Rev. Rul. 89-97

1989-2 C.B. 217, 1989-33 I.R.B. 11.

                       Internal Revenue Service

                                 Revenue Ruling

         COOPERATIVE ASSOCIATION; PATRONAGE DIVIDENDS; COMMODITY CREDIT

                                  CORPORATION

                           Published: August 14, 1989

Section 1382. - Taxable Income of Cooperatives, 26 CFR 1.1382-3: Taxable income of cooperatives, special deductions for exempt farmers' cooperatives.

(Also Sections 61.1388:  1.61-5. 1.1388-1.)

  Cooperative association; patronage dividends; commodity credit corporation. Payments made by the Commodity Credit Corporation to a farmers cooperative association for certain expenses of the cooperative's farmer-producers under a 'reseal' program of the U.S. Department of Agriculture are patronage source income that may give rise to patronage dividends under section 1382(b)(1) of the Code. Rev. Rul. 70-25 revoked. [

                                     ISSUE

  If the Commodity Credit Corporation (CCC) makes payments to a farmers' cooperative association for certain expenses of the cooperative's farmer- producer under a 'reseal' program of the United States Department of Agriculture, are those payments patronage source income that may give rise to patronage dividends under section 1382(b)(1) of the Internal Revenue Code?

                                     FACTS

  A, a farmer-producer, is a member of X, a nonexempt cooperative that markets A's farm commodity. Under the CCC's price support programs, the CC makes a non- recourse loan to A secured by A's commodity stored on X's premises. A's loan is eligible for the Department of Agriculture's reseal program under which the maturity dates of CCC loans are extended. Under the reseal program, the CCC pays the storage and handling charges for the commodity during the extension period.

                                LAW AND ANALYSIS

  Section 1382(b)(1) of the Code provides that 'patronage dividends' shall not be taken into account in determining the taxable income of a cooperative. Section 1388(a) defines 'patronage dividend' as an amount paid to a patron by an organization to which part I of subchapter T applies (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. Patronage dividends do not include any amount paid to a patron to the extent that (A) such amount is out of earnings other than from business done with or for patrons, or (B) such amount is out of earnings from business done with or for other patrons to whom no amounts are paid, or to whom smaller amounts are paid, with respect to substantially identical transactions.

  Section 1.1382-3(c)(2) of the Income Tax Regulations defines the term 'income derived from sources other than patronage' as incidental income derived from sources not directly related to the marketing, purchasing, or service activities of the cooperative association.

  Rev. Rul. 59-107, 1959-1 C.B. 20, considers storage and handling charges paid under a price support program. Under the program, the farmer-producers obtained non-recourse loans pledging a commodity as sole collateral. The storage and handling charges to the date of maturity were deducted from the proceeds of the price support loan unless such charges had been prepaid by the farmer-producer. When default occurred, the CCC became the owner of the stored commodity and any payments for the period after default were made by the CCC on its own behalf. Rev. Rul. 59-107 concludes that storage and handling charges paid by the CCC to the cooperative for the period prior to default were patronage source income. Payments made by the CCC to the cooperative following default constituted non- patronage source income because the commodity at that time belonged to the CCC.

  Rev. Rul. 70-25, 1970-1 C.B. 17, concerns a reseal program. Although the commodity remained the property of the farmer-producer during the reseal period, the revenue ruling concludes that the handling and storage charges paid by the CCC were income from business done with or for the United States Government and, therefore, non-patronage source income. The ruling relies on the fact that the CCC was solely liable for payment during the reseal period.

  Rev. Rul. 70-25 is inconsistent with Rev. Rul. 59-107 and reaches the wrong conclusion. The issue is not whether the CCC is liable for the storage and handling payments. Rather, the issue is whether the CCC is making the storage and handling payment on its own behalf, as it would if owned the commodity, or on behalf of the farmer-producer, as it is required to do under the reseal program.

  In the instant case, the loan property remains that of the farmer-producer during the reseal period. Although the CCC pays the cost of storage and handling incurred during the reseal period, it is doing so on behalf of the farmer-producer. Therefore, those amounts are income of the cooperative derived from business done with or for its patrons.

                                    HOLDING

  Payments made by the CCC to a farmers' cooperative association for certain expenses of the cooperative's farmer-producers under a 'reseal' program of the United States Department of Agriculture are patronage source income that may give rise to patronage dividends under section 1382(b)(1) of the Code.

                        EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 70-25, 1970-1 C.B. 17, is revoked.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Paul F. Handleman of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. Handleman on (202) 566-4121 (not a toll-free call).

Rev. Rul. 89-97, 1989-2 C.B. 217, 1989-33 I.R.B. 11.