[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.522-3]

[Page 224-225]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.522-3  Patronage dividends, rebates, or refunds; treatment as 
to cooperative associations entitled to tax treatment under section 522.

    (a) General rule. Patronage dividends, refunds, or rebates, 
allocated by a cooperative association entitled to tax treatment under 
section 522 to a patron shall be taken into account in computing the 
gross income of such association for the taxable year, as an increase in 
its other cost of goods sold in the case of an association marketing 
products for patrons, or as a reduction in its gross receipts, in the 
case of an association purchasing supplies and equipment or performing 
services for patrons, as the case may be, if:
    (1) The allocation is made in fulfillment and satisfaction of a 
valid obligation of such association to the patron, which obligation was 
in existence prior to the receipt by the cooperative association of the 
amount allocated, and
    (2) The allocation is made on or before the 15th day of the ninth 
month following the close of the taxable year in which the amounts 
allocated were received by the cooperative association.

For the purpose of subparagraph (1) of this paragraph, amounts allocated 
by a cooperative association entitled to tax treatment under section 522 
will be deemed allocated in fulfillment and satisfaction of a valid 
enforceable obligation, if made pursuant to provisions of the bylaws, 
articles of incorporation, or other contract, whereby the association is 
obligated to make such allocation after the retention of reasonable 
reserves and after payment of dividends on capital stock or other 
proprietary capital interests. Notwithstanding the provisions of 
subparagraphs (1) and (2) of this paragraph, amounts allocated as 
patronage dividends, refunds, or rebates during the taxable year, on or 
before the 15th day of the ninth month following the close of such year, 
with respect to patronage for years preceding the taxable year, shall be 
taken into account as an increase in its other cost of goods sold, or as 
a reduction in gross receipts, for the taxable year, as the case may be, 
where retention as

[[Page 225]]

reasonable reserves of the amounts so allocated beyond the year in which 
earned was proper in accordance with the provisions of section 521 and 
where the allocation is made to the patron on a patronage basis is 
proportion insofar as is practicable, to the amount of business done by 
such patrons during the taxable year or years in which the retained 
amounts were received by the cooperative association.
    (b) Examples. This section may be illustrated by the following 
examples:

    Example 1. E, a cooperative association entitled to tax treatment 
under section 522, organized without capital stock, is engaged in the 
business of marketing products for its patrons on a non-pool basis. The 
by-laws of Cooperative E provide that there shall be allocated to 
patrons as patronage dividends within a reasonable time following the 
close of the year all of the gross returns from sales, less expenses of 
operation for the year and amounts retained as reasonable reserves 
necessary to the operation of Cooperative E. At the close of the taxable 
year, 1954, it is determined that from the gross returns from sales less 
operating expenses and all taxes for such year, $5,000 is to be retained 
as reasonable reserves for various necessary purposes of Cooperative E. 
It is assumed that the retention of such amount is proper in accordance 
with the provisions of section 521. Such $5,000 is apportioned on the 
books of Cooperative E to patrons of 1954 on a patronage basis, or 
permanent records are kept from which an apportionment to such patrons 
can be made. On March 1, 1955, pursuant tothe terms of the by-laws, 
$200,000, the balance of the gross returns for the taxable year, is 
allocated to patrons of 1954 on the basis of patronage. $100,000 of such 
$200,000 is allocated in cash. The remaining $100,000 is allocated in 
retain certificates, bearing no interest and redeemable in the 
discretion of the Board of Directors of Cooperative E. There may be 
added to the cost of goods sold by Cooperative E for 1954, $200,000 
($100,000 in cash, $100,000 in retain certificates), the total amount 
allocated as patronage dividends, rebates, or refunds in fulfillment and 
satisfaction of the obligation of the by-laws, on March 1, 1955, before 
the 15th day of the ninth month following the close of 1954. There may 
not be added to the cost of goods sold by Cooperative E for 1954, 
$5,000, the amount retained as reserves apportioned on the books, but 
not allocated as patronage dividends, rebates, or refunds.
    Example 2. The facts are the same as example 1, it additionally 
appearing that at the close of 1955 it is determined by Cooperative E to 
allocate as cash patronage dividends, rebates, or refunds to patrons of 
1954, $5,000, the amount retained as reasonable reserves for 1954 in 
accordance with the provisions of section 521. On March 1, 1956, such 
amount is allocated. There may be added to the cost of goods sold by 
Cooperative E for 1955, $5,000, the amount allocated with respect to 
patronage of a preceding year, 1954, properly maintained as a reserve 
under section 521.