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Rev. Rul. 73-570 1, 1973-2 CB 194

REV-RUL, Qualification; lumber marketing cooperative., Rev. Rul. 73-570 ¹, 1973-2 CB 194, (Jan. 01, 1973)

Section 521.--Exemption of Farmers' Cooperative from Tax

26 CFR 1.521-1: Farmers' cooperative marketing and purchasing associations; requirements for exemption under section 521.

[IRS Headnote] Qualification; lumber marketing cooperative.--
An incorporated organization that markets lumber for the independent lumber producing companies controlling such organization, whose members share in its surplus or deficit on the basis of their stock interests, does not qualify for exemption as a "farmers', fruit growers, or like association, organized and operated on a cooperative basis," under section 521(a) of the Code; I.T. 1312 superseded.

[Text]

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 1312, C.B. I-1, 263 (1922).

The question presented is whether a corporation that markets products of its members under the circumstances described below can qualify for exemption as a farmers' cooperative under section 521(a) of the Internal Revenue Code of 1954.

The corporation was organized in 1965 for the purpose of selling the products of independent lumber producing companies. The stock of the corporation is owned by the producing companies and certain individuals, in some instances the original incorporators, who themselves are stockholders and officials of the producing companies. In this manner the producing companies have associated themselves together through the representation of their officials on the board of directors of the corporation so that control of the corporation rests with the producing companies.

The method pursued by the corporation in conducting its business has been to adopt at the beginning of each year a unit cost rate of so much per thousand feet as a basis for charging the producing companies for selling their products. Such rate represents the estimated cost to the corporation of selling a unit during the period for which it is adopted. As a result of this estimation, the amount received by the corporation from the producing companies is sometimes more than the selling expenses and results in a surplus at the end of the taxable year, while in other years the estimate has not been high enough and a deficit has resulted. Members share in such surplus (or deficit) on the basis of the amount of their stockholdings rather than on the basis of the amount of lumber marketed.

Section 521(a) of the Code exempts from taxation "farmers, fruit growers, or like associations" organized and operated on a cooperative basis to market the products of its members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them.

Section 1.521-1(d) of the Income Tax Regulations provides that cooperative organizations engaged in occupations dissimilar from those of farmers, fruit growers, and the like, are not exempt.

The corporation here in question was not organized or operated on a cooperative basis as contemplated by section 521(a) of the Code because the members are entitled to share in the corporation's surplus or deficit on the basis of their stock interests rather than on the basis of the amount of lumber marketed.

Also, the corporation does not meet the tests set forth in section 521(a) of the Code. For purposes of section 521(a), the term "like associations" is confined to pursuits similar to farming and fruit growing, and the business of lumbering cannot be considered such an activity. See section 1.61-4(d) of the regulations defining the term "farm" in the ordinary accepted sense, and section 1.175-3 which provides in part that "a taxpayer engaged in forestry or the growing of timber is not thereby engaged in the business of farming."

Accordingly, it is held that the corporation, under the stated facts, does not qualify for exemption under section 521(a) of the Code.

I.T. 1312 is superseded, since the position set forth therein is restated under current law in this Revenue Ruling.

1 Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.