the amount of the allocation which constitutes a patronage dividend either as a dollar amount or as a percentage of the stated dollar amount of the written notice of allocation. See Treas. Reg. 1.1388–1(b).

A per-unit retain certificate is a written notice which discloses to the recipient the stated dollar amount of a per-unit retain allocation to the recipient by the cooperative. See IRC section 1388(g).

IRC section 1388(f) defines a per-unit retain allocation as any allocation, made by a Subchapter T cooperative, other than payment in money or other property (except per-unit retain certificates) to a patron with respect to products marketed for him/her, the amount of which is fixed without reference to the net earnings of the organization, pursuant to an agreement between the organization and the patron.

A cooperative may enjoy certain favorable tax treatment if it obtains the patron’s consent to take certain amounts into account (income) The three types of consent are:

There are special rules for individual and by-law consents used in pooling agreements.

A "qualified check" is a check, or other instrument redeemable in money by the cooperative, which is paid as a part of the patronage dividend or payment (as described in IRM 4.44.1.9.2.4.1 (qualified written notice of allocation), on which there is clearly imprinted a statement that the endorsement and cashing of the check or other instrument constitutes the consent of the payee to take into account, as provided in the federal income tax laws, the stated dollar amount of any written notices of allocation which are paid as a part of the patronage dividend or payment of which such check or other instrument is also a part. See Treas. Reg. 1.1388–1(c)(3)(iii)(b).

A qualified check need not be in the form of an ordinary check which is payable through the banking system. It may, for example, be in the form of an instrument which is redeemable in money by the cooperative organization. See Treas. Reg. 1.1388–1(c)(3)(iii)(b).

The term "qualified check" does not include a check or other instrument paid as part of a patronage dividend, or payment, with respect to which a consent is already in effect. In addition, the term "qualified check" does not include a check or other instrument which is paid as part of a patronage dividend or payment, if such patronage dividend or payment does not also include a written notice of allocation (other than a written notice of allocation that is described in IRC section 1388(c)(1)(A)). Thus, a check which is paid as part of a patronage dividend is not a qualified check (even if it has the required imprinted statement) if the remaining portion of such patronage dividend is paid in cash or if only qualified written notices of allocation are included in the payment. See Treas. Reg. 1.1388–1(e)(3)(iii). Also, see IRM 4.44.1.9.2.6.3 (consent by qualified check) for the effect of endorsing and cashing a "qualified check" and for the method of obtaining IRC section 1388 consent by use of a "qualified check."

The term "payment period" is defined in IRC section 1382(d).

IRC section 1382(e) clarifies the beginning of the "payment period" for cooperatives engaged in pooling arrangements.

IRC section 1382(f) clarifies an aspect of the payment period for patronage sourced earnings that are received after patronage has occurred.

The "payment period" for any taxable year of a cooperative is the period beginning with the first day of the taxable year and ending on the fifteenth day of the ninth month following the close of such year. See IRC section 1382(d).

Two examples follow:

If a cooperative sustains a net operating loss, as defined in IRC section 172(c), the net operating loss may be carried back or forward to offset taxable income (after the allowance of the patronage dividend deduction) in the same manner and to the same extent as an ordinary corporation’s net operating loss. The cooperative’s constitution or by-laws may specifically provide for the treatment of losses. Such documents should be examined to verify compliance with the loss provisions.

The Service will follow the decision in Buckeye Countrymark v. Commissioner. In this case, an operating loss was carried back by the nonexempt (not exempt under IRC section 521) cooperative under IRC section 172. The Service argued that cooperatives are "member organizations" described in IRC section 277. Under IRC section 277, member losses cannot be carried back (only forward). The Tax Court held that IRC section 277 does not apply to cooperatives subject to subchapter T of the Code (IRC sections 1381-1388). This holding is consistent with the holding of the United States Claims Court in Landmark inc. v. United States, 25 Cl. Ct.100 (1992) [92-1 USTC), AOD Acquiescence, May 5, 1997.

Patronage and nonpatronage losses must be computed separately and carried over or carried back separately. This is shown on Form 8817, which is filed with the tax return (for all cooperatives with gross receipts of $10,000,000 or more).

