- On the basis of quantity or quality of business done with the patron
- Pursuant to a written obligation in existence before the cooperative received the amounts paid into it by the patron
- Determined by reference to net earnings
In other words, patronage dividends amount of a return of some of the amounts a patron spent with a cooperative. Patronage dividends usually occur with farm cooperative. Any refund and discount to the patron is income.
What is not a patronage dividend?
Patronage dividend does not include the following:
- an amount paid to a patron by a cooperative to the extent that such amount is paid out of earnings not derived from business done with or for patrons
- an amount paid to a patron by a cooperative to the extent that such amount is paid out of earnings from business done with, or for, other patrons to whom no amounts are paid, or to whom smaller amounts are paid, with respect to substantially identical transactions
- that portion of a capital stock dividend that is charged against net earnings from nonmembers business
- an amount paid to a patron by a cooperative to the extent that such amount is paid to redeem instruments other than written notices of allocation
Treatment of patronage dividends by members and patrons
Members of a cooperative association who receive patronage dividends must treat the dividends consistently with the transaction giving rise to the dividend. For example, patronage dividends attributable to the marketing of a product to a member are treated like additional proceeds from sale of the product and are includible in the recipient's income. Likewise, patronage dividends attributable to the purchase of equipment for its members are treated as a reduction in the recipient's basis in the purchased equipment (provided the recipient still owns the equipment).
The exemption for recipients of allocated patronage dividends
With respect to patronage dividends, whether paid in cash or credited to the patron in one form or another, the Treasury has consistently held that the recipients are subject to tax in the same way that other income is taxed. As many cooperatives allocated their earnings to patrons in paper that was far from being the real equivalent of cash, and as the recipients were expected to pay tax on such dividends in actual cash, the unreality of the Treasury's theory that such payments represented immediate reinvestment was evidenced by many protests and much evasion. Nonnegotiable certificates payable at some far distant and indefinite time appeared to farmers and others as anything but cash, and certificates or credits for small amounts were regarded as practically worthless.
In recent years the theory, as it was applied by the Treasury Department, has not stood up under the scrutiny of the courts. They have upheld the more realistic view that such payments, under definitely described conditions, do not meet the test of realization that determines taxable income. Certificates which allocate cooperatives earnings to patrons, but which have no fair market value, were held not to be taxable income to the patrons at the time the certificates were issued. If later they were to acquire a fair market value they would then become taxable income.
- P.W. Bernstein 2014, p.204-205
- L.R. Langdon 2002, p.31-32
- Explanation of Miscellaneous Tax Proposals 1990, p.36-37
- United States Congress 2010, p.1602
- Bernstein P.W., (2014), EY Tax Guide, John Wiley & Sons, Chicago.
- Explanation of Miscellaneous Tax Proposals, (1990), Government Printing Office, Washington.
- Langdon L.R., (2002), Manual Transmittal, Exempt Farmers Cooperatives, John Wiley & Sons, New York.
- United States Congress, (2010), Hearings, Government Printing Office, Washington.
Author: Karina Stefańska