
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC1388]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
              Subchapter T--Cooperatives and Their Patrons
 
                  PART III--DEFINITIONS; SPECIAL RULES
 
Sec. 1388. Definitions; special rules


(a) Patronage dividend

    For purposes of this subchapter, the term ``patronage dividend'' 
means an amount paid to a patron by an organization to which part I of 
this subchapter applies--
        (1) on the basis of quantity or value of business done with or 
    for such patron,
        (2) under an obligation of such organization to pay such amount, 
    which obligation existed before the organization received the amount 
    so paid, and
        (3) which is determined by reference to the net earnings of the 
    organization from business done with or for its patrons.

Such term does not include any amount paid to a patron to the extent 
that (A) such amount is out of earnings other than from business done 
with or for patrons, or (B) such amount is 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.

(b) Written notice of allocation

    For purposes of this subchapter, the term ``written notice of 
allocation'' means any capital stock, revolving fund certificate, retain 
certificate, certificate of indebtedness, letter of advice, or other 
written notice, which discloses to the recipient the stated dollar 
amount allocated to him by the organization and the portion thereof, if 
any, which constitutes a patronage dividend.

(c) Qualified written notice of allocation

                             (1) Defined

        For purposes of this subchapter, the term ``qualified written 
    notice of allocation'' means--
            (A) a written notice of allocation which may be redeemed in 
        cash at its stated dollar amount at any time within a period 
        beginning on the date such written notice of allocation is paid 
        and ending not earlier than 90 days from such date, but only if 
        the distributee receives written notice of the right of 
        redemption at the time he receives such written notice of 
        allocation; and
            (B) a written notice of allocation which the distributee has 
        consented, in the manner provided in paragraph (2), to take into 
        account at its stated dollar amount as provided in section 
        1385(a).

    Such term does not include any written notice of allocation which is 
    paid as part of a patronage dividend or as part of a payment 
    described in section 1382(c)(2)(A), unless 20 percent or more of the 
    amount of such patronage dividend, or such payment, is paid in money 
    or by qualified check.

                   (2) Manner of obtaining consent

        A distributee shall consent to take a written notice of 
    allocation into account as provided in paragraph (1)(B) only by--
            (A) making such consent in writing,
            (B) obtaining or retaining membership in the organization 
        after--
                (i) such organization has adopted (after October 16, 
            1962) a bylaw providing that membership in the organization 
            constitutes such consent, and
                (ii) he has received a written notification and copy of 
            such bylaw, or

            (C) if neither subparagraph (A) nor (B) applies, endorsing 
        and cashing a qualified check, paid as a part of the patronage 
        dividend or payment of which such written notice of allocation 
        is also a part, on or before the 90th day after the close of the 
        payment period for the taxable year of the organization for 
        which such patronage dividend or payment is paid.

              (3) Period for which consent is effective

        (A) General rule

            Except as provided in subparagraph (B)--
                (i) a consent described in paragraph (2) (A) shall be a 
            consent with respect to all patronage of the distributee 
            with the organization occurring (determined with the 
            application of section 1382(e)) during the taxable year of 
            the organization during which such consent is made and all 
            subsequent taxable years of the organization; and
                (ii) a consent described in paragraph (2) (B) shall be a 
            consent with respect to all patronage of the distributee 
            with the organization occurring (determined without the 
            application of section 1382(e)) after he received the 
            notification and copy described in paragraph (2)(B)(ii).

        (B) Revocation, etc.

                (i) Any consent described in paragraph (2)(A) may be 
            revoked (in writing) by the distributee at any time. Any 
            such revocation shall be effective with respect to patronage 
            occurring on or after the first day of the first taxable 
            year of the organization beginning after the revocation is 
            filed with such organization; except that in the case of a 
            pooling arrangement described in section 1382(e), a 
            revocation made by a distributee shall not be effective as 
            to any pool with respect to which the distributee has been a 
            patron before such revocation.
                (ii) Any consent described in paragraph (2)(B) shall not 
            be effective with respect to any patronage occurring 
            (determined without the application of section 1382(e)) 
            after the distributee ceases to be a member of the 
            organization or after the bylaws of the organization cease 
            to contain the provision described in paragraph (2)(B)(i).

