Rev. Rul. 69-67

Advice has been requested as to the proper method of valuing inventories of unmarketed commodities of a farmers' marketing cooperative operating under a pooling arrangement when the pool to which these unmarketed commodities relates has not closed at the end of the cooperative's taxable year.

The farmers' cooperative in the instant case marketed the products of its patrons under various pooling arrangements. A number of the pools remained open at the end of the cooperative's taxable year as some of the products of each pool had not been marketed. The specific question is whether the cooperative may value the inventory of the unmarketed products on hand at the end of its taxable year at net realizable value. Under this method the ending inventory would be computed by taking the estimated price that the inventory would sell for less the estimated selling and handling expenses.

Section 471 of the Internal Revenue Code of 1954 provides that whenever in the opinion of the Secretary or his delegate the use of inventories is necessary in order to clearly determine the income of the taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary or his delegate may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Section 1.471-2(c) of the Income Tax Regulations provides, in pertinent part, that the bases of inventory valuation most commonly used by business concerns and which meet the requirements of section 471 of the Code are (1) cost and (2) cost or market, whichever is lower.

One of the fundamental principles associated with a farmers' cooperative is that it is operated at cost for its patrons. This principle is usually evidence when the net earnings (net savings) resulting from the operation of the cooperative from business done with or for its patrons are returned by the cooperative to its patrons in proportion to the amount of business done with or for each patron.

Accordingly, in order to be consistent with the fundamental principle of operation at cost and in order to clearly reflect the income of a farmers' cooperative, the inventories of unmarketed commodities on hand relating to pools not yet closed should be valued at cost. For this purpose "cost" is the sum of the advances paid to its patrons plus the processing or handling expenses actually paid or incurred. Advances as used in this Revenue Ruling include all cash payments made to the patrons with respect to their products on or after delivery to the cooperative and prior to the closing of the pool.

Revenue Ruling 67-333, C.B. 1967-2, 299, provides, in effect, that advances are deductions of the cooperative as costs of the products sold in the same year they are considered to be income to the members. In light of the foregoing, Revenue Ruling 67-333 is hereby modified to the extent that it implies that the total amount of the advances may be deducted in the year of payment even though a portion of the products acquired from the patron may be on hand at the end of the cooperative's taxable year. Thus, the inventory of unmarketed commodities on hand at the end of the cooperative's taxable year should bear its proper share of the cost as defined herein.