LEGAL PHASES OE COOPEKATlVE ASSOCIATIONS 101 
or indirectly in the profits of the association upon dissolution or 
otherwise beyond the fixed dividends. 30 
The Bureau of Internal Revenue denied the right of an associa- 
tion to exemption where it appeared that 12 per cent of the common 
stock of the association was held by nonproducers and where over 
9 per cent of the common stock was voluntarily sold or issued to 
persons who were not producers. In another case an association 
was denied exemption because its records did not disclose the amount 
of business which it had done with members and the amount which 
it had done with nonmembers. In other words, the association was 
unable to show from its books that it was entitled to exemption, 
because its records did not show the amount of business done with 
nonmembers. 
With respect to the earnings or savings accruing on nonmember 
business, the Bureau of Internal Revenue has taken the position that 
such earnings or savings effected on the business of a given non- 
member may be applied by the association on the payment of a share 
or shares of stock in the case of an association formed with capital 
stock or on a membership fee in the case of an association formed 
without capital stock in lieu of returning the amount involved to 
him in cash; the books of the association should show that this has 
been done and the nonmember should be advised accordingly. 
Under the language quoted above, an association may not be 
denied exemption because it accumulates and maintains a reserve 
required by State law or a reasonable reserve for any necessary pur- 
pose. In view of this language, an association could set aside all of 
its savings or earnings as reserves, if this were reasonable in view 
of the financial situation of the association and its plans and policies. 
Cooperative associations that are not exempt from the payment of 
income taxes are not required to pay such taxes on patronage divi- 
dends or refunds paid to members or patrons on account of business 
done by them with the association. On the other hand, the amount 
paid by an association as dividends on its capital stock would be 
taxable, sums carried by it to reserves would apparently be taxable, 
and, generally speaking, any profits accruing on business done with 
members or nonmembers would be taxable, but any patronage divi- 
dends paid to members or nonmembers would be deductible from 
this amount. 
With respect to the type of corporation that is exempt under the 
provisions of paragraph (13) quoted above, Regulations 74 relating 
to the income tax under the revenue act of 1928, issued by the 
Treasury Department, provides as follows: 
(c) Corporations organized by farmers' cooperative marketing or purchasing 
associations, or the members thereof, for the purpose of financing the ordinary 
crop operations of such members or other producers are also exempt, provided 
the marketing or purchasing association is exempt under section 103 (12), and 
the financing corporation is operated in conjunction with the marketing or 
purchasing association. 
In addition, the discussion given above with respect to the right of 
associations to obtain exemption under the language of paragraph 
(12) applies to corporations coming under paragraph (13) in so far 
as reserves, surplus, and capital stock are concerned. 
30 In re Temtor Corn & Fruit Products Co., 299 F. 326 ; Schlafly v. United States, 4 F. 
(2d) 195. 