                         (4) Qualified check

        For purposes of this subchapter, the term ``qualified check'' 
    means only a check (or other instrument which is redeemable in 
    money) which is paid as a part of a patronage dividend, or as a part 
    of a payment described in section 1382(c)(2)(A), to a distributee 
    who has not given consent as provided in paragraph (2)(A) or (B) 
    with respect to such patronage dividend or payment, and on which 
    there is clearly imprinted a statement that the endorsement and 
    cashing of the check (or other instrument) constitutes the consent 
    of the payee to include in his gross income, as provided in the 
    Federal income tax laws, the stated dollar amount of the written 
    notice of allocation which is a part of the patronage dividend or 
    payment of which such qualified check is also a part. Such term does 
    not include any check (or other instrument) which is paid as part of 
    a patronage dividend or payment which does not include a written 
    notice of allocation (other than a written notice of allocation 
    described in paragraph (1)(A)).

(d) Nonqualified written notice of allocation

    For purposes of this subchapter, the term ``nonqualified written 
notice of allocation'' means a written notice of allocation which is not 
described in subsection (c) or a qualified check which is not cashed on 
or before the 90th day after the close of the payment period for the 
taxable year for which the distribution of which it is a part is paid.

(e) Determination of amount paid or received

    For purposes of this subchapter, in determining amounts paid or 
received--
        (1) property (other than a written notice of allocation or a 
    per-unit retain certificate) shall be taken into account at its fair 
    market value, and
        (2) a qualified written notice of allocation or qualified per-
    unit retain certificate shall be taken into account at its stated 
    dollar amount.

(f) Per-unit retain allocation

    For purposes of this subchapter, the term ``per-unit retain 
allocation'' means any allocation, by an organization to which part I of 
this subchapter applies, to a patron with respect to products marketed 
for him, the amount of which is fixed without reference to the net 
earnings of the organization pursuant to an agreement between the 
organization and the patron.

(g) Per-unit retain certificate

    For purposes of this subchapter, the term ``per-unit retain 
certificate'' means any written notice which discloses to the recipient 
the stated dollar amount of a per-unit retain allocation to him by the 
organization.

(h) Qualified per-unit retain certificate

                             (1) Defined

        For purposes of this subchapter, the term ``qualified per-unit 
    retain certificate'' means any per-unit retain certificate which the 
    distributee has agreed, in the manner provided in paragraph (2), to 
    take into account at its stated dollar amount as provided in section 
    1385(a).

                  (2) Manner of obtaining agreement

        A distributee shall agree to take a per-unit retain certificate 
    into account as provided in paragraph (1) only by--
            (A) making such agreement in writing, or
            (B) obtaining or retaining membership in the organization 
        after--
                (i) such organization has adopted (after November 13, 
            1966) a bylaw providing that membership in the organization 
            constitutes such agreement, and
                (ii) he has received a written notification and copy of 
            such bylaw.

             (3) Period for which agreement is effective

        (A) General rule

            Except as provided in subparagraph (B)--
                (i) an agreement described in paragraph (2)(A) shall be 
            an agreement with respect to all products delivered by the 
            distributee to the organization during the taxable year of 
            the organization during which such agreement is made and all 
            subsequent taxable years of the organization; and
                (ii) an agreement described in paragraph (2)(B) shall be 
            an agreement with respect to all products delivered by the 
            distributee to the organization after he received the 
            notification and copy described in paragraph (2)(B)(ii).

        (B) Revocation, etc.

            (i) Any agreement described in paragraph (2)(A) may be 
        revoked (in writing) by the distributee at any time. Any such 
        revocation shall be effective with respect to products delivered 
        by the distributee on or after the first day of the first 
        taxable year of the organization beginning after the revocation 
        is filed with the organization; except that in the case of a 
        pooling arrangement described in section 1382(e) a revocation 
        made by a distributee shall not be effective as to any products 
        which were delivered to the organization by the distributee 
        before such revocation.
            (ii) Any agreement described in paragraph (2)(B) shall not 
        be effective with respect to any products delivered after the 
        distributee ceases to be a member of the organization or after 
        the bylaws of the organization cease to contain the provision 
        described in paragraph (2)(B)(i).

(i) Nonqualified per-unit retain certificate

    For purposes of this subchapter, the term ``nonqualified per-unit 
retain certificate'' means a per-unit retain certificate which is not 
described in subsection (h).

