Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-5

1975-1 C.B. 166

Sec. 521

IRS Headnote

Farmers' cooperatives; marketing range grasses by grazing cattle. A nonprofit agricultural cooperative formed to produce and market range grasses, on land owned or leased by its members, by grazing its own herd of breeder cattle and by grazing the cattle of others during the peak growing season qualifies for exemption as a farmers', fruit growers', or like association within the meaning of section 521 of the Code.

Full Text

Rev. Rul. 75-5

Advice has been requested whether an association whose activities are described below can qualify for exemption as a farmers' cooperative under section 521 of the Internal Revenue Code of 1954.

The owners of parcels of land within the rugged confines of a certain designated area in the State of X formed an association to market the range grasses which grow on the parcels. The association was incorporated under the agricultural code of X as a non-profit agricultural cooperative.

The range grasses on the parcels are not harvestable by conventional methods due to the nature of the terrain and due to the type of grasses. As a result of this, the cooperative maintains a small breeder herd throughout the year to harvest the grasses by means of grazing cattle on the land of its members. Any calves resulting from the operation are immediately sold by the cooperative. During the peak growing season when grass is more abundant, the cooperative contracts with cattleraisers to arrange for their cattle to graze on the land in order to utilize the range grasses to the maximum. Income received under the contract with the cattleraisers is based on the weight gained by the cattle during the grazing period. In this connection, the association has hired an experienced cattle manager to conduct the range operations and, as an incidental service, will provide a range management service for the individual parcel owner's range land.

Membership in the association is limited to those who own or lease one or more parcels within the designated areas and who are producing range grass or other fodder thereon.

Each member's land is assigned a number of units which is the basis upon which patronage is determined and the "net earnings" from the sale of the calves and grazing contracts are distributed. These units are assigned based on the number of acres in production, the accessibility of the land to the cattle and equipment, and the yield per acre in terms of the average number of cattle such acreage will support throughout the year.

Parcels will be revalued and units reassigned to reflect change in the event that part or all of the land is withdrawn from use, a natural disaster affects the land productivity, or range management is completed which affects the productivity of the land.

Each member is entitled to one vote on matters submitted to a vote of the members. The association was organized without capital stock and is operated on a cooperative nonprofit basis. Capital for the association is furnished by the members through patronage. All amounts received from patrons in excess of the association's operating costs and expenses are received with the understanding that such amounts are furnished as capital. The amounts are credited to a revolving fund or funds, and the respective patrons will be entitled to a revolving fund credit for the amount collected or retained.

Within 81/2 months after the close of each fiscal year, the association will pay each patron in cash or revolving fund certificates, or a combination of these, the amount of capital which has been credited to the patron during the year. Any dissolution or liquidation of the association will be made on a patronage basis.

Section 521(b) of the Code provides, in part, that farmers' cooperatives exempt from taxation to the extent provided in subsection (a) thereof are 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) of the Income Tax Regulations states, in part, that cooperative associations engaged in the marketing of farm products for farmers, fruit growers, livestock growers, dairymen, etc., and turning back to the producers the proceeds of the sales of their products, less the necessary operating expenses, on the basis of either the quantity or the value of the products furnished by them are exempt from income tax.

Since the evidence in the instant case indicates that the association is engaged in cooperatively marketing "range grasses" produced by its members, it is considered to be an organization composed of producers of a farm product.

Accordingly, it is held that the association is entitled to exemption from Federal income tax as a farmers', fruit growers' or like association within the meaning of section 521 of the Code.

An organization that considers itself within the scope of this Revenue Ruling must, in order to establish exemption under section 521 of the Code, file an application on Form 1028, Exemption Application, with the District Director of Internal Revenue for the internal revenue district in which is located the principal place of business or principal office of the organization. See section 1.521-1 of the regulations.