Rev. Rul. 81-96

1981-1 C.B. 359, 1981-12 I.R.B. 24.

                       Internal Revenue Service
                                 Revenue Ruling

           FARMERS' COOPERATIVE; ALCOHOL PRODUCED FOR MAKING GASOHOL

                           Published: March 23, 1981

SECTION 521.--EXEMPTION OF FARMERS' COOPERATIVES FROM TAX, 26 CFR 1.521-1: Farmers' cooperative marketing and purchasing associations; requirements for exemption under section 521

(Also Section 1381; 1.1381-1.)

  Farmers' cooperative; alcohol produced for making gasohol. A cooperative association that, in connection with its marketing function, processes its members' agricultural products into alcohol for making gasohol qualifies as an exempt farmers' cooperative.

ISSUE

  Does a cooperative association that, in connection with its marketing function, processes its members' agricultural products into alcohol, qualify as a farmers' cooperative for purposes of section 521 of the Internal Revenue Code?

FACTS

  A cooperative association was organized primarily to process its members' agricultural products into alcohol.  The alcohol manufactured by the cooperative will be sold to a company that will use the alcohol to produce gasohol for sale to the public as a motor fuel.  The excess of the proceeds generated from the disposition of the alcohol by the association over the necessary costs associated with the processing and marketing of the alcohol is distributed to the members based on the quantity of the agricultural products furnished by term.  The association does not make a profit for its own account from these activities.

LAW AND ANALYSIS

  Section 521 of the Code provides for the exemption from federal income tax, except as otherwise provided in sections 1381 through 1382, of 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 value of the products furnished by them.

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

  Rev. Rul. 77-384, 1977-2 C.B. 198, holds that a farmers' cooperative operating a cannery and facility for drying fruit and a farmers' cooperative operating a textile mill, both of which market the processed or unprocessed products of their members and distribute the proceeds to them on the basis of the quantity of product furnished, less a charge to cover the cost of processing, qualify as exempt farmers' cooperatives under section 521 of the Code.

  Section 1.521-1(a)(1) of the regulations and Rev. Rul. 77-383 are illustrative of the Internal Revenue Service's long standing position of allowing cooperatives, in connection with their marketing functions, to manufacture or to otherwise change the basic form of their members' products without jeopardizing the cooperatives' exempt status under section 521 of the Code.

HOLDING

  A cooperative association that processes its members' agricultural products into alcohol meets the requirements of section 521 of the Code and the regulations thereunder and qualifies as a farmers' cooperative exempt from federal income tax except as otherwise provided in sections 1381 through 1383.

Rev. Rul. 81-96, 1981-1 C.B. 359, 1981-12 I.R.B. 24.