IRC section 1388(j) provides special rules for the netting of gains and losses by all exempt and nonexempt cooperatives. In general, IRC section 1388(j) permits cooperatives to offset patronage losses (including patronage losses carried over into the taxable year) that are attributable to one or more allocation units (such as a function, division, department, geographic unit, etc.) against patronage earnings of one or more other allocation units. However, the cooperative must provide the affected patrons with notice that the cooperative is netting losses against gains. Additionally, netting of losses against gains is not permissible to the extent it reduces nonpatronage earnings. See Farm Service Cooperative v. Commissioner, 619 F.2d 718 (8th Cir. 1980).

Form 990-C is filed by farmers' cooperatives (exempt or taxable), and Form 1120 is filed by other corporations filing as a cooperative under IRC section 6072(d). Both types of returns are due on or before September 15 for calendar years, or the 15th day of the ninth month following the close of the taxable year.

Farmers' cooperatives (whether exempt or taxable) and other taxable cooperatives are subject to subchapter T, provided the cooperative is under an obligation to pay patronage dividends equal to at least 50-percent of its net earnings from patronage, or actually paid such dividends in such amount for the most recent taxable year in which it had net earnings from patronage. See IRC section 6072(d).

A taxable cooperative that does not satisfy IRM 4.44.1.9.7.1(2) is required to file its tax return by the 15th day of the third month after the close of its taxable year, like any other corporation.

Nonexempt cooperatives with gross receipts of $10 million dollars or more must file Form 8817, Allocation of Patronage and Nonpatronage Income and Deductions, with their tax return, if they have both patronage and nonpatronage income. Many cooperatives do not file schedules attached to the returns and the examiner cannot determine patronage and nonpatronage income and expenses by reviewing the returns. The examiner will need to ask for the allocation schedules.

For the purpose of determining whether the 50-percent requirement is met, net earnings are not reduced by any taxes imposed by subtitle A of the Internal Revenue Code nor by dividends paid on capital stock or other proprietary interest. A cooperative can pay less than 50-percent patronage dividends and still file under IRC section 6072(d). The bylaws must "obligate" the cooperative to pay patronage dividends of at least 50-percent of its net earnings from patronage. See Revenue Ruling 93-21.

In general, all subchapter T cooperatives making payments of patronage dividends and other payments described in IRC section 1382 aggregating $10 or more per person must file information returns on Forms 1096 and 1099. See IRC section 6044 and the implementing regulations for further detail.

Cooperatives; farmers; integrated business unit; marketing and storage—The marketing activity of a nonexempt farmers' cooperative may be combined with its storage activity so that the two aspects of the business are treated as a unit. However, where a cooperative distributes profits only to member patrons, the exclusion under IRC section 522 will be limited to that portion of the dividend attributable to member business. Revenue Ruling 63-58.

Net operating loss deduction—The net operating loss deduction allowed under IRC section 172(a) does not reduce the earnings of a cooperative that are available for payment of patronage dividends. Revenue Ruling 65-106.

Assignment to distributing cooperative—Patronage dividends in the form of written notices of allocation are deductible in computing the taxable income of a cooperative where the cooperative pays more than 20-percent of such dividends by qualified check, even though the patron has specifically assigned 100-percent of his/her annual allocable patronage dividend to the cooperative to be credited against annual payments due under the terms of a conditional sales contract. Revenue Ruling 65-128.

Assignment for membership dues owed to farmers' educational organization—Amounts paid in cash or by check out of current patronage dividends by a cooperative for membership dues owed to a farmers' educational organization by the cooperative’s member/patrons will be treated as patronage dividends "paid in money" provided that the payments are made at the option of the member for whom the dues are paid. Revenue Ruling 65-221.

Withholding; nonresident aliens—A domestic cooperative is required to withhold tax on patronage dividends distributed to its nonresident member patrons, some of whom are nonresident aliens, and foreign corporations, or foreign cooperatives not doing business in the U.S., since these dividends are amounts which are fixed or determinable annual or periodical income from sources within the U.S. Revenue Ruling 66-53.

