Legal Ruling 1965-284

Franchise-Cooperative: Marketing Operations Ceased

Cooperative marketing association in liquidation deriving its income from rents, dividends, etc., is not operated in whole or in part on a cooperative basis.

Taxpayer was organized as a farmers cooperative in 1925 for the purpose of cooperative marketing of poultry products. In June of 1957, the active membership terminated these operations, and affiliated with another marketing organization. Since June of 1957, taxpayer has been in the process of liquidating as a step toward ultimate dissolution. Pursuant to its bylaws, all net proceeds from operations are required to be allocated and distributed to members on the basis of their interests in the capital funds of the association.  In its 1958 and subsequent returns, the balance sheets show that the association has been liquidating "members' advance fund certificates", but that it has not made any distribution on its "members' retain funds". This latter represents an accumulation of net profits realized since it ceased its marketing operations. The income reported since June 1957 is made up of rents, dividends received from the bank for cooperatives, sales of sundry salvaged supplies and scrap, gains on sales of its assets reported on the installment basis and interest.

Was subject corporation operated in whole or in part on a cooperative or mutual basis subsequent to 1956 within the meaning of Sections 24404 or 24405 of the Bank and Corporation Tax Law?

Under the Bank and Corporation Tax Law cooperative marketing associations are not exempt from taxation but are taxable like other corporations in the absence of an express provision of law conferring immunity.

Prior to 1959 nonmember income from business done on a profit basis was not deductible from gross income. In 1959 Section 24404 was amended to allow a special deduction of all amounts allocated to members during the income year.

The special deduction is only extended to those cooperative marketing associations which meet prescribed statutory requirements, i.e., the association must be organized and operated in whole or in part on a cooperative or mutual basis, (a) for the purpose of marketing the products of members or other producers . . . (b) for the purpose of purchasing, or producing, supplies and equipment for the use of members or other persons . . . .

The facts clearly disclose that subject corporation is not and has not marketed the products of members or other producers since 1956 and has not purchased or produced supplies and equipment for the use of members or other persons since 1956. It has not been operated in whole or in part on a cooperative or mutual basis since 1956 within the meaning of Sections 24404 or 24405 of the Bank and Corporation Tax Law.

Subject corporation was organized and did operate as a cooperative marketing association prior to 1957 but since 1956 it has been in liquidation and has derived its income from rents, dividends, salvage sales, etc., none of which income appears to meet the marketing and purchasing tests for the said special deduction.