Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-50

1972-1 C.B. 163

Sec. 521

IRS Headnote

Application of the "look through" principle for determining whether a federated farmers' cooperative meets the requirements of section 521 of the Code where a nonexempt member purchases supplies from commercial sources and sells them at a profit to nonmembers.

Full Text

Rev. Rul. 72-50

The Internal Revenue Service has been asked how a federated farmers' cooperative's exemption from Federal income tax under section 521 of the Internal Revenue Code of 1954 is affected if a nonexempt member cooperative purchases farm supplies not available from the federated commercial sources and sells them to its nonmembers who are not entitled to share in its net earnings from such sales.

A federated farmers' cooperative (a cooperative whose membership includes other farmers' cooperatives) purchases farm supplies and sells them to its member cooperatives. One of the members, which is not exempt, obtains certain types of farm supplies from the federated and buys other types of farm supplies that are not available from the federated, from commercial sources. Those purchased from the federated are turned over to all the member's patrons at cost, plus necessary expenses, with patronage dividends being paid to both member and nonmembers under a pre-existing legal obligation. Those purchased from commercial sources are sold to members and to nonmembers, with patronage dividends paid only to members.

Section 521 of the Code sets forth the requirements that a farmers' cooperative association must meet in order to qualify for exemption. One of the requirements of section 521 is that an exempt cooperative turn over any supplies and equipment to its patrons at cost, plus necessary expenses.

Revenue Ruling 69-651, C.B. 1969-2, 135, describes a federated farmers' cooperative and states that in determining whether a federated cooperative meets the requirements of section 521(b) of the Code, it is necessary to look to the patrons of the member cooperative. In making that determination, the federated is considered to be dealing directly with the patrons of its member cooperatives.

Applying this general principle, it is necessary to look to the patrons of the member cooperatives and determine that such patrons are being dealt with on a cost, plus necessary expenses, basis with respect to the supplies of the federated. However, for purposes of determining the exemption of the federated, there is no requirement that the federated look to patrons of the member cooperative to determine that farm supplies, that are not available from the federated, purchased from other sources are being sold at cost, plus necessary expenses. The purpose of looking to the patrons of the member cooperatives is to test the exemption of the federated and the purchase of farm supplies by a member cooperative from outside sources and their sale at other than a cost basis has no bearing on the federated's exemption. However, this would have a bearing on the member cooperative if it were seeking exemption under section 521 of the Code.

Accordingly, it is held that the fact that some farm supplies are purchased from other sources by a nonexempt member cooperative, under the circumstances described here, and sold on other than a cost basis has no effect on the exemption of the federated.