Legal ruling 389

Franchise - Farmers' Cooperative Associations - Income Deductible - A Farmers' Cooperative Association May Deduct from its Gross Income All Income, Regardless of Source, Which is Properly Allocated

Section 24404 of the Bank and Corporation Tax Law provides to qualified farmers' cooperative associations a special deduction for all income resulting from or arising out of certain business activities, whether or not derived from patronage, allocated to members during the income year.

Advice has been requested whether farmers' cooperative associations may deduct allocated income accruing from activities other than the marketing, purchasing and producing activities described in Section 24404(a) and (b).

The legislative history of the second paragraph of Section 24404, which was enacted in 1959 (Senate Bill No. 886, Chap. 923), suggests that the intent was to tax all income, including income not derived from cooperative activities, of a farmers' cooperative association once, either before allocation at the corporate level, or after allocation when in the hands of the members.

For several years the Franchise Tax Board has acknowledged the amendment to Section 24404 by permitting farmers' cooperative associations to deduct all properly allocated income.

The courts have given "great weight" to administrative construction of statutes, and "will not depart from such construction unless it is clearly erroneous or unauthorized." (Handerly v. Franchise Tax Board, 26 Cal.App. 3d 970,982 (1972); Whittell v. Franchise Tax Board, 231 Cal.App. 2d 278, 286 (1964).)

It cannot be said that the prevailing administrative construction of Section 24404 is clearly erroneous or unauthorized; accordingly, the practice of allowing deductions to farmers' cooperative association based upon the allocation, rather than the source, of the income is affirmed.