Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-51

1972-1 C.B. 164

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 supply cooperative purchases supplies for a nonexempt member.

Full Text

Rev. Rul. 72-51

The Internal Revenue Service has been asked how a federated farmers' supply cooperative should treat purchases of supplies for a nonmember cooperative organization to be consistent with the federated's exemption from Federal income tax under section 521 of the Internal Revenue Code of 1954.

An exempt federated farmers' cooperative (an association whose membership includes other farmers' cooperative associations) purchases farm supplies and sells them exclusively to its exempt member cooperatives and to one nonexempt nonmember cooperative at cost, plus necessary expenses. The value of supplies purchased by the federated and sold to the nonmember cooperative is 11 percent of the value of all the federated's purchases. All of the exempt member cooperatives deal exclusively with producers.

Section 521 of the Code sets forth the requirements that a farmers' cooperative association must meet to qualify for exemption from Federal income tax. One of the requirements of section 521 is that an exempt cooperative turn over any supplies and equipment to its patrons at actual cost, plus necessary expenses. Another requirement, imposed by section 521(b)(4) of the Code, is that the value of supplies and equipment purchased for nonproducers cannot exceed 15 percent of the value of all purchases made by the cooperative.

Revenue Ruling 69-651, C.B. 1969-2, 135, deals with federated farmers' cooperatives, setting forth the "look through" principle for determining their eligibility for exemption. According to this principle, the operations of a member cooperative will be attributed to a federated cooperative in ascertaining whether the federated meets the requirements for exemption. A federated is considered to be dealing directly with the patrons of its member cooperatives.

An exempt farmers' supply cooperative may purchase supplies for nonproducers (including nonproducer organizations) to the extent of the 15 percent limitation so long as it makes the supplies available at cost. It need not determine what the nonproducers do with the supplies. Similarly, an exempt federated cooperative may sell supplies to nonproducer organizations without any requirement to look through such organizations to determine the ultimate use or destination of the supplies.

In this case, all purchases made by the federated for the nonmember cooperative are clearly nonmember business. In addition, since this is a nonmember cooperative, the federated may presume that the purchases for such nonmember are nonproducer business.

Accordingly, since these purchases (11 percent) when added to the other purchases for nonproducers (none) are less than 15 percent of the value of all purchases, there is no effect on the federated's exempt status.

However, the federated has the option of looking through the nonmember cooperative to determine the actual percentage of producer business. For example, if the value of purchases for nonproducers had exceeded the 15 percent limitation, the federated could look through the nonmember cooperative to determine the amount, if any, of purchases made ultimately for producers. In this way, the federated might then be able to meet the 15 percent test. In order to look through the nonmember cooperative and make this determination, two requirements must be met. First, the nonmember cooperative must establish the amount of producer business that it does. Second, it must also establish that it is selling the supplies of the federated to both its members and nonmembers at cost, plus necessary expenses.