100 BULLETIN" 110 6, U. S. DEPARTMENT OF AGRICULTURE 
than nonvoting preferred stock, the owners of which are not entitled or per- 
mitted to participate, directly or indirectly, in the profits of the corporation, 
upon dissolution or otherwise, beyond the fixed dividends) is owned by such 
association, or members thereof ; nor shall exemption be denied any such cor- 
poration because there is accumulated and maintained by it a reserve required 
by State law or a reasonable reserve for any necessary purpose. 
For a cooperative marketing or purchasing association, or an as- 
sociation engaged in both activities, to be exempt from liability foi 
the payment of Federal income taxes, under paragraph (12) above, 
the association must meet the conditions specified in that paragraph. 
Attention is called to the fact that the association must be organized 
and operated on a cooperative basis and that nonmember patron? 
must be treated on the same basis as members. That is to say, if 
patronage dividends are paid to members, nonmember patrons must 
also be paid patronage dividends, either in cash or as a credit toward 
the purchase of stock or a membership fee, if the association is to 
be entitled to exemption. An association may do business with non- 
members provided the amount of products marketed for nonmembers 
does not exceed in value the amount marketed for members; and 
an association may purchase supplies and equipment for nonmem- 
bers in an amount the value of wdiich does not exceed the value of 
the supplies and equipment purchased for members. The amount 
of purchases which may be made for persons who are neither mem- 
bers nor producers must not exceed 15 per centum of the value of all 
its purchases. Of course, persons who are neither members nor pro- 
ducers would ordinarily be town people. 
The fact that an association has capital stock does not affect its 
right to exemption if the dividend rate on the stock is fixed at not 
to exceed the legal rate of interest in the State of incorporation, or 
8 per centum per annum. In order to obtain exemption, an asso- 
ciation formed with capital stock must have substantially all of the 
stock other than nonvoting preferred stock held by producers who 
market their products or purchase supplies and equipment through 
the association. 
For an association to obtain exemption, it must satisfactorily ex- 
plain in its application for exemption the reason why any of its 
stock is owned by persons who are not actually producers, and, gen- 
erally speaking, an association will be required to show that the own- 
ership of its capital stock has been restricted as far as possible to 
actual producers. 
If by statutory requirement all officers of an association must be share- 
holders, the ownership of a share of stock by a nonproducer to qualify him 
as an officer will not destroy the association's exemption. Likewise, if a share- 
holder for any reason ceases to be a producer and the association is unable, 
because of a constitutional inhibition or other reason beyond the control of 
the association, to purchase or retire the stock of such nonproducer, the fact 
that under such circumstances a small amount of the outstanding- capital stock 
is owned by shareholders who are no longer producers will not destroy the 
exemption. 29 
Nonvoting preferred stock may be held in any amount by anyone 
without affecting the rights of the association to exemption, pro- 
vided that the stock is not entitled or permitted to participate directly 
29 Art. 532, Regulations 74 relating to the income tax under the revenue act of 1928, 
issued by the Treasury Department. 
