Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-59

1973-1 C.B. 292

Sec. 521

IRS Headnote

A livestock marketing cooperative prohibited under the Packers and Stockyards Act of 1921 from distributing patronage dividends to nonmembers does not qualify for exemption by depositing those dividends in a patronage refund suspense reserve.

Full Text

Rev. Rul. 73-59

Advice has been requested whether, under the circumstances below, a corporation (the "taxpayer") can qualify for exemption under Section 521 of the Internal Revenue Code of 1954.

The taxpayer was organized in 1970 as a cooperative organization to do business under the Packers and Stockyards Act of 1921 (the "Act"). Since the time of incorporation the taxpayer has been a livestock marketing cooperative and is licensed by the Department of Agriculture as a market agency within the meaning of the Act.

Section 207(b) of the Act, provides, in pertinent part, that a market agency shall not refund or remit in any manner any portion of the rates or charges established according to the provisions of this Act, (but this shall not prohibit a cooperative association of producers from returning to its members, on a patronage basis, its excess earnings on their livestock, subject to such regulations as the Secretary of Agriculture may prescribe).

The Opinion of the Attorney General, 34 O.A.G. 306 (1924) states, in part that the

"Act must be construed to speak as of the time when the market agency performs the service for its patrons, which is at the time that the sale of the livestock takes place. The rates and charges then in force and effect for such services must be charged. If the market agency is a cooperative concern and sells livestock for one who is not then a member of such cooperative association, the right of the market agency to retain the entire rate or charge specified in the schedule then on file with the Secretary of Agriculture is a fixed right."

In an attempt to comply with the Act, the taxpayer credits to a patronage refund suspense reserve amounts equal to patronage dividends that the nonmembers would have received had they been members.

Section 521 of the Code provides that a farmers' cooperative that meets the requirements of subsection (b)(1) shall be exempt from taxation except as provided in Part I of Subchapter T.

Section 521(b)(1) of the Code provides in pertinent part, that the farmers' cooperatives exempt from taxation are farmers', fruit growers', or like associations organized and operated on a cooperative basis (A) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or value of the products furnished by them.

Section 1.521-1(a)(1) of the Income Tax Regulations provides, in part, that nonmember patrons must be treated the same as members insofar as the distribution of patronage dividends is concerned. Thus, if products are marketed for nonmember producers, the proceeds of the sale, less necessary operating expenses, must be returned to the patrons from the sale of whose goods such proceeds result whether or not such patrons are members of the association. Section 1.521-1(a)(1) also provides that while under the Code patronage dividends must be paid to all producers on the same basis, this requirement is complied with if an association instead of paying patronage dividends to nonmember producers in cash, keeps permanent records from which the proportionate shares of the patronage dividends due to nonmember producers can be determined, and such shares are made applicable toward the purchase price of a share of stock or of a membership in the association.

Section 1388(a) of the Code defines a patronage dividend to be an amount paid to a patron by a cooperative (1) on the basis of quantity or value of business done with or for such patron, (2) under an obligation of such organization to pay such amount, which obligation existed before the organization received the amount so paid and (3) which is determined by reference to the net earnings of the organization from business done with or for its patrons. [emphasis added]

At the time of the nonmember transactions the taxpayer is under no obligation to pay patronage dividends to nonmembers. The taxpayer is, in fact, precluded from paying such dividends to nonmembers by the Packers and Stockyards Act of 1921 as interpreted by the Attorney General. Therefore, even though section 1.521-1(a)(1) permits exempt cooperatives to credit patronage dividends to nonmembers rather than pay them in cash, the amounts set aside by the taxpayer do not qualify as patronage dividends because the taxpayer does not have the necessary preexisting obligation to pay such amounts as patronage dividends.

Accordingly, it is held that the taxpayer does not qualify for exemption under section 521 of the Code.