(j) Special rules for the netting of gains and losses by cooperatives

    For purposes of this subchapter, in the case of any organization to 
which part I of this subchapter applies--

    (1) Optional netting of patronage gains and losses permitted

        The net earnings of such organization may, at its option, be 
    determined by offsetting patronage losses (including any patronage 
    loss carried to such year) which are attributable to 1 or more 
    allocation units (whether such units are functional, divisional, 
    departmental, geographic, or otherwise) against patronage earnings 
    of 1 or more other such allocation units.

    (2) Certain netting permitted after section 381 transactions

        If such an organization acquires the assets of another such 
    organization in a transaction described in section 381(a), the 
    acquiring organization may, in computing its net earnings for 
    taxable years ending after the date of acquisition, offset losses of 
    1 or more allocation units of the acquiring or acquired organization 
    against earnings of the acquired or acquiring organization, 
    respectively, but only to the extent--
            (A) such earnings are properly allocable to periods after 
        the date of acquisition, and
            (B) such earnings could have been offset by such losses if 
        such earnings and losses had been derived from allocation units 
        of the same organization.

                       (3) Notice requirements

        (A) In general

            In the case of any organization which exercises its option 
        under paragraph (1) for any taxable year, such organization 
        shall, on or before the 15th day of the 9th month following the 
        close of such taxable year, provide to its patrons a written 
        notice which--
                (i) states that the organization has offset earnings and 
            losses from 1 or more of its allocation units and that such 
            offset may have affected the amount which is being 
            distributed to its patrons,
                (ii) states generally the identity of the offsetting 
            allocation units, and
                (iii) states briefly what rights, if any, its patrons 
            may have to additional financial information of such 
            organization under terms of its charter, articles of 
            incorporation, or bylaws, or under any provision of law.

        (B) Certain information need not be provided

            An organization may exclude from the information required to 
        be provided under clause (ii) of subparagraph (A) any detailed 
        or specific data regarding earnings or losses of such units 
        which such organization determines would disclose commercially 
        sensitive information which--
                (i) could result in a competitive disadvantage to such 
            organization, or
                (ii) could create a competitive advantage to the benefit 
            of a competitor of such organization.

        (C) Failure to provide sufficient notice

            If the Secretary determines that an organization failed to 
        provide sufficient notice under this paragraph--
                (i) the Secretary shall notify such organization, and
                (ii) such organization shall, upon receipt of such 
            notification, provide to its patrons a revised notice 
            meeting the requirements of this paragraph.

        Any such failure shall not affect the treatment of the 
        organization under any provision of this subchapter or section 
        521.

              (4) Patronage earnings or losses defined

        For purposes of this subsection, the terms ``patronage 
    earnings'' and ``patronage losses'' means earnings and losses, 
    respectively, which are derived from business done with or for 
    patrons of the organization.

(Added Pub. L. 87-834, Sec. 17(a), Oct. 16, 1962, 76 Stat. 1049; amended 
Pub. L. 89-809, title II, Sec. 211(c), Nov. 13, 1966, 80 Stat. 1582; 
Pub. L. 91-172, title IX, Sec. 911(b), Dec. 30, 1969, 83 Stat. 722; Pub. 
L. 94-455, title XIX, Sec. 1901(a)(153), Oct. 4, 1976, 90 Stat. 1789; 
Pub. L. 95-600, title III, Sec. 316(b)(3), Nov. 6, 1978, 92 Stat. 2830; 
Pub. L. 99-272, title XIII, Sec. 13210(a), Apr. 7, 1986, 100 Stat. 323; 
Pub. L. 101-508, title XI, Sec. 11813(b)(24), Nov. 5, 1990, 104 Stat. 
1388-555.)

                       References in Text

    The Federal income tax laws, referred to in subsec. (c)(4), are 
classified generally to this title.


