Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-93

1973-1 C.B. 292

Sec. 521
Sec. 1385
Sec. 1388

IRS Headnote

Noncash allocations made by a farmers' cooperative to the estate of a deceased member, who prior to his death filed a consent pursuant to section 1388 of the Code, are deductible as patronage dividends by the cooperative.

Full Text

Rev. Rul. 73-93

Advice has been requested whether, under the circumstances described below, a farmers' cooperative exempt from Federal income tax under section 521 of the Internal Revenue Code of 1954, may, in determining its taxable income, deduct as a patronage dividend the noncash allocation paid to the estate of a deceased member.

The policy of the taxpayer had been to pay patronage dividends of 30 percent in cash and 70 percent in qualified written notices of allocation with both member and nonmember patrons being treated alike.

The cooperative adopted a bylaw as provided in section 1388(c)(2)(B) of the Code to obtain a distributee's consent to include a qualified written notice of allocation into the distributee's income at its stated dollar amount. At the time a producer becomes a member, he signs an application for membership indicating that he has received a copy of the by-laws and acknowledges that he understands that noncash patronage allocations are to be taken into income in the year the notice of allocation is received.

During the calendar year 1971, a member of the cooperative who had filed a consent, pursuant to section 1388 of the Code, died. An administrator was appointed to handle his estate.

Section 1385(a)(1) of the Code provides, in part, that each person shall include in gross income the amount of any patronage dividend which is paid in money, a qualified written notice of allocation, or other property, and which is received by him during the taxable year from a cooperative exempt from tax under section 521 of the Code.

Section 1388(c)(2) provides, in part, that a distributee shall consent to take a written notice of allocation in to account only by (A) making such consent in writing, or (B) obtaining or retaining membership in the organization after (i) such organization constitutes such consent, and (ii) he has received a written notification and copy of such bylaw.

It is held that a written notice of allocation made to the estate of the deceased member for business conducted with the cooperative for that portion of the year prior to his death are deductible by the cooperative in arriving at its taxable income, and the estate is required to include the noncash allocation in its gross income. However, if the cooperative wishes to deduct additional written notices of allocation in arriving at its taxable income with respect to the deceased member's estate, the estate will be required to follow the normal procedures for membership which, in the instant case, would require that the estate receive a copy of the by-laws and sign the application for membership signifying the receipt of the by-laws as required by section 1388 of the Code.