14 shareholders deposited with petitioner to pay its expenses. We disagree. Subchapter T prohibits cooperatives from using patronage losses to offset nonpatronage income. Buckeye Countrymark, Inc. v. Commissioner, supra at 559; Certified Grocers of Calif., Ltd. v. Commissioner, 88 T.C. 238, 250 (1987). A cooperative earns patronage income from business it does with or for its patrons. Sec. 1388(a); Illinois Grain Corp. v. Commissioner, 87 T.C. 435, 450 (1986). Income is patronage sourced if it is derived from an activity that is so closely intertwined with the main cooperative effort that it may be characterized as directly related to, and inseparable from, the cooperative's principal business activity, and thus facilitates the accomplishment of the cooperative's business purpose. Illinois Grain Corp. v. Commissioner, supra at 459-460. However, if the transaction or account which produces the income merely enhances the overall profitability of the cooperative, then the income is from nonpatronage sources. Id. at 452-453. Investment income is not patronage sourced. Sec. 1.1382-3(c)(2), Income Tax Regs. In Illinois Grain Corp. v. Commissioner, supra at 442, 459- 460, the taxpayer-cooperative had a specific business need for large amounts of cash at short notice. As a result, it invested its temporary surplus funds in short-term (e.g., overnight, weekend, and 10-day or less deposits) debt instruments because it did not know when it would need the temporary surplus funds inPage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Next
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