                               Amendments

    1990--Subsec. (k). Pub. L. 101-508 struck out subsec. (k) which 
cross-referenced section 46(h) for provisions relating to apportionment 
of investment credit between cooperative organizations and their 
patrons.
    1986--Subsecs. (j), (k). Pub. L. 99-272 added subsec. (j) and 
redesignated former subsec. (j) as (k).
    1978--Subsec. (j). Pub. L. 95-600 added subsec. (j).
    1976--Subsec. (c)(2)(B)(i). Pub. L. 94-455, Sec. 1901 (a)(153)(A), 
substituted ``October 16, 1962'' for ``the date of the enactment of the 
Revenue Act of 1962''.
    Subsec. (h)(2)(B)(i). Pub. L. 94-455, Sec. 1901(a)(153)(B), 
substituted ``November 13, 1966'' for ``the date of the enactment of 
this subsection''.
    1969--Subsec. (f). Pub. L. 91-172 struck out reference to 
allocations made by organizations other than by payment of money or 
other property except per-unit retain certificates.
    1966--Subsec. (e). Pub. L. 89-809, Sec. 211(c)(1), inserted 
references to per-unit retain certificates.
    Subsecs. (f) to (i). Pub. L. 89-809, Sec. 211(c)(2), added subsecs. 
(f) to (i).


                    Effective Date of 1990 Amendment

    Amendment by Pub. L. 101-508 applicable to property placed in 
service after Dec. 31, 1990, but not applicable to any transition 
property (as defined in section 49(e) of this title), any property with 
respect to which qualified progress expenditures were previously taken 
into account under section 46(d) of this title, and any property 
described in section 46(b)(2)(C) of this title, as such sections were in 
effect on Nov. 4, 1990, see section 11813(c) of Pub. L. 101-508, set out 
as a note under section 29 of this title.


                    Effective Date of 1986 Amendment

    Section 13210(c) of Pub. L. 99-272 provided that:
    ``(1) In general.--Except as provided in paragraph (2), the 
amendments made by this section [amending this section and section 521 
of this title] shall apply to taxable years beginning after December 31, 
1962.
    ``(2) Notification requirement.--The provisions of section 
1388(j)(3) of the Internal Revenue Code of 1954 [now 1986] (as added by 
subsection (a)) shall apply to taxable years beginning on or after the 
date of the enactment of this Act [Apr. 7, 1986].
    ``(3) No inference.--Nothing in the amendments made by this section 
[amending this section and section 521 of this title] shall be construed 
to infer that a change in law is intended as to whether any patronage 
earnings may or not be offset by nonpatronage losses, and any 
determination of such issue shall be made as if such amendments had not 
been enacted.''


                    Effective Date of 1978 Amendment

    Amendment by Pub. L. 95-600 applicable to taxable years ending after 
October 31, 1978, see section 316(c) of Pub. L. 95-600, set out as a 
note under section 46 of this title.


                    Effective Date of 1969 Amendment

    Amendment by Pub. L. 91-172 applicable to per-unit retain 
allocations made after Oct. 9, 1969, see section 911(c) of Pub. L. 91-
172, set out as a note under section 1382 of this title.


                    Effective Date of 1966 Amendment

    Amendment by Pub. L. 89-809 applicable to per-unit retain 
allocations made during taxable years of an organization described in 
section 1381(a) of this title (relating to organizations to which part I 
of subchapter T of chapter 1 applies) beginning after Apr. 30, 1966, 
with respect to products delivered during such years, see section 
211(e)(1) of Pub. L. 89-809, set out as a note under section 1382 of 
this title.


                             Effective Date

    Section applicable, except as otherwise provided, to taxable years 
of organizations described in section 1381(a) of this title beginning 
after Dec. 31, 1962, see section 17(c) of Pub. L. 87-834, set out as a 
note under section 1381 of this title.


                            Savings Provision

    For provisions that nothing in amendment by Pub. L. 101-508 be 
construed to affect treatment of certain transactions occurring, 
property acquired, or items of income, loss, deduction, or credit taken 
into account prior to Nov. 5, 1990, for purposes of determining 
liability for tax for periods ending after Nov. 5, 1990, see section 
11821(b) of Pub. L. 101-508, set out as a note under section 29 of this 
title.


Per-Unit Retain Certificates Covered by Written Agreements Between Oct. 
 14, 1965, and Nov. 13, 1966: Transition Treatment of By-Law Provisions

    Section 211(f) of Pub. L. 89-809 provided that a written agreement 
between a patron and a cooperative association which met certain 
qualifications and was entered into after Oct. 14, 1965 and before Nov. 
13, 1966, and which was in effect on Nov. 13, 1966, was to be treated 
for purposes of subsec. (h) of this section as if entered into after 
Nov. 13, 1966.

                  Section Referred to in Other Sections

    This section is referred to in sections 521, 1382, 6044, 6072 of 
this title; title 7 section 1445-1; title 12 section 3019.
