Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-52

1972-1 C.B. 165

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 cooperative handles fungible products and also markets through commercial sources.

Full Text

Rev. Rul. 72-52

The Internal Revenue Service has been asked how, under the facts described below, a federated farmers' cooperative that is exempt from Federal income tax under section 521 of the Internal Revenue Code of 1954 determines the amount of products marketed for members and the amount marketed for nonmembers.

A federated farmers' cooperative (a cooperative whose membership includes other farmers' cooperatives) markets grain exclusively for its member cooperatives. One of its members is a nonexempt member cooperative which obtains grain from both its own member-producers and from nonmember-producers. Sixty percent in value comes from members and forty percent in value from nonmembers. The member cooperative then markets 80x dollars of this grain through the federated and 20x dollars through ordinary commercial outlets.

Section 521 of the Code sets forth the requirements that a farmers' cooperative association must meet in order to qualify for exemption. One of these requirements, imposed by section 521(b)(4), is that no more than fifty percent of the value of the products an exempt cooperative markets may be for nonmembers.

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

According to that principle, the federated cooperative in this case must look through the member cooperative to determine the value of grain it is marketing for member-producers and the value for nonmember-producers. For this purpose the ration of the value of the member grain to the value of the total grain received by this member cooperative will be used to determine the portion of member grain marketed through the federated.

Therefore, it is held that for purposes of determining the federated's exemption from Federal income tax under section 521 of the Code under the facts in this case, 48x (60 percent of 80x) of the grain marketed by this member cooperative through the federated is member-grain and 32x (40 percent of 80x) is nonmember-grain.