- 78 -
was produced by a transaction directly connected with
marketing patrons' products.
The objective of distinguishing between patronage and
nonpatronage income is “bound up with the basic concept of
a cooperative”, that is, transforming the cooperative’s net
income into lower prices for its patrons. CF Indus., Inc.
v. Commissioner, 995 F.2d 101, 103 (7th Cir. 1993),
modifying and affg. T.C. Memo. 1991-568. In making this
determination, the courts have recognized that cooperatives
should be permitted to take the action that is reasonably
necessary under the circumstances without suffering the
loss of benefits under subchapter T. As the court stated
in Cotter & Co. v. United States, 765 F.2d at 1110:
“Subchapter T was also not enacted to require that a
cooperative acting for its patrons function in an
economically unreasonable manner or penalize it for acting
reasonably.”
The taxpayer in Cotter & Co. v. United States, supra,
was a nonexempt cooperative that purchased, warehoused, and
distributed products for its members, small independent
hardware retailers. See id. The court agreed with the
taxpayer that interest income from short-term commercial
paper and certificates of deposit purchased with
temporarily unneeded funds was properly treated as
Page: Previous 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 NextLast modified: May 25, 2011