Rev. Proc. 67-37

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to provide guidelines for determining the effect that the retail sale of nonproducer items sold as a sideline to facilitate the marketing of items produced by the patrons of a farmers' cooperative association will have on the association's exemption from Federal income tax under section 521 of the Internal Revenue Code of 1954. These guidelines provide a test to be used in connection with the examination of annual returns, Form 990-C, Exempt Cooperative Association Income Tax Return. They are not applicable to situations where a cooperative association acquires products from nonproducers in an emergency to fill outstanding orders, or where nonproducer items are acquired as ingredients for processing producers' products for marketing.

SEC. 2. BACKGROUND.

Section 521(b)(1) of the Code provides exemption for farmers' cooperative associations which are organized and operated for the purpose of marketing the products of their members and other producers on a cooperative basis. Although section 521 does not provide exemption for cooperatives which market products for nonproducers, the Internal Revenue Service considers that there can be some circumstances under which an exempt cooperative may sell products it acquires from nonproducers as a necessary supplement or sideline to the efficient retail marketing of products for its producer patrons. For example, a dairy cooperative may find it difficult to market the milk products of its patrons at retail unless it also offers for sale products acquired from nonproducers, such as fruit juice and eggs, which in these circumstances are sold as sideline items. However, the volume of sales of such sideline items may be so substantial that they are not merely incidental to the marketing of products for producer patrons, but are important income producing sources and therefore are inconsistent with the requirements for exemption under section 521.

SEC. 3. GUIDELINES.

.01 Retail sales of nonproducer sideline items necessary to the effective marketing of items produced by patrons will not be considered by the Service in the examination of exempt farmers' cooperative associations as being other than incidental to the marketing of products for producer members of a cooperative exempt from Federal income tax under section 521 of the Code where the dollar volume of such sales does not exceed five percent of the total retail sales of the marketing activity.

.02 This guideline figure reflects the audit experience of the Internal Revenue Service that sales of nonproducer items at or below this figure are incidental sales required in the effective marketing of producer items and are not indicative of a separate profit motive.

.03 Where sales of nonproducer sideline items exceed five percent, a determination whether the sales constitute a necessary supplement to the efficient marketing of producer items will be made on the basis of all the facts and circumstances in the particular case.