26 U.S.C. § 1388 — Definitions; special rules

Page 2473 TITLE 26—INTERNAL REVENUE CODE § 1388 (c) Treatment of certain nonqualified written no- tices of allocation and certain nonqualified per-unit retain certificates (1) Application of subsection This subsection shall apply to— (A) any nonqualified written notice of allo- cation which— (i) was paid as a patronage dividend, or (ii) was paid by an organization de- scribed in section 1381(a)(1) on a patronage basis with respect to earnings derived from business or sources described in section 1382(c)(2)(A), and (B) any nonqualified per-unit retain cer- tificate which was paid as a per-unit retain allocation. (2) Basis; amount of gain In the case of any nonqualified written no- tice of allocation or nonqualified per-unit re- tain certificate to which this subsection ap- plies, for purposes of this chapter— (A) the basis of such written notice of allo- cation or per-unit retain certificate in the hands of the patron to whom such written notice of allocation or per-unit retain cer- tificate was paid shall be zero, (B) the basis of such written notice of allo- cation or per-unit retain certificate which was acquired from a decedent shall be its basis in the hands of the decedent, and (C) gain on the redemption, sale, or other disposition of such written notice of alloca- tion or per-unit retain certificate by any person shall, to the extent that the stated dollar amount of such written notice of allo- cation or per-unit retain certificate exceeds its basis, be considered as ordinary income. (Added Pub. L. 87–834, § 17(a), Oct. 16, 1962, 76 Stat. 1048; amended Pub. L. 89–809, title II, § 211(b)(1)–(4), Nov. 13, 1966, 80 Stat. 1582; Pub. