What are patronage refunds?

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Material Information

Title:
What are patronage refunds?
Series Title:
FCS information ; 34
Physical Description:
7 p. : 23 x 10 cm.
Language:
English
Creator:
Volkin, David, 1916-
United States -- Farmer Cooperative Service
Publisher:
Dept. of Agriculture, Farmer Cooperative Service
Place of Publication:
Washington
Publication Date:
Edition:
Rev. Apr. 1977.

Subjects

Subjects / Keywords:
Rebates -- United States   ( lcsh )
Cooperative societies -- United States   ( lcsh )
Genre:
federal government publication   ( marcgt )
non-fiction   ( marcgt )

Notes

General Note:
MONTHLY CATALOG NUMBER: gp 77009753
General Note:
Cover title.
Statement of Responsibility:
David Volkin.

Record Information

Source Institution:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 021893420
oclc - 03039881
System ID:
AA00013706:00001

Full Text
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U.S. DEPARTMENT OF AGRICULTURE
FARMER COOPERATIVE SERVICE
FCS INFORMATION 34 -







CONTENTS

Page
Basic Requirements, 2
Relation of patronage refunds to
cooperative features ................. 4
Member ownership and control ..... 5 Service at cost .................... 5
Limited returns on capital .......... 5 Obligation to finance .............. 6



































FCS Information 34 Revised April 1977







:J.

What are

Patronage

ref unds'?

David Volkin
Senior Agricultural Economist, Organization and Finance

Patronage refunds or patronage dividends
are terms distinctive to cooperatives. Rebate is
the term more often used in other businesses.
The Internal Revenue Code of 1954 as
amended,' defines a "patronage dividend" as
66
an amount paid to a patron by an
organization which part I of this subchapter
applies
1. on the basis of quantity or value of busi
ness 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 naid
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 buc.
ness 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."
We use the Internal Revenue Service (IRS)
definition as a basis for achieving some understanding of the term "patronage refund" because the IRS definition provides legal status and guidelines for implementing the cooperative concept of operating on a "service at cost" basis. We prefer to use the term "refund" rather than "divi'See Section 1.1388-1(a)(1) of the income tax
regulations.


















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that patronage refunds arise only from trans actions with its patrons. Thus, income that a cooperative receives from so-called "unrelated"' activities are per se not derived from patronage t ransActions and would not be included in the IRS definition of a patronage refund. Such distfibuti'ns, however, may be computed and distributed on a patronage basis in compliance with Section 521 of the IRS Code. Examples of nonpatronage income would include income items such as rental income, interest income, and capital gains.
Fifth, the obligation of the cooperative to pay patronage refunds must exist before any patronage transaction takes place. Thus, both the cooperative and its patrons have knowledge prior to any transaction that net margins derived from the transaction will be paid in whole or in part as a patronage refund. A typical bylaw provision that sets forth the obligatory nature of a patronage refund reads as follows:
"The association is obligated to make payments of all such amounts in excess of operating costs and expenses in cash refunds or by credits to a capital account for each patron."
Under such'a preexisting mandatory obligation to pay patronage refunds, it is clear that a cooperatives board of directors has no discretionary posture as to whether the cooperative will or will not pay a patronage refund. That decision already exists. The board's purview fies only in the decision area of the time and form of the patronage refund, not if it will be made.
The preexisting obligation must be in enforceable written form. Valid examples include a cooperatives bylaws, articles of incorporation, marketing agreement, sales receipt, or other, written contract obligating the association to make such payment. If a State law makes such patroneage unds mandatory, that law also is considcred as a valid obligation.
Sixth, patronage refunds are distributions of net earnings (net margins or net savings) derived from business transactions with or for patrons. A question as to what constitutes "net earnings" may come up. The Federal income tax regu nations define net earnings as the excess of

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Member Ownership and Control
As patrons increase their equity interest in their cooperatives as a result of receiving patronage distributions in the form of allocated equities, their ownership interest increases. But their patronage, the resulting patronage allocations, other forms of participation in the affairs of their cooperative and, in fact, their loyalties, are unequal. As a result, some cooperatives, as a means of achieving their perceived interpretation of equitability adopt a system of weighted voting that takes into account members' investments arising primarily from their proportionate use of their association.
Based on this analysis, many associations have adopted weighted or proportional voting in preference to the one-member, one-vote method. In other words, patronage refunds appear to contribute to a shift from democratic control to socalled equitable control.


Service at Cost
Patronage refunds strengthen the operationat-cost concept. One point of view is that because costs cannot be estimated accurately in advance, patrons of a cooperative usually. pay the "going or competitive price" for goods or services and generally receive an advance or the going market price for products marketed that is less than the actual value of the product. Adjustments are made at the end of the year when costs are known. The amount of any necessary adjustment then goes to member-patrons as refunds based on patronage, thus reducing the operation to a cost baSiL The refund results in the cooperative not making a profit for itself nor for nonpatron investors.

Limited Returns on Capital primary
Members of a cooperative are i ily
interested in the benefits they derive as patrons of the organization. Because benefits in a cooper ative are distributed to patrons on the basis of

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OTHER PUBLICATIONS AVAILABLE


Handling Net Margins Under Federal Tax Law. :FCS Information 39. Revised September 1976.
pp.


Using Co-op Members' Money. C. H. Kirkman, Jr. FCS Information 79. Revised 1975. 16 pp.


Federal Income Taxes. Part 11-Legal Phases of Farmer Cooperatives. Morrison Neely. FCS Information 100. May 1976. 126 pp.

How Farm Marketing Cooperatives Return Savlings to Patrons. Donald R. Davidson. FCS Research Report 7. 1970. 81 pp.

A Financial Profile of Farmer Cooperatives in ,the United States. Nelda Griffin. FCS Research Report 23. 1970. 95 pp.


How The Adjustable Revolving Fund Capital Plan Works. Nelda Griffin. FCS General Report I 11. 1963, 8 pp.


Methods -and Policies Used in Making Patronage Refunds By Selected Cooperatives. Donald R. Davidson. FCS General Report 137. 1966. 22 pp.


For copies, write Farmer Cooperative Service, U.S. Department of Agriculture, Washington, D. C. 20250.










7




UNIVERSITY OF FLORIDA

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tive leaders and FdrladS improve organization, ledrhi,4 cooperatives and to gv ud development.

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through cooperativeactiont na helps cooperatives improesri efficiency; (4) informs mr employees, and the ublcohwc and~ benefit their mebes ndp'W and (5) encorgsitentoa programs.

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