REVENUE RULE 93-21

1993-1 C.B. 188, 1993-13 I.R.B. 5.

Internal Revenue Service
Revenue Ruling

SUBCHAPTER T; OPERATING ON A COOPERATIVE BASIS

Published: March 29, 1993

§ 1381.  Organizations to Which Part Applies, 26 CFR 1.1381-1: Organizations to which part applies.

(See Also § 1382)

Subchapter T; operating on a cooperative basis. The Service has ruled that a cooperative that operates on a for-profit, nonpatronage basis with nonmembers will not be precluded from being considered "operating on a cooperative basis" simply because it does less than 50 percent in value of its business with members on a patronage basis. Rev. Rul. 72-602 modified.

ISSUE

If a cooperative operates on a for-profit, nonpatronage basis with non- members, must the cooperative do more than 50 percent in value of its business with members on a patronage basis to be considered "operating on a cooperative basis" under § 1381(a)(2) of the Internal Revenue Code?

FACTS

In Rev. Rul. 72-602, 1972-2 C.B. 510, the taxpayer is a corporation that markets a single product for 10 members and 90 nonmembers. The combined value of the products marketed for members comprises over 75 percent of the taxpayer's total business. The specific issue in Rev. Rul. 72-602 is whether the taxpayer may qualify for the benefits of Subchapter T of the Code if it does business with 90 nonmembers and 10 members.

Rev. Rul. 72-602 concludes that, in order to be considered "operating on a cooperative basis" under § 1381(a)(2) of the Code, the taxpayer must have a sufficient membership to form a mutual joinder of interest in the risks and benefits of the organization and must do more than 50 percent in value of its business with members.

LAW AND ANALYSIS

§ 1381(a)(2) of the Code provides that part I of subchapter T of the Code, which governs the taxation of cooperatives, applies to any corporation "operating on a cooperative basis".

Subchapter T of the Code does not preclude a nonexempt cooperative from dealing with nonmembers on a for-profit basis. There is no requirement that in order for an organization to obtain the benefits of a non-exempt cooperative under subchapter T that both members and nonmembers be treated equally.

The cooperative principles stated in Puget Sound Plywood, Inc. v. Commissioner, 44 T.C. 305 (1965), acq., 1966-1 C.B. 3, provide the basis for determining whether a corporation is operating on a cooperative basis for purposes of subchapter T of the Code.

The United States Court of Appeals for the Eighth Circuit concluded that the 50-percent quantitative test of Rev. Rul. 72-602 is an unreasonable interpretation of § 1381(a)-(2) of the Code. Conway County Farmers Ass'n v. United States, 588 F.2d 592 (8th Cir.1978), rev'g No. LR-75-C-82 (E.D.Ark.1978). On similar facts, two other courts followed the Eighth Circuit's decision in Conway and refused to apply the 50-percent quantitative test of Rev. Rul. 72-602. Columbus Fruit & Vegetable Coop. Ass'n v. United States, 7 Cl.Ct. 561 (1985); Geauga Landmark, Inc. v. United States, No. 81- 942 (N.D.Ohio 1985).

HOLDING

A cooperative that operates on a for-profit, nonpatronage basis with nonmembers will not be precluded from being considered "operating on a cooperative basis" simply because it does less than 50-percent in value of its business with members on a patronage basis. Whether a corporation is operating on a cooperative basis under § 1381(a)(2) of the Code will be determined from all the facts and circumstances and the cooperative principles enunciated in Puget Sound Plywood.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 72-602 is modified to the extent it provides that conducting more than 50 percent in value of business with members is necessary for a corporation to be considered operating on a cooperative basis under § 1381(a)(2) of the Code.

DRAFTING INFORMATION

The principal author of this revenue ruling is Jack Malgeri of the Office of the Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Jack Malgeri on (202) 622- 3040 (not a toll-free call).

Rev. Rul. 93-21, 1993-1 C.B. 188, 1993-13 I.R.B. 5.