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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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