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two distinct theories were advanced as the reason for the
exclusion of patronage dividends from the taxable income of
cooperatives. Certified Grocers, Inc. v. United States, 18 AFTR
2d 5012, 66-2 USTC par. 9493 (M.D. Fla. 1966). In that case, the
District Court described those theories as follows:
Under the so-called agency theory, the cooperative
should never be taxed because it is conceived of as an
agent, bailee, or trustee for the patrons, serving
merely as a conduit for their income which it does not
own. On the other hand, the so-called price adjustment
theory excludes patronage dividends from income because
it treats the dividends as minor adjustments in the
costs of goods, analogous to discounts and rebates
given by a seller at the time of sale or upon prompt
payment. [Id. at 5,013, 66-2 USTC par. 9493, at
86,547.]
See also discussion and cases collected in Ravenscroft, supra at
154-168; Reynolds, “What Then To Do With a Non-Cooperative
Cooperative?” 56 Tax Law. 825, 831-832 (2003).
The price adjustment theory appears to have been the more
widely accepted theory. Certified Grocers, Inc. v. United
States, supra; Ravenscroft, supra at 157, 160; Reynolds, supra at
831. Indeed, the U.S. Court of Appeals for the Fifth Circuit has
said:
The exclusion of patronage dividends for federal
income tax purposes has not been placed upon the ground
that cooperatives are special creatures of statute
under the tax laws, but rather upon the theory that
patronage dividends are in reality rebates on purchases
or deferred payments on sales allocated or distributed
pursuant to a pre-existing obligation of the
cooperative, and thus do not constitute taxable income
to the cooperative. * * *
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