Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-4

1975-1 C.B. 165

Sec. 521

IRS Headnote

Dairy farmers' cooperative marketing association; purchases from nonproducers. The purchase of cream from nonproducers by a dairy farmers' cooperative marketing association, that markets ice cream produced from the excess cream resulting from the processing of its members' raw milk, is not an ingredient purchase but is a purchase of a product and will adversely affect the association's exempt status.

Full Text

Rev. Rul. 75-4

Advice has been requested whether the purchase of dairy products from nonproducers, under the circumstances described below, are ingredient purchases and whether the purchase will adversely affect the exempt status of a farmers' cooperative marketing association otherwise entitled to exemption from Federal income tax under section 521 of the Internal Revenue Code of 1954.

The taxpayer, a farmers' cooperative marketing association, is engaged in marketing dairy products for its members and other producer patrons. The taxpayer purchases raw milk from its members that it processes at its various plants. The excess cream resulting from the processing is used to produce ice cream. The taxpayer purchased additional cream from nonproducers for use in manufacturing the ice cream. The taxpayer maintained that it was necessary to acquire additional cream in order to economically produce its ice cream and that such purchases were ingredient purchases.

Sections 521(a) and 521(b)(1) of the Code provide, among other things, for exemption from Federal income tax for farmers', fruit growers', or like associations, organized and operated on a cooperative basis 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 the value of the products furnished by them.

Section 1.521-1(a)(1) of the Income Tax Regulations provides, in part, that cooperative dairy companies which are engaged in collecting milk and disposing of it or the products thereof and distributing the proceeds, less operating expenses, among the producers upon the basis of either the quantity or the value of milk furnished by such producers, are exempt from tax.

A marketing cooperative generally will not qualify for exemption if it markets the goods of nonproducers. However, under certain circumstances a marketing cooperative may market a limited amount of goods furnished by nonproducers, for example emergency purchases, sideline purchases, and ingredient purchases.  Rev. Rul. 69-222, 1969-1 C.B. 161; Rev. Proc. 67-37, 1967-2 C.B. 668.

The purchase of nonproducers' ingredients is limited to those necessary to put into marketable condition the agricultural products of producers marketed by a farmers' marketing cooperative association. For example, in the instant case, items such as sugar and flavoring would be necessary in the production of ice cream and are not products that are furnished by the members of a dairy cooperative. Cream, however, is a product furnished by the members of the cooperative in the instant case and, therefore, its purchase cannot be considered in an ingredient purchase. There is also no indication that the purchase of the cream was an emergency purchase.

Accordingly, the taxpayer may not market ice cream products from cream purchased from nonproducers and retain its exempt status under section 521 of the Code.