Title 26, Internal Revenue CodeRelease 119-110
§1388 Definitions; Special Rules
Title 26 › Subtitle A — Income Taxes › CHAPTER 1 — NORMAL TAXES AND SURTAXES › Subchapter T — Cooperatives and Their Patrons › PART III — DEFINITIONS; SPECIAL RULES › § 1388
Summary
Sets rules for how cooperatives treat payments to their members and the papers that describe those payments. Patronage dividend means a payment to a member based on how much business the member did with the cooperative, required by the cooperative, and tied to the coop’s net earnings from business with its members. Written notice of allocation means any paper that tells a member the dollar amount allocated to them and what part, if any, is a patronage dividend. A qualified written notice of allocation is one that can be cashed for its stated dollar amount within a period that ends not earlier than 90 days after it is paid, or one the member agreed to treat as income in the required ways; such notices paid as part of a patronage dividend are not qualified unless at least 20 percent of the payment is in cash or by qualified check. A member can agree in writing, by keeping or getting membership after the cooperative adopted a bylaw (after October 16, 1962) saying membership counts as agreement and the member got notice and a copy, or by endorsing and cashing a qualified check on or before the 90th day after the close of the cooperative’s payment period. Those agreements usually cover the year made and later years, but a written agreement can be revoked in writing and becomes effective for the first taxable year of the coop beginning after the revocation is filed (with limited exceptions for pooling or prior deliveries). A qualified check is a check that is part of a patronage payment, has a clear statement that cashing it means the payee consents to include the stated allocation in income, and is paid to someone who has not otherwise consented. A nonqualified written notice of allocation is any notice that is not qualified or is a qualified check that was not cashed within the 90-day limit. For value rules, property (other than notices or per-unit retain certificates) is counted at fair market value, while qualified notices and qualified per-unit retain certificates are counted at their stated dollar amount. Per-unit retain allocation means an amount fixed by agreement for products marketed for a member and not based on the coop’s net earnings. A per-unit retain certificate tells the member the stated dollar amount of that allocation. A qualified per-unit retain certificate is one the member agreed to treat as income by writing or by membership after a bylaw adopted after November 13, 1966 and a written notice; those agreements follow rules like the other consents and may be revoked with similar limits. Cooperatives may choose to offset patronage losses in one part of their business against earnings in another part. If a coop buys another coop’s assets in a qualifying transaction, it may offset losses and earnings of allocation units across the two coops for years after the purchase, but only for earnings after the acquisition and only to the extent such offsets would have been allowed had the units been in the same coop. If a cooperative uses offsets, it must give patrons a written notice by the 15th day of the 9th month after the close of the taxable year saying offsets occurred, naming the units in general, and saying how patrons can get more financial information; the coop can leave out detailed sensitive data. Patronage earnings or losses mean amounts from business done with the coop’s patrons. Marketing of members’ products also includes feeding those products to animals and selling the resulting animals or animal products.
Full Legal Text
Title 26, §1388
Internal Revenue Code, Source: USLM XML via OLRC
(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. For purposes of paragraph (3), net earnings shall not be reduced by amounts paid during the year as dividends on capital stock or other proprietary capital interests of the organization to the extent that the articles of incorporation or bylaws of such organization or other contract with patrons provide that such dividends are in addition to amounts otherwise payable to patrons which are derived from business done with or for patrons during the taxable year.
(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)
(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.
(k)Cooperative marketing includes value-added processing involving animals
For purposes of section 521 and this subchapter, the marketing of the products of members or other producers shall include the feeding of such products to cattle, hogs, fish, chickens, or other animals and the sale of the resulting animals or animal products.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2004—Subsec. (a). Pub. L. 108–357, § 312(a), inserted at end of concluding provisions “For purposes of paragraph (3), net earnings shall not be reduced by amounts paid during the year as dividends on capital stock or other proprietary capital interests of the organization to the extent that the articles of incorporation or bylaws of such organization or other contract with patrons provide that such dividends are in addition to amounts otherwise payable to patrons which are derived from business done with or for patrons during the taxable year.” Subsec. (k). Pub. L. 108–357, § 316(a), added subsec. (k). 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, § 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, § 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, § 211(c)(1), inserted references to per-unit retain certificates. Subsecs. (f) to (i). Pub. L. 89–809, § 211(c)(2), added subsecs. (f) to (i).
Statutory Notes and Related Subsidiaries
Effective Date
of 2004 Amendment Pub. L. 108–357, title III, § 312(b), Oct. 22, 2004, 118 Stat. 1467, provided that: “The amendment made by this section [amending this section] shall apply to distributions in taxable years beginning after the date of the enactment of this Act [Oct. 22, 2004].” Amendment by section 316(a) of Pub. L. 108–357 applicable to taxable years beginning after Oct. 22, 2004, see section 316(c) of Pub. L. 108–357, set out as a note under section 521 of this title.
Effective Date
of 1990 AmendmentAmendment 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 45K of this title.
Effective Date
of 1986 Amendment Pub. L. 99–272, title XIII, § 13210(c), Apr. 7, 1986, 100 Stat. 324, 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 AmendmentAmendment 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 AmendmentAmendment 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 AmendmentAmendment 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 45K 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 Pub. L. 89–809, title II, § 211(f), Nov. 13, 1966, 80 Stat. 1584, 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.
Reference
Citations & Metadata
Citation
26 U.S.C. § 1388
Title 26, Internal Revenue Code
Last Updated
Sep 23, 2026
Release point: 119-110