Cooperative

Taxation of Cooperatives and their Patrons

The issue should analyze the federal income tax treatment of cooperatives and their patrons under subchapter T of Chapter 1, Subtitle A, of the Internal Revenue Code. A cooperative is a business format in which patrons of the cooperative join together to transact business collectively. The two general categories of cooperatives governed by the favorable rules of subchapter T are exempt farmers’ cooperatives and certain nonexempt cooperatives.

History of the tax treatment of cooperatives and their patrons

Characteristics

It is of relevance to examine the basic characteristics that identify an enterprise as a cooperative subject to subchapter T, particularly the requirement that such an enterprise operate “on a cooperative basis.”

It is also of relevance to see in detail the requirements for qualifying as an exempt farmers’ cooperative under § 521 of the Code, including the limitation on permissible activities to marketing and purchasing functions, limitations on transactions with nonmembers, and requirements for distributions to patrons.

It is important to examine how the subchapter T rules apply to prescribe the tax treatment of both cooperatives and their patrons.