- 74 -
In effect, the Commissioner ruled that the patronage
dividend received by the taxpayer in Rev. Rul. 69-516,
supra, and the interest income received by the taxpayer in
Rev. Rul. 74-160, supra, qualified for inclusion in the
taxpayer’s net earnings from “business done with or for its
patrons”. Sec. 1388(a)(3). In neither case were patrons
of the taxpayer cooperative directly involved in the
transaction out of which the income arose. Compare Rev.
Rul. 73-497, 1973-2 C.B. 18, in which the Commissioner
ruled that interest paid to a bank for cooperatives by
other farm credit banks did not qualify as patronage income
because the payors were “not patrons of the taxpayer”.
This ruling has been criticized by the courts and it has
not been followed. See St. Louis Bank for Coops. v. United
States, 224 Ct. Cl. 289, 624 F.2d 1041, 1051 (1980); see
also Cotter & Co. v. United States, 765 F.2d 1102, 1106
(Fed. Cir. 1985).
Generally, under the “directly related” test, as
applied by the courts, transactions with third parties can
qualify as business “with or for” patrons, as long as the
transaction is reasonably related to the business which
the cooperative conducts with its patrons and benefits the
patrons, other than incidentally through the generation of
extra income. St. Louis Bank for Coops. v. United States,
Page: Previous 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 NextLast modified: May 25, 2011