Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 70-64

1970-1 C.B. 36

Sec. 165
Sec. 1385
Sec. 1388

IRS Headnote

Losses incurred by members of an agricultural cooperative upon the redemption of qualified written notices of allocation are ordinary losses deductible in the year of redemption.

Full Text

Rev. Rul. 70-64

Advice has been requested as to the nature and amount of a loss incurred by a taxpayer under the circumstances described below.

The taxpayer has operated a chicken farm for many years. In order to facilitate the operation of his farming business, the taxpayer became a member of an agricultural cooperative. The taxpayer deals extensively with the cooperative in the marketing of his eggs and chickens, and the purchasing of farm supplies.

The cooperative follows the practice of retaining patronage dividends as the need for operating capital demands. In lieu of cash the cooperative issues to its patrons qualified written notices of allocation, within the meaning of section 1388 of the Internal Revenue Code of 1954. The cooperative normally redeems these allocations for cash as soon as feasible, usually within one or two years. In 1963 the cooperative issued to the taxpayer a qualified written notice of allocation in the stated amount of 100x dollars. In accordance with section 1385(a)(1) of the Code, the taxpayer properly included as ordinary income for the taxable year 1963 the stated dollar amount of the qualified written notice of allocation.

In 1968 the cooperative announced for the first time that it would redeem the notices of allocation in question but at less than their stated amount upon issuance. The taxpayer incurred a loss in 1968 when his allocation was redeemed for an amount less than its stated dollar amount.

The specific question presented is whether the loss incurred by the taxpayer is an ordinary loss or a capital loss.

In the instant situation the taxpayer joined the cooperative to facilitate his business and to make it more profitable. The transaction that gave rise to the issuance of the notice of allocation arose in the ordinary course of taxpayer's trade or business. Accordingly, the loss incurred by the taxpayer upon redemption of the qualified written notice of allocation is an ordinary loss deductible for 1968 under the provisions of section 165 of the Code. See Corn Products Refining Company v. Commissioner, 350 U.S. 46 (1955), Ct. D. 1787, C.B. 1955-2, 511; Burnet v. Harmel, 287 U.S. 103 (1932), Ct. D. 611, C.B. XI-2, 210; and Western Wine and Liquor Company v. Commissioner, 18 T.C. 1090 (1952), acquiescence, C.B. 1958-1, 6. The loss is measured by the difference between the stated amount included in income in 1963 and the amount received upon redemption.