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fulfill a cooperative function will allow courts
to distinguish from cooperative activity
transactions which merely enhance overall
profitability in a manner incidental to
cooperative function. Such activity is not to
receive the benefits of Subchapter T, but other
activity, which does directly relate to
cooperative function when considered in its
actual business environment, cannot properly be
considered outside “business done with or for
patrons.” Cotter’s transactions here were not
merely to gain incidental profits; they resulted
from activities integrally intertwined with the
cooperative’s functions. The earnings Cotter in
this case produced and passed through to its
members are patronage dividends. [Id. at 1110.]
Similarly, in Illinois Grain Corp. v. Commissioner,
87 T.C. 435 (1986), the Court agreed that rental income
from two barges that the taxpayer caused to be constructed,
leased from an insurance company, and subleased to a barge
company constituted patronage income. The Court found that
“petitioner’s leasing and subleasing of barges to its
transportation cooperative was not an ‘investment’ in such
barges, intended to produce merely passive rental income,
but was an integral part of its overall cooperative
activity in moving its patrons’ grain to market.” Id.
at 461.
In derogation of the “directly related” test,
described above, respondent argues in this case that
capital gains and losses are always classified as non-
patronage without consideration of the relatedness of the
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