Subchapter T cooperative; financing corporation—A financing corporation which purchases accounts receivable with recourse from its member stores at face value charging a uniform discount rate to all members and distributes any net savings to its members on a cooperative basis is an organization described in IRC section 1381(a). Cash distributions made to the member/patrons by the corporation which are based on the discounts charged each member as compared with the discounts charged all members are patronage dividends and deductible from the corporation’s gross income under IRC section 1382. Revenue Ruling 66-98.

Producer/patron-purchaser of crops—A producer/patron of a nonexempt marketing and purchasing cooperative who purchases crops marketed by the cooperative for other producer/patrons is not dealing with the cooperative "on a cooperative basis" and, therefore, is not a "patron" with respect to such purchases. Such a producer/patron/purchaser is in the same position as a commercial customer of the cooperative, and the cooperative is not entitled to a deduction for so-called patronage dividends paid on such purchases. Distinguished by Revenue Ruling 72-547 to provide in certain cases that a nonexempt cooperative may deduct patronage dividends paid to both marketing and purchasing patrons of the same grain. Revenue Ruling 66-380.

Cooperative operating on pooling basis—Only those payments from each pool which are paid by a cooperative to its patrons and which are determined with reference to the net earnings of the cooperative with respect to such pool or pools are patronage dividends. These amount are determinable only in the taxable year in which each pool closes. Amounts set up on the books of an accrual method cooperative at the close of each taxable year as amounts due patrons, which are determined by estimating the sales proceeds of the patrons’ crops in pools yet to be closed, are neither deductible by the cooperative nor includible in the patrons’ gross income. Modified to provide that inventories of unmarketed commodities on hand at the end of the year should be valued at cost. Clarified to provide that a "completed pool" accounting method is not an acceptable method. Revenue Rulings 67-333, 69-67 and 69-71.

Earnings from nonmember business—Distributions of earnings from business attributable to nonmembers by a nonexempt farmers' cooperative to its members in accordance with its by-laws do not qualify as patronage dividends and, therefore, are not deductible in arriving at taxable income. A.R.R. 6967 superseded. Modified by Revenue Ruling 72-602. Revenue Ruling 68–228.

Per-unit retain allocations—Guidance is provided for cooperative organizations, including farmers' cooperatives, and their patrons in their treatment of per-unit retain allocations made during taxable years of cooperatives beginning after April 30, 1966, with respect to products delivered in such years. Revenue Ruling 68-236.

Farmers; nonpatronage income reported on installment method—An exempt farmers' cooperative that realized nonpatronage income upon the sale of a building, and elected to report the gain under the installment method of accounting, may deduct the portion of the gain included in its income in each taxable year under the installment method, provided it allocates and pays such amount on a patronage basis, insofar as is practicable, to the persons who were patrons during the taxable years in which the asset was owned by the cooperative. Revenue Ruling 68-332.

Farmers; unclaimed nonpatronage income paid to State—Unclaimed allocations of nonpatronage income paid to a State by an exempt farmers' cooperative pursuant to the State’s escheat law are deductible by the cooperative to the extent such amounts would have been deductible had they been paid to the patron. The cooperative must file information returns indicating payments are made to the State on behalf of the patrons. Revenue Ruling 68-423.

Farmers' cooperative; pooling arrangement; unmarketed commodities—Inventories of unmarketed commodities on hand at the end of the taxable year of a farmers' marketing cooperative operating under a pooling arrangement should be valued at cost. For this purpose cost is the sum of the advances paid to its patrons plus the processing or handling expenses actually paid or incurred. Revenue Ruling 67-333 modified. Revenue Ruling 69-67. (Some court cases may differ on cost basis depending on facts and circumstances.)

Taxable income of cooperatives; products marketed under pooling arrangements—A "completed pool" method of accounting employed by a farmers' cooperative operating under a pooling arrangement is not an acceptable accounting method for income tax purposes. Revenue Ruling 67-333 clarified. Revenue Ruling 69-71.

