102 BULLETIN 110 6, U. S. DEPARTMENT OF AGRICULTURE 
Each association, at the first opportunity, should ascertain its 
status with respect to liability for Federal income taxes. This should 
be done by applying to the collector of internal revenue for the 
district in which the association has its principal office for a form 
on which to make application for exemption. Obviously, the Bureau 
of Internal Revenue must make inquiries for the purpose of ascer- 
taining if a given association is, in fact, entitled to exemption. Many 
associations have assumed that they were exempt from liability for 
the payment of income taxes when, in fact, they were not exempt 
because they did not qualify for exemption, and several years elapsed 
before they were called upon and were compelled to pay taxes. 
This has resulted in hardships which could have -been avoided had 
the associations promptly ascertained their liability for income taxes. 
PATRONAGE DIVIDENDS 
What are patronage dividends? They are not dividends at all 
in the sense in which that term is ordinarily employed, but are refunds 
or savings. The aim of a cooperative association is to operate on a 
cost basis, or as near thereto as practicable, giving the members of 
the association the entire selling price of their products, less neces- 
sary marketing expenses and any other authorized deductions for 
maintaining and developing the association. Patronage dividends 
are simply a means of enabling associations the better to achieve 
this result. 
The question of patronage dividends arises principally, if not 
solely, with respect to associations that have a fixed schedule of 
charges for the handling of products and in the case of associations 
that pay for products handled at the time of receipt. For instance, 
some cooperative elevators have a fixed charge per bushel for the 
marketing of the grain they handle, generally the same as the going 
rate charged by private operators, whereas others aim to pay the 
current price therefor. In each case it is contemplated that at the 
end of the year, or of a fixed period, the expenses and costs of opera- 
tion of the association will be ascertained and that the amount re- 
maining will be distributed among the members on the basis of the 
quantity of product, or the value thereof, marketed by the associa- 
tion for each of them. 
In the case of associations that have a schedule of charges, it is 
contemplated that the returns therefrom will more than cover all 
expenses of the association, but obviously it is unknown in advance 
what the exact amount of the expenses will be, and in the case of 
associations that pay the current price for the products handled, 
it is contemplated that the products will be sold for prices that will 
leave a balance after meeting all expenses; but the amount of this 
balance is likewise unknown in advance. At the end of the year, 
or of a fixed period, the expenses of the association are ascertained, 
and this amount, together with any other deductions such as deduc- 
tions for working capital or reserves, is subtracted from the total 
amount which has been received by the association for handling 
charges or from the total sale price of the product. The balance, 
or such portion thereof as the board of directors of the association 
deems advisable, is then returned to the members of the association 
