Rev. Rul. 67-333

Advice has been requested concerning the year of deducting allocations of patronage dividends under section 1382 of the Internal Revenue Code of 1954 by a cooperative association operating on a pooling basis.

M , a farmers' cooperative subject to the provisions of subchapter T of chapter 1 of subtitle A of the Code, is engaged in the processing and marketing of certain products on a pool basis for its members and patrons. It uses the accrual method of accounting.

M enters into marketing agreements with its members which provide, among other things, that advances on pooled products delivered shall be paid to the members at the discretion of the board of directors, and that, as final settlement upon the close of each pool, M shall pay to the members a ratable portion of the amount of the purchase price less these advances, interest thereon, interest on loan capital, and various marketing and general operating expenses. The members agree to accept revolving fund certificates as payment for that part of the purchase price which is equal to retained amounts for loan capital purposes. The agreements are entered into for one year with automatic renewals thereof.

It has been requested of the Service whether it is proper for M , upon reporting the receipts in arriving at gross income from the pooled products in each taxable year, to deduct from such receipts (a) cash advances, (b) revolving fund certificates, and (c) accounts payable to members. The accounts payable at the end of each taxable year would be derived from a determination of the estimated net proceeds from pools yet to be closed at that date.

Patronage dividends are defined in section 1.1388-1(a)(1) of the Income Tax Regulations generally to mean amounts paid to patrons by a cooperative organization on the basis of the business done with or for such patron which is determined by reference to the net earnings of the cooperative organization.

Under section 1382(e) of the Code and section 1.1382-5 of the regulations, in the case of a pooling arrangement for the marketing of products the patronage under such pool shall be treated as occurring during the taxable year in which the pool shall be treated as occurring for patronage dividends with respect to the pool may not be taken prior to such taxable year.

The advances mentioned above are includible in the gross income of the members in the taxable year in which they are received by the members. The revolving fund certificates are also taxable income to the members under section 1385 of the Code in the year in which the certificates are issued, provided of course that said certificates meet the definitional requirements of a `qualified per-unit retain certificate' as set forth in section 1388(h)(1) and (2) of the Code. However, these advances on the part of M are deductions as costs of the products sold in the same year they are considered to be income to the members.

In the instant case, although any amounts paid by M to its patrons which are determined without reference to the net earnings on each pool, would not be patronage dividends within the meaning of sections 1382(b) and 1382(e) of the Code, they may be deductible as advances. The last payment to the patrons of each pool would, however, if made in accordance with the various requirements under section 1382 of the Code as to time and manner of allocation, be considered to be patronage dividends since such final payment to the patrons of each pool would be determined by reference to the net earnings from the pool and would equal the proceeds from the sale of the patrons' products, less all previous advances to the patrons with respect to such products, less the amount of the revolving fund certificates and less all actual processing and other costs attributable to such products. This can best be explained by the following illustration of entries made on M's books:

                                    Pool

Furthermore, with cooperatives, as well as other corporations, an expense may be accrued and deducted only for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy. See section 1.461-1(a)(2) of the regulations. In the instant case, all of the events giving rise to the liability have not occurred, i.e., the products have not been sold and, if they are not sold by M , then M has no obligation to pay the patrons anything for their products. Thus, in the instant case it would not be proper for M to accrue liability to the patrons for the proceeds of sales of their products until such time as those products were actually sold.

Accordingly, based upon the circumstances set forth above, only those payments from each pool which are paid to the patrons of each pool and which are determined with reference to the net earnings of the cooperatives with respect to such pool or pools would be patronage dividends. These amounts could be determined only in the taxable year in which each pool closes, since only then would the net earnings from each pool be known. If these amounts are allocated on the basis of the quantity or value of the patrons' products delivered to the pool or pools then closing, such amounts may be considered patronage dividends as defined in section 1388(a) of the Code and may, if otherwise qualified, be properly excludible or deductible by a cooperative association for the taxable year in which such pool or pools close.

However, amounts set up on the books of a cooperative association at the close of each taxable year as amounts due patrons, but not paid, which amounts are determined by estimating the sales proceeds of the patrons' crops in pools yet to be closed, are neither deductible by the cooperative nor includible in the gross income of the patrons since all events giving rise to the liability of the cooperative or to the unqualified right of the patrons to receive such amounts have not yet taken place.