Subsidiary of wholesale grocery cooperative—A wholesale grocery cooperative is entitled to a deduction for patronage dividends paid its independently operated wholly owned subsidiary where it deals with the subsidiary on a cooperative basis in the same manner as with its other retail grocer members. Revenue Ruling 69-389.

Allocation; amounts received from cooperative bank—The amount received by a nonexempt farmers' cooperative on a patronage basis, from a bank for a cooperative which is subsequently allocated and paid by the farmers’ cooperative to its own patrons qualifies as a patronage dividend. If the income is produced by a transaction which actually facilitates the accomplishment of the cooperative's marketing, purchasing or service activities, the income is from patronage sources. Revenue Ruling 69-576.

Net profits to patrons—The amount of a cooperative’s net profits distributed to its patrons on a patronage basis in excess of dividends paid on its stock during the taxable year qualifies as patronage dividend. Such amount is deductible by the cooperative if it otherwise meets the requirements with respect to form and timing. Revenue Ruling 69-621.

Farmers; handling and storage charges under "reseal" program—Handling and storage charges paid to a farmers' cooperative by the Commodity Credit Corporation under the "reseal" program of the U.S. Department of Agriculture is income of the cooperative derived from business done with or for the U.S. or any of its agencies and is not income from patronage sources. Revenue Ruling 70-25.

Farmers; notices of allocation; redemption—Losses incurred by members of an agricultural cooperative upon the redemption by the cooperative of its qualified written notices of allocation for less than the stated face amount are ordinary losses deductible in the year of redemption measured by the difference between the stated amount included in income in the year of issuance and the amount received upon redemption. Revenue Ruling 70-64.

Farmers; dividends paid; taxable year of deduction—A farmers' cooperative is entitled to a deduction for dividends paid on its capital stock in the year it was held to be exempt even though the dividend was declared in the prior year when it was operating as a nonexempt cooperative. Revenue Ruling 70-233.

Per-unit retain certificates; transaction between cooperatives—IRC section 1382(f) applies to a transaction in which a cooperative receives qualified unit-retain certificates in a subsequent taxable year for seed purchased from its patrons and delivered to another cooperative of which it is a patron. Revenue Ruling 70-249.

Farmers; cancellation of patron’s marketing credits—Patrons notified in writing by a farmers' cooperative that their outstanding marketing credits which they had previously included in gross income had been cancelled to offset the excessive marketing advances paid them in a prior year are entitled to an ordinary loss for the year in which notified. Revenue Ruling 70-407.

Service corporation—A corporation rendering services to its members through a clearing house to effect settlement of orders between them and providing extensive advertising, public relations, and educational and research services at cost and making distributions to the members based on business transacted with them, is "operating on a cooperative basis" and the distributions are patronage dividends. Revenue Ruling 70-481.

Per-unit retain certificates; redemption date—Per-unit retain certificates, issued before October 10, 1969, by an accrual basis cooperative and not redeemed within 30 days of issuance are treated as qualified certificates under IRC section 1388(h). Per-unit retain certificates redeemed on the date of issuance or within 30 days of issuance are treated as cash advances. Revenue Ruling 71-374.

Farmers; advances to member growers—Advances received by cash method member growers from a cooperative association for crops sold to the association, under an agreement whereby all crops are sold to the association for resale, are partial payments includible in the growers’ gross income in the year received. The growers may not defer the accounting for the payments until the year in which final settlement is made for their crops. I.T. 2107 superseded. Revenue Ruling 71-430.

Distribution based on man-hours worked—Distributions of net earnings by a nonexempt cooperative association to its member-stockholders based on man-hours worked by such members qualify as patronage dividends deductible from gross income of the association. Gain recognized by the cooperative pursuant to an election under IRC section 631 (a) to treat the cutting of timber as a sale or exchange is patronage income. Revenue Ruling 61-47 revoked. Revenue Ruling 71-439.

Federal intermediate credit bank; class B stock—The tax treatment of patronage dividends received by a production credit association (PCA) from a Federal intermediate credit bank (FICB), a cooperative exempt under section 501(c)(1) of the Internal Revenue Code, in the form of the bank’s class B stock is determined under the provisions of Regs. 1.61-5 and not subchapter T (IRC sections 1381-1388). The class B stock is includible in the PCA’s gross income at its fair market value for the year of receipt. Revenue Ruling 71-556.

