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otherwise payable to patrons derived

allocation are redeemed. The

Line 2. Nonpatronage

from business done with or for patrons.

cooperative is entitled to:

Income Allocated to Patrons

1. A deduction in the tax year the

Patronage dividends may be paid in:

(Section 521 Cooperatives

•

nonqualified written notices of allocation

Money,

•

Only)

are redeemed (if permitted under

Qualified written notices of allocation,

section 1382(b)(2) or (4) or section

Enter nonpatronage income allocated

•

1382(c)(2)(B), or

Other property (except nonqualified

to patrons. Payment may be in:

•

2. A tax credit based on a

written notices of allocation).

Money,

•

recomputation of tax for the year(s) the

Qualified written notices of allocation,

A written notice of allocation means:

•

nonqualified written notices of allocation

Any capital stock,

•

were issued. See the instructions for

Other property (except nonqualified

Revolving fund certificate,

•

line 32f.

written notices of allocation).

Retain certificate,

•

Certificate of indebtedness,

The amounts must be paid during

•

Amounts paid to patrons are not

Letter of advice, or

the payment period that begins on the

•

patronage dividends if paid:

Other written notice, which states the

first day of the tax year and ends on the

1. Out of earnings not from

dollar amount allocated to the patron by

15th day of the 9th month after the end

business done with or for patrons;

the cooperative and the part, if any,

of the tax year in which the income was

2. Out of earnings from business

which is a patronage dividend.

earned.

done with or for other patrons to whom

In general, a qualified written notice

Nonpatronage income.

no amounts or smaller amounts are

of allocation is a written notice of

Nonpatronage income includes

paid for substantially identical

allocation that is:

incidental income from sources not

•

transactions;

Paid as part of a patronage dividend,

directly related to:

3. To redeem capital stock,

•

in money or by qualified check equal to

Marketing,

certificates of indebtedness, revolving

•

at least 20% of the patronage dividend,

Purchasing,

•

fund certificates, retain certificates,

and

Service activities of the cooperative

•

letters of advice, or other similar

One of the following conditions is

(such as income from the lease of

documents; or

met:

premises, investments, or from the sale

4. Without reference to the net

or exchange of capital assets), or

1. The patron must have at least 90

earnings of the cooperative

•

Income from business done with or

days from the date the written notice of

organization from business done with or

for the U.S. Government, or any of its

allocation is paid to redeem it in cash,

for its patrons.

agencies.

and must receive written notice of the

right of redemption at the time the

See the line 3 instructions, below, for

Line 3(e). Other. An agricultural or

patron receives the allocation; or

a definition of “qualified written notice of

horticultural cooperative must reduce its

2. The patron must agree to have

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

section 1382 deduction for that portion

the allocation treated as constructively

for deductibility of amounts paid in

of its section 199 deduction entered on

received and reinvested in the

redemption of nonqualified written

Form 8903 that is allocated to patrons.

cooperative. See section 1388(c)(2)

notices of allocation. See section 1388

Enter this amount on line 3(e) as a

and the related regulations for

(d) for a definition of a nonqualified

negative amount.

information on how this consent must

written notice of allocation.

be made.

Line 3. Patronage Dividends

Schedule J

If a written notice of allocation does

To be deductible, patronage dividends

not qualify, no deduction is allowable at

must be paid during the payment period

the time it is issued. However, the

Tax Computation

that begins on the first day of the tax

cooperative is entitled to a deduction or

year in which the patronage occurs and

refund of tax when the nonqualified

Line 1. Members of a

ends on the 15th day of the 9th month

written notice of allocation is finally

after the end of that tax year.

Controlled Group

redeemed, if that notice was paid as a

See sections 1382(e) and (f) for

patronage dividend during the payment

A member of a controlled group, as

special rules for the time when

period for the tax year during which the

defined in section 1563, must check the

patronage occurs if products are

patronage occurred. The deduction or

box on line 1 and complete lines 2a and

marketed under a pooling arrangement,

refund is allowed, but only to the extent

2b, as applicable. The term “controlled

or if earnings are includible in the gross

that amounts paid to redeem the

group” means any parent-subsidiary

income of the cooperative for a tax year

nonqualified written notices of allocation

group, brother-sister group, or

after the year in which the patronage

are paid in money or other property

combined group. See the definitions

occurred.

(other than written notices of allocation)

below.

which do not exceed the stated dollar

Patronage dividends include any

Parent-subsidiary group. A

amounts of the nonqualified written

amount paid to a patron by a

parent-subsidiary group is one or more

notices of allocation. See section

cooperative based on the quantity or

chains of corporations connected

1382(b), Regulations section 1.1382-2,

value of business done with or for that

through stock ownership with a

and section 1383.

patron under a pre-existing obligation to

common parent corporation if:

•

pay that amount. The amount is

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

Stock possessing at least 80% of the

determined by reference to the net

447, for the redemption of nonqualified

total combined voting power of all

earnings of the organization from

written notices of allocation issued to

classes of stock entitled to vote or at

business done with or for its patrons.

patrons by a payment of cash and a

least 80% of the total value of shares of

crediting of accounts receivable due

Note. Net earnings are not reduced by

all classes of stock of each of the

from patrons.

dividends paid on capital stock of the

corporations, except the common

organization if there is a legally

See section 1383 for special rules

parent corporation, is directly or

enforceable agreement that such

for figuring the cooperative’s tax in the

indirectly owned by one or more of the

dividends are in addition to amounts

year nonqualified written notices of

other corporations; and

-16-

Instructions For Form 990-C - Farmers' Cooperative Association Income Tax Return - Internal Revenue Service - 2005 Page 16

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