Rev. Rul. 57-59

Advice has been requested as to the treatment, for Federal income tax purposes, of patronage dividend distributions in cash, merchandise, or document form, by a farmers' nonexempt cooperative marketing crops and selling supplies, where the members did not produce the crops but owned them at the time they were delivered to the cooperative and the cooperative distributes patronage dividends attributable to sales to members as well as nonmembers.

Patronage dividends distributed by a farmers' nonexempt cooperative on account of crops purchased from its members are excludable from its gross income to the extent they are distributed, on a true patronage basis in accordance with a pre-existing agreement, to members who owned the crops when they were acquired by the cooperative, even though such members did not produce the crops.

Similarly, if a nonexempt cooperative sells part of its products to members and the remainder to nonmembers, but pays patronage dividends to its member-patrons only, such dividends are excludable from the gross income of the cooperative to the extent they are attributable to sales to members and are allocated on a true patronage basis in accordance with a pre-existing agreement, even though member-patrons may purchase such products for resale to others.

However, profits distributed to members, which are derived from sales by the cooperative to nonmembers, are taxable to the cooperative and to the members. See I.T. 3208, C.B. 1938-2, 127; I.T. 1499, C.B. I-2, 189 (1922), which hold, in part, that any profits made on business with nonmembers of a cooperative association which may be distributed to members in the guise of rebates are taxable to the association and the members; and S.M. 2595, C.B. III-2, 238 (1924), which holds, in part, that profits made by a farmers', fruit growers', or like association, upon sale to nonmembers, constitute taxable income, irrespective of the fact that such profits were returned to members by reduction of cost or otherwise.

If patronage dividends which meet the foregoing requirements are not paid in cash or merchandise, but each distributee-patron is notified of the amount allocated to him pursuant to a pre-existing obligation, the principles stated in Revenue Ruling 54-10, C.B. 1954-1, 24, with respect to amounts that may be excluded by an exempt cooperative and the tax treatment thereof as to its patrons, are also applicable to a nonexempt cooperative and its patrons. Compare Colony Farms Cooperative Dairy, Inc. v. Commissioner , 17 T.C. 688, acquiescence, C.B. 1952-1, 1, and Southwest Hardware Co. v. Commissioner , 24 T.C. No. 12, acquiescense, C.B. 1955-2, 9.

Accordingly, patronage dividend distributions, made by a nonexempt farmers' cooperative to its members who owned the crop at the time delivered to the cooperative, are excludable from the gross income of the cooperative if made in accordance with a pre-existing agreement. Similarly, if a nonexempt cooperative sells part of its products to members and the remainder to nonmembers, but pays such dividends to members only, such dividends, to the extent attributable to sales to members, are excludable from the gross income of the cooperative, but any such dividends distributed to members, attributable to sales made to nonmembers, are taxable to the cooperative and to its members.