Thwaites Terrace House Owners Corp. - Page 14

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          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 in              




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