Federal intermediate credit bank; written notification—The tax treatment of a patronage dividend received by a production credit association (PCA) from a Federal intermediate credit bank (FICB) in the form of the bank’s written notification of reserve allocations is determined under the rules of Regs. 1.61-5 and not subchapter T (IRC section 1381-1388). No portion of such reserve allocation is includible in gross income in the year of receipt unless a fair market value is clearly established. However, any amount realized on a subsequent redemption or other disposition is includible in ordinary income in the year of redemption or disposition. Revenue Ruling 71-557.

Federal intermediate credit bank; participation certificate; commercial bank—The tax treatment of patronage dividends received by a commercial bank from a Federal intermediate credit bank (FICB), a cooperative organization exempt under IRC section 501(c)(1), in the form of participation certificates, is determined under the provisions of Treas. Reg. 1.61-5 and not subchapter T. Revenue Ruling 71-558.

Purchasing and marketing patrons of grain—A nonexempt marketing and purchasing cooperative operates a purchasing function in which it processes grain for livestock feed and operates a marketing function, one department of which markets grain for the grain farmers and also supplies some grain to livestock farmers as feeder grain. These combined marketing and purchasing activities do not preclude the deduction of patronage dividends paid to both marketing and purchasing patrons of the same grain. Revenue Ruling 66-380 distinguished. Revenue Ruling 72-547.

Majority nonmembers; nonexempt cooperative—A nonexempt cooperative doing more than 50-percent in value of its business with members may qualify for the benefits of Subchapter T even though the number of nonmembers is greater than the number of members. Revenue Ruling 68-228 modified. Revenue Rulings 72-602 and 93-21.

Cooperative; noncash allocation; deceased member’s estate—A written notice of allocation made by an exempt farmers’ cooperative to the estate of a deceased member, who during the deceased member’s lifetime had filed a consent pursuant to IRC section 1388, for business conducted with the cooperative prior to the member’s death is deductible by the cooperative as a patronage dividend. The estate is required to include the noncash allocation in gross income. For any additional cooperative written notices of allocation with respect to the decedent, the estate would be required to follow the normal membership procedure. Revenue Ruling 73-93.

Bank for Cooperatives; nonexempt; interest earned; distribution—Interest income earned by a nonexempt Bank for Cooperatives from investments in Government securities and from surplus funds loaned to other farm credit banks is nonpatronage income and is not deductible as a patronage dividend even if distributed to member-patrons. Revenue Ruling 73-497.

Distribution based on man-hours worked; method of computation —Distributions of a nonexempt cooperative, whose work force is composed of both member and nonmember workers, based on the total hours worked by the nonmember workers plus the total hours worked by member workers increased by a specified percentage to determine the applicable percentage of net income available for patronage distributions, do not qualify as patronage dividends to the extent that such distributions are from income attributable to nonmember workers and to the extent the cooperative is not entitled to a deduction for such distributions. The quantity method to determine patronage dividends may be elected and an example of the calculations under this method is set forth. Revenue Ruling 74-20.

Distribution based on man-hours worked—Gain recognized by a nonexempt cooperative engaged in the manufacture of wood products under an election to treat the cutting of timber as a sale or exchange is patronage income in the year recognized to the extent attributable to member workers and will qualify for distribution as a patronage dividend. That portion of the gain attributable to nonmember workers is not patronage income and will not qualify. Revenue Ruling 71-439 amplified. Revenue Ruling 74-24.

Nonexempt cooperative—The ordinary income portion of gain realized from the sale of IRC section 1245 property by a nonexempt cooperative is patronage sourced income to be allocated between member and nonmember workers in accordance with the applicable method of allocation utilized in those prior years in which depreciation deductions were taken on the property sold and to the extent allocated to member workers qualifies as a patronage dividend. However, the portion of such gain attributable to depreciation deducted in years the cooperative did not qualify under IRC section 1381(a) and the portion of the gain treated under IRC section 1231 as gain from the sale of a capital asset are not patronage income. Revenue Ruling 74-84, .

