Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 63-58

1963-1 C.B. 109

Full Text

Rev. Rul. 63-58 /1/

The Internal Revenue Service clarifies its position, in the light of the opinion of the United States Court of Appeals for the Eighth Circuit in Pomeroy Cooperative Grain Co. v. Commissioner , 288 Fed.(2d) 326 (1961), with regard to whether the marketing activity of a cooperative may be combined with its storage activity so that the two aspects of the business are treated as a unit.

In the Pomeroy case, the Court of Appeals concluded that the taxpayer's grain business was an integrated business, that is, that the same storage and handling facilities were used by the taxpayer in its marketing and storage activities and that patrons were credited with the number of bushels of grain delivered without regard to whether they were for sale or for storage.

Therefore, where other cooperatives are operated in a substantially similar manner, the storage and marketing activities may be treated as a unit. However, where a cooperative distributes profits only to member patrons, the Federal income tax exclusion will be limited to that portion of the dividend attributable to member business. This is in accord with the well established principle affirmed in the Pomeroy case that a distribution is not a true patronage dividend to the extent that it is out of earnings from business done with nonmember patrons to whom no amounts are paid.

Accordingly, it is essential that cooperatives keep permanent records to show the business done with nonmembers and that done with members. Where, for example, 20 per cent of the bushels delivered for storage and 60 per cent of the bushels delivered for marketing are attributable to transactions with members, only 20 per cent of the income from storage may be combined with 60 per cent of the income from marketing and the aggregate net profit may be distributed to the members ratably on the basis of the number of bushels which they delivered to the cooperative. In the absence of unusual circumstances in a particular case, in determining the ratio of member to nonmember business, it will not be necessary to make the computation on a crop by crop basis.

/1/ Based on Technical Information Release 447, dated Jan. 30, 196-3.