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Although patronage dividends are deductible by the
cooperative, the patron must include the amount of any patronage
dividend in income. Sec. 1385(a)(1). Accordingly, when income
from the cooperative's business is distributed as a patronage
dividend, the cooperative and its patrons pay only "a single
current tax with respect to the income of the cooperative, either
at the level of the cooperative or at the level of the patron."
S. Rept. 1881, 87th Cong., 2d Sess. 111 (1962), 1962-3 C.B. 707,
822.
However, nonexempt cooperatives, such as petitioner, are
taxed like ordinary C corporations on business not conducted with
patrons. Gold Kist Inc. v. Commissioner, supra at 708.
"Consequently, income from nonpatronage business is taxed to the
cooperative, and, if the balance is distributed to patrons, the
income is taxed again to the patrons." Id.
Petitioner purchases products from vendors and resells the
products to member and nonmember stores. Petitioner profits from
its sales. The profit from sales to nonmember stores is
allocated to petitioner's retained earnings. However, profit
from business conducted with patrons is treated differently.
As a cooperative, petitioner can distribute the profit it
earns from patronage business to the shareholders who own the
member stores and claim a deduction for this amount. Sec.
1382(b). Thus, income from cooperative activities will be
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