Nonexempt cooperative; source of income or loss—Interest income received by a nonexempt cooperative from loans made to its chief supplier to assure supplies, and an operating loss sustained in its operation of a veneer plant operated as a part of its business, are patronage sourced to the extent allocable to member workers. However, a payment it received as lessee from the cancellation of its lease on the veneer plant is nonpatronage sourced income. Revenue Ruling 74-160.

Nonexempt cooperative; State taxes on earnings from nonmember business—The state income taxes paid by a nonexempt farmers' cooperative on earnings from business done with nonmembers does not reduce the earnings from business done with members in computing the amount available for distribution as a patronage dividend. Revenue Ruling 74-161.

Distribution in excess of net earnings from patrons’ business—A distribution by a nonexempt cooperative that used different methods of depreciation for net book earnings and net earnings from business done with or for patrons reported for Federal income tax purposes will qualify as a patronage dividend only to the extent of the net earnings reported for Federal income tax purposes. Revenue Ruling 74-274.

Investment credit; qualified investment—An example illustrates that in the computation of the amount of a qualified investment for purposes of the investment credit a cooperative’s "taxable income" for purposes of the ratio provided by IRC section 46(d)(2)(C) must reflect deductions allowed under IRC section 1382(b) and special deductions allowed under IRC section 243. Revenue Ruling 74-288.

Earnings computation; depreciation—A subchapter T Cooperative may use any method of depreciation provided under IRC section 167(b), subject to limitations of IRC section 167(c) and 167(j), in computing its depreciation deduction under IRC section 167(a), but the method used must also be used for determining the amount of its net earnings for computing patronage dividends. Revenue Ruling 74-303.

Farmers; nonqualifying patronage dividends—A supplemental distribution of earnings by an exempt farmers’ cooperative to its patrons as the result of a 1973 audit disallowing depreciation deductions claimed on the 1970 and 1971 returns of the cooperative, whose bylaws obligate it to pay its patrons all net margins over and above operating expenses, will not qualify as a patronage dividend deduction in any year. The cooperative must pay tax on the amount of depreciation disallowed for each year and the tax payment should be reflected on its books as a deduction from net earnings of the respective year’s pool. The remaining amount may be distributed as a nonqualifying patronage dividend. Revenue Ruling 74-327.

Net operating loss; patronage dividend deduction; loss in nonmember transactions—For a nonexempt cooperative that has a preexisting obligation to pay patronage dividends to members, but does not pay patronage dividends to nonmembers, and then sustains a net loss in nonmember transactions in a taxable year, the amount available for distribution as patronage dividends is its net earnings from member business undiminished by the net loss; the loss may be applied against nonmember income in accordance with IRC section 172. Revenue Ruling 70–420 revoked. Revenue Ruling 74-377.

Purchasing and feed yard patrons; equitable allocation—An exempt farmers’ cooperative that operates a grain elevator branch, a soybean processing branch, and establishes a feed yard branch financed by selling preferred debentures to its members, allocates the feed yard earnings between the debenture holders and the other branches according to the feed source and allocates the grain and soybean branch's earnings according to the branch's individual patronage, resulting in debenture and nondebenture holders receiving different dividends for identical marketing, is using a method of operation that does not affect its exempt status. Revenue Ruling 74-567.

Farmers; distribution received from subsidiary DISC—The dividend an exempt farmers' cooperative received from its wholly owned DISC out of the DISC’s commission income earned on its overseas sales of the cooperative patron's products is patronage sourced income and not taxable to the cooperative if distributed in the form of qualified patronage dividends. Revenue Ruling 75-228.

Cooperative; change in accounting method—A nonexempt cooperative changed from LIFO to FIFO for inventory purposes, which required a positive adjustment to income under IRC section 481(a). Held: Even though the adjustment relates to business done with the cooperative’s patrons in prior years, it results in patronage earnings that are includible in the cooperative’s gross income in the year of the adjustment for IRC section 1382(f) purposes. Revenue Ruling 79-45.

