Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 54-12

1954-1 C.B. 93

Sec. 521

Caution: Modified by Rev. Rul. 69-417

IRS Headnote

Sales made by a farmers' cooperative association, engaged in the production and distribution of petroleum products, on the open market of byproducts such as heavy fuel oils and distillates not usable by its farmer patrons, and the value of petroleum products exchanged with other refineries in order to utilize its output and effect a savings in transportation costs shall, for the purpose of determining exemption under section 101(12)(A) of the Internal Revenue Code, be disregarded in determining whether the purchases made for persons who are neither members nor producers exceed 15 percent of the value of all purchases.

Full Text

Rev. Rul. 54-12

Advice is requested whether sales of heavy petroleum products made on the open market by a farmers' cooperative association and the value of petroleum products exchanged with other refineries shall be disregarded in determining whether the value of all purchases made for persons who are neither members nor producers exceeds the statutory limitation of 15 percent, as provided in section 101(12)(A) of the Internal Revenue Code.

In the instant case, a petroleum refining company is a wholly owned subsidiary of an association which has been held to be exempt from Federal income tax as a farmers' cooperative marketing and purchasing association under the provisions of section 101(12)(A) of the Code. In earlier years the cooperative association purchased petroleum products in the open market for its member associations. In order to assure a continued supply of such products the association acquired by purchase the refining company here involved. Such company was reorganized for the purpose of engaging in any activity on a cooperative basis in connection with the acquisition, development, production, and distribution of oil, gas, petroleum, asphaltum, and other minerals and byproducts thereof. The primary purpose of the refining company is the production of petroleum fuels required by farmers in the production of agricultural products. In the production of light petroleum products used by farmers, certain byproducts such as heavy fuel oils and distillates are produced which its farmer patrons do not use. These products are disposed of to railroads, steel mills or in whatever market is available at the prevailing market price of such products. Further, in order to utilize its output to the best advantage by effecting a savings in transportation costs, it is the practice of the refinery to make exchanges of products with other refineries which in turn deliver a like quantity of the same products to the distributing agency of the association from their stocks located at points convenient to its farmer patrons.

Section 101(12)(A) of the Internal Revenue Code provides, in part, for the exemption from Federal income tax of farmers, fruitgrowers, or like associations organized and operated on a cooperative basis for the purpose of purchasing supplies and equipment for the use of members or other persons and turning over such supplies and equipment to them at cost, plus necessary expenses, provided they meet the other requirements of that section. Such associations may purchase supplies and equipment for nonmembers provided that the value of supplies and equipment purchased for nonmembers does not exceed the value of supplies and equipment purchased for members and provided further that the value of supplies and equipment purchased for persons who are neither members nor producers of agricultural products does not exceed 15 percent of the value of all its purchases.

It is held that sales made by a farmers' cooperative association, engaged in the production and distribution of petroleum products, on the open market of byproducts such as heavy fuel oils and distillates not usable by its farmer patrons, and the value of the petroleum products exchanged with other refineries in order to utilize its output and effect a savings in transportation costs shall, for the purpose of determining exemption under section 101(12)(A) of the Internal Revenue Code, be disregarded in determining whether the value of purchases made for persons who are neither members nor producers exceeds 15 percent of the value of all its purchases.