Affiliated Foods, Inc., A Corporation - Page 39




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         for the benefit of those who do business with it and not for the             
         purpose of making a profit for the organizers), the idea is that,            
         periodically, any surplus, or amount in excess of the break-even             
         point from doing business with patrons, will be returned to the              
         patrons on the basis of their dealings with the cooperative                  
         (i.e., on a patronage basis).  See id.  Indeed, today, for                   
         Federal income tax purposes, patronage dividends are determined              
         by reference to the “net earnings” of the organization from                  
         business done with or for its patrons.  Sec. 1388(a)(3); sec.                
         1.1388-1(a)(1), Income Tax Regs.  The regulations describe “net              
         earnings” as including “the excess of amounts retained (or                   
         assessed) by the organization to cover expenses or other items               
         over the amount of such expenses or other items.”  Sec. 1.1388-              
         1(a)(1), Income Tax Regs.                                                    
              Notwithstanding the question of the appropriateness of the              
         term “profit” with respect to a cooperative enterprise, both                 
         early administrative interpretations and judicial decisions                  
         conceived of a patronage dividend not as a simple price                      
         adjustment or immediate rebate but as a distribution of corporate            
         profits or income.  In O.D. 64, 1 C.B. 208 (1919), the                       
         Commissioner ruled concerning an incorporated fruit grower’s                 
         association that conducted its business at a profit.  It ruled               
         that the nonexempt corporation would not have to pay any income              
         tax on its patronage dividends.  It authorized the corporation               







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