Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 65-5

1965-1 C.B. 244

Sec. 521

IRS Headnote

An organization exempt from Federal income tax as a farmers' cooperative under section 521 of the Internal Revenue Code of 1954 will not jeopardize its exempt status if it does business of a marketing or purchasing nature for or with the United States or an agency thereof so long as it otherwise continues to engage in marketing or purchasing activities for its patrons pursuant to the exemption requirements of section 521 of the Code.

Full Text

Rev. Rul. 65-5

Advice has been requested whether a farmers' cooperative, exempt from Federal income tax under section 521 of the Internal Revenue Code of 1954, may do business of both a marketing and purchasing nature with the United States or an agency thereof without jeopardizing its exempt status.

In the instant case an exempt cooperative proposes to purchase grain from the Commodity Credit Corporation, a government agency, for disposal as a supply to its patrons and also for marketing purposes.

Section 521(b)(1) of the Code describes farmers' cooperatives which are exempt from taxation, to the extent provided in section 521(a) of the Code, as farmers', fruit growers', or like associations organized and operated on a cooperative basis (A) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (B) 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 actual cost, plus necessary expenses.

Section 521(b)(4) of the Code, relating to transactions between exempt farmers' cooperatives and nonmembers, provides that exemption shall not be denied any such association which markets products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, or which purchases supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the purchases made for persons who are neither members nor producers does not exceed 15 percent of the value of all its purchases.

Section 521(b)(5) of the Code provides that business done for the United States or any of its agencies shall be disregarded in determining the right to exemption under this section.

Based upon the provision of section 521(b)(5) of the Code, a cooperative may do business, either of a marketing or purchasing nature, for or with the United States and not jeopardize its exempt status.

As to the extent to which an exempt cooperative may deal with the United States or an agency thereof, it is clear that the provision contained in section 521(b)(5) of the Code above means that, at least in determining whether the percentage requirements specified in section 521(b)(4) of the Code have been satisfied, the amount of business done for the United States shall be disregarded. However, that provision should not be construed to mean that there is no limit on the amount of business a cooperative may do with the United States.

In this connection, section 1.521-1(c) of the Income Tax Regulations provides as follows:

In order to be exempt under either paragraph (a) or (b) of this section section 521  an association must establish that it has no taxable income for its own account other than that reflected in a reserve or surplus authorized in paragraph (a) of this section. An association engaged in marketing farm products and in purchasing supplies and equipment is exempt if as to each of its functions it meets the requirements of the Internal Revenue Code of 1954. Business done for the United States or any of its agencies shall be disregarded in determining the right to exemption under section 521 and this section. An association to be entitled to exemption must not only be organized but actually operated in the manner and for the purposes specified in section 521.

While the above regulation provides, in effect, that `Government' business shall be disregarded in determining the right to exemption, this same regulation further provides that an association, to be entitled to exemption, must not only be organized but actually operated in the manner and for the purposes specified in section 521 of the Code.

Accordingly, it is held that the farmers' cooperative in question will not jeopardize its exemption because of business done for or with the United States or an agency thereof in purchasing grain under the circumstances set forth above, provided the organization continues to engage in marketing or purchasing activities for its patrons to the extent that it may properly be characterized as a farmer's cooperative within the meaning of that term as defined in section 521 of the Code.