Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 68-76

1968-1 C.B. 285

Sec. 521

IRS Headnote

A cooperative association that owns sire cattle and produces and processes semen for use in the artificial breeding of its members' livestock may qualify for exemption from Federal income tax under section 521 of the Internal Revenue Code of 1954.

Full Text

Rev. Rul. 68-76

Advice has been requested whether a cooperative association that owns sire cattle, processes the semen produced therefrom, and artificially inseminates members' livestock may qualify for exemption from Federal income tax under section 521 of the Internal Revenue Code of 1954.

The association was organized and operated on a cooperative basis to provide its members and other livestock growers with semen for use in the artificial breeding of their stock. Its activities have been limited to the production of semen and the artificial breeding of its members' stock.

Membership in the association is open to any bona fide producer of agricultural products who agrees to be a patron of the association. In order to obtain semen for its members, the association has purchased pure bred sire cattle. In addition to owning sire cattle, the association owns and maintains buildings to house cattle, and a laboratory and freezing equipment to process and store the semen. The fees charged for servicing the members' livestock comprise the principal source of the association's income.

Section 521 of  the Code provides for the exemption from Federal income tax of farmers', fruit growers', 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 actual cost, plus necessary expenses.

Section 1.521-1(b) of the Income Tax Regulations states that cooperative associations engaged in the purchasing of supplies and equipment for farmers, fruit growers, livestock growers, dairymen, etc., and turning over such supplies and equipment to them at actual cost, plus the necessary operating expenses, are exempt. The term `supplies and equipment' as used in section 521 includes groceries and all other goods and merchandise used by farmers in the operation and maintenance of a farm or a farmer's household.

Under the circumstances, the activities of the organization are considered to constitute the furnishing of farm supplies to its members since it is a product that enables them to produce livestock. Since this is the association's only activity, it is functioning as a purchasing cooperative within the meaning of section 521 of the Code. Accordingly, the association is exempt from Federal income tax under that section.

Even though an organization considers itself within the scope of this Revenue Ruling, it must (in order to establish exemption under section 521 of the Code) file an application on Form 1028, Exemption Application, with the District Director of Internal Revenue for the internal revenue district in which is located the principal place of business or principal office of the organization. See section 1.501(a)-1 of the regulations.