Cooperative; integrated poultry operation—A nonexempt cooperative engaged in an integrated poultry operation that is indistinguishable from the normal operation of a corporation doing business for profit is not operating on a cooperative basis within the meaning of IRC section 1381(a)(2) and is subject to tax at the corporate level on amounts returned to its shareholder-members according to their marketing agreement, Revenue Ruling 82-51.

A cooperative that operates on a for-profit, nonpatronage basis with nonmembers will not be precluded from being considered "operating on a cooperative basis" simply because it does less than 50-percent in value of its business with members on a patronage basis. The cooperative principles stated in Puget Sound Plywood, Inc., 44 TC 305, provide the basis for determining whether a corporation is operating on a cooperative basis under IRC section 1381(a)(2). Revenue Ruling 93-21.

Deposits made by borrower-stockholders—The taxpayer, a lending corporation, was organized by five members of a wholesale purchasing cooperative. A refundable deposit of five cents per box of fruit sold by the borrower-stockholder was required to indemnify the taxpayer against credit and operating losses. The deposits remained the property of the borrowers until such time as the taxpayer might elect to use them for a purpose specified in the loan agreements, and were not intended as compensation to the taxpayer for use of its capital. Held, the deposits were not taxable income to the taxpayer when received. Growers Credit Corp., 33 T.C. 981, (1960), Acq., 1960-2 C.B. 5.

Farmers; Class C stock of "Bank for Cooperatives" ; interest v. capital asset—Class C stock of a Bank for Cooperatives purchased quarterly by a farmers’ cooperative association as a condition of obtaining a loan from the Bank is a capital asset and its cost is not deductible as an interest expense. Mississippi Chemical Corp., 405 U.S. 298, (1972), 1972-1 C.B. 229.

Landlord as agent for sharecropper—The taxpayer farmers’ cooperative association contracted with certain landlords to gin the cotton and sell the cotton seed grown on their lands by sharecroppers. The contracts were negotiated solely with the landlords, although they provided that the latter were also acting as agents for the sharecroppers. The taxpayer paid the landlords dividends attributable to the sharecroppers’ share of the cotton. Held, these dividends were patronage dividends properly excludable from the taxpayer’s gross income. Producers Gin Assn., 33 T.C. 608; (1959), Acq., 1960-2 C.B.6.

Distribution based on man-hours worked—Amounts distributed during 1958, 1959, and 1960, pursuant to a preexisting legal obligation, as patronage dividends by a nonexempt workers’ cooperative association to its worker/members in proportion to the hours worked in producing and marketing the products of their cooperative endeavor, are excludable from the gross income of the cooperative association. Puget Sound Plywood, 44 T.C. 305, (1965), Acq., 1966-1 C.B. 3.

Allocations in document form; treatment in the hands of patrons—Amounts were retained out of earnings of a farmers’ cooperative, at the sole discretion of the board of directors, for capital purposes. The amounts were evidenced by revolving fund certificates issued to members in payment of patronage dividends. The certificates bore no interest, were retirable at the sole discretion of the directors, were subordinate to all other debts of the cooperative, and had no fair market value when issued. Held, the certificates were not income to members of the cooperative in the year issued. B.A. Carpenter, 20 T.C. 603, Acq., 1958-2 C.B. 4.

The discounted value of qualified notices of allocation paid to patrons who terminated their membership in the cooperative did not have to be included in the cooperative's gross income. The tax benefit rule did not apply as the tax court had determined. The cooperative's payments did not cease to be deductible as patronage dividends when the cooperative redeemed the qualified written notices for less than their stated amounts and reclassified the difference on its financial statement as additions to its retained earnings. See Gold Kist Inc., Petitioner-Appellant, v. Commissioner of Internal Revenue, Respondent-Appellee, No. 96-8257, United States Court of Appeals, for the Eleventh Circuit, 110 F. 3d 769: 1997. The Service has not acquiesced to the court's ruling.

Federal intermediate credit bank; class B stock; interest paid-Patronage dividends received by a production credit association (PCA) from a Federal intermediate credit bank (FICB) in the form of the bank’s class B stock, during the bank’s fiscal year in which it had class A stock outstanding, does not represent income "wholly exempt" within the meaning of IRC section 265(a)(1) and no portion of the deduction for interest paid by the PCA on a loan from the FICB will be disallowed. Revenue Ruling 73-471.

Allocations in document form—When a patron of a farmers’ marketing or purchasing cooperative receives amounts allocated to him/her in document form pursuant to a preexisting contractual obligation, or the dollar value is known to him/her, the face amount is includible in income in the year of receipt and the basis upon redemption, sale, or other disposition, is the face amount. Under certain circumstances where the patron reports less than the face amount of the document in his/her return for the year of receipt his/her basis is limited to the amount reported. Revenue Ruling 54-10.

Liquidation; value of capital stock—Where an exempt growers’ marketing cooperative association, pursuant to a revolving fund agreement, each year retains portions of the amounts due growers for crops and issues stock in exchange, and the growers report the face amount of the stock received as part of income from crops each year, the value of the stock does not represent earnings and profits of the association upon its liquidation. Revenue Ruling 54-244.

Allocations in document form; dissolution or insolvency—Where an allocation in document form is made by a cooperative to its patrons, the type of instrument will indicate whether a loss due to worthlessness, upon dissolution or insolvency of the cooperative which issued it, should be treated as a bad debt or a capital loss. Revenue Ruling 55-66.

Distribution by nonexempt cooperative—Patronage dividend distributions made by a nonexempt farmers’ cooperative to its members who owned the crop at the time it was delivered to the cooperative are excludable from the cooperative’s income if made in accordance with a preexisting agreement. However, any dividends attributable to sales of products made to nonmembers are taxable to the cooperative and to its members. Revenue Ruling 57-59.

Farmers; overplus held by Commodity Credit Corporation—A farmers’ cooperative does not have a claim of right to any part of the one-half of the "overplus" held as collateral security retained by the Commodity Credit Corporation from the sale of a crop until the excess over the outstanding indebtedness can be determined. Such amount constitutes gross income to the cooperative in the year received. Revenue Ruling 57-358.

Farmers; certificates of interest for stock; reorganization—5-percent cumulative preferred capital certificates of interest of a farmers’ cooperative association received by shareholders of a corporation merged under state law into the association represent, under described facts, equity interests in the association. No gain or loss will be recognized to the shareholders of the acquired corporation. Revenue Ruling 68-22.

Farmers; reorganization; revolving fund credits for capital stock—The rearrangement of the capital structure of a tax-exempt, farmers’ marketing cooperative whereby its members exchange revolving fund credits for share interests in a permanent capital fund constitutes a recapitalization and therefore, a reorganization within the meaning of IRC section 368(a)(1)(E). Revenue Ruling 70-298.

Investment credit; carryback and carryovers—A cooperative association that acquired and placed in service IRC section 38 property during a taxable year in which its operations resulted in a net operating loss, has no qualified investment in IRC section 38 property for that year and, therefore, has no unused investment credit for carryback or carryover purposes. Revenue Ruling 70-328.

Cooperatives; change in accounting method—A mandatory procedure is provided for taxpayers to change their method of accounting for interest on indebtedness when they have been reporting interest income or deductions in accordance with the Rule of 78’s computation. This procedure applies to loans for which the interest computed using the Rule of 78’s does not exceed the loan payments during any year of the term of the loan. Revenue Procedure 84-27.

Cooperatives; change in accounting method—A mandatory procedure is provided for taxpayers to change their method of accounting for interest on indebtedness when they have been reporting interest income or deductions in accordance with the Rule of 78’s computation. This procedure applies to loans for which the interest computed using the Rule of 78’s exceeds the loan payments during any year of the term of the loan. Revenue Procedure 84-28.

Cooperatives; change in accounting method—A procedure is provided for taxpayers to change their method of accounting for interest on indebtedness when they have been reporting interest income or deductions in accordance with the Rule of 78’s computation. This procedure applies to short-term consumer loans that are covered by the administrative exception of Revenue Procedure 83-40. Revenue Procedure 84-302.