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Revolving fund certificates,

dividends are in addition to amounts

are redeemed (if permitted under section

•

Letters of advice, or

otherwise payable to patrons derived from

1382(b)(2) or (4) or section 1382(c)(2)(B),

•

Other documentary evidence of a

business done with or for patrons.

proprietary interest in the cooperative

2. A tax credit based on a

Patronage dividends may be paid in:

•

association.

recomputation of tax for the year(s) the

Money,

•

nonqualified written notices of allocation

See Regulations section 1.1382-3(b)

Qualified written notices of allocation,

were issued. See the instructions for line

for more information.

•

32f.

Other property (except nonqualified

Line 2. Nonpatronage Income

written notices of allocation).

Amounts paid to patrons are not

Allocated to Patrons (Section

A written notice of allocation means:

patronage dividends if paid:

521 Cooperatives Only)

•

Any capital stock,

1. Out of earnings not from business

•

Enter nonpatronage income allocated to

Revolving fund certificate,

done with or for patrons;

•

patrons. Payment may be in:

Retain certificate,

2. Out of earnings from business done

•

Money,

Certificate of indebtedness,

with or for other patrons to whom no

•

Qualified written notices of allocation,

Letter of advice, or

amounts or smaller amounts are paid for

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Other written notice, which states the

substantially identical transactions;

•

Other property (except nonqualified

dollar amount allocated to the patron by

3. To redeem capital stock,

written notices of allocation).

the cooperative and the part, if any, which

certificates of indebtedness, revolving

is a patronage dividend.

The amounts must be paid during the

fund certificates, retain certificates, letters

payment period that begins on the first

of advice, or other similar documents; or

In general, a qualified written notice of

day of the tax year and ends on the 15th

4. Without reference to the net

allocation is a written notice of allocation

day of the 9th month after the end of the

earnings of the cooperative organization

that is:

•

tax year in which the income was earned.

from business done with or for its patrons.

Paid as part of a patronage dividend, in

Nonpatronage income.

money or by qualified check equal to at

least 20% of the patronage dividend, and

Nonpatronage income includes incidental

•

One of the following conditions is met:

income from sources not directly related

Schedule J

to:

1. The patron must have at least 90

•

Marketing,

Tax Computation

days from the date the written notice of

•

Purchasing,

allocation is paid to redeem it in cash, and

•

Line 1. Members of a Controlled

Service activities of the cooperative

must receive written notice of the right of

(such as income from the lease of

Group

redemption at the time the patron

premises, investments, or from the sale or

receives the allocation; or

A member of a controlled group, as

exchange of capital assets), or

2. The patron must agree to have the

•

defined in section 1563, must check the

Income from business done with or for

allocation treated as constructively

box on line 1 and complete lines 2a and

the U.S. Government, or any of its

received and reinvested in the

2b, as applicable.

agencies.

cooperative. See section 1388(c)(2) and

Line 2a. Income Brackets

the related regulations for information on

See the line 3 instructions, below, for a

how this consent must be made.

Members of a controlled group are

definition of “qualified written notice of

allocation.” See section 1382(c)(2)(B) for

entitled to share one $50,000, one

If a written notice of allocation does not

$25,000, and one $9,925,000 taxable

deductibility of amounts paid in

qualify, no deduction is allowable at the

redemption of nonqualified written notices

income bracket amount (in that order).

time it is issued. However, the

of allocation. See section 1388 (d) for a

When a controlled group adopts or

cooperative is entitled to a deduction or

definition of a nonqualified written notice

later amends an apportionment plan,

refund of tax when the nonqualified

of allocation.

each member must attach to its tax return

written notice of allocation is finally

a copy of its consent to this plan.

Line 3. Patronage Dividends

redeemed, if that notice was paid as a

The copy (or an attached statement)

patronage dividend during the payment

To be deductible, patronage dividends

must show the part of the amount in each

period for the tax year during which the

must be paid during the payment period

taxable income bracket apportioned to

patronage occurred. The deduction or

that begins on the first day of the tax year

that member. See Regulations section

refund is allowed, but only to the extent

in which the patronage occurs and ends

1.1561-3(b) for other requirements and

that amounts paid to redeem the

on the 15th day of the 9th month after the

for the time and manner of making the

nonqualified written notices of allocation

end of that tax year.

consent.

are paid in money or other property (other

See sections 1382(e) and (f) for

Equal apportionment plan. If no

than written notices of allocation) which

special rules for the time when patronage

apportionment plan is adopted, members

do not exceed the stated dollar amounts

occurs if products are marketed under a

of a controlled group must divide the

of the nonqualified written notices of

pooling arrangement, or if earnings are

amount in each taxable income bracket

allocation. See section 1382(b),

includible in the gross income of the

equally among themselves. For example,

Regulations section 1.1382-2, and section

cooperative for a tax year after the year in

Controlled Group AB consists of

1383.

which the patronage occurred.

Cooperative A and Cooperative B. They

See Rev. Rul. 81-103, 1981-1 C.B.

Patronage dividends include any

do not elect an apportionment plan.

447, for the redemption of nonqualified

amount paid to a patron by a cooperative

Therefore, each cooperative is entitled to:

written notices of allocation issued to

•

based on the quantity or value of

$25,000 (one-half of $50,000) on line

patrons by a payment of cash and a

business done with or for that patron

2a(1),

crediting of accounts receivable due from

•

under a pre-existing obligation to pay that

$12,500 (one-half of $25,000) on line

patrons.

amount. The amount is determined by

2a(2), and

•

reference to the net earnings of the

See section 1383 for special rules for

$4,962,500 (one-half of $9,925,000) on

organization from business done with or

figuring the cooperative’s tax in the year

line 2a(3).

for its patrons.

nonqualified written notices of allocation

Unequal apportionment plan. Members

are redeemed. The cooperative is entitled

Note. Net earnings are not reduced by

of a controlled group can elect an unequal

to:

dividends paid on capital stock of the

apportionment plan and divide the taxable

organization if there is a legally

1. A deduction in the tax year the

income brackets as they want. There is

enforceable agreement that such

nonqualified written notices of allocation

no need for consistency among taxable

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Instructions For Form 990-C - Farmers' Cooperative Association Income Tax Return - Internal Revenue Service - 2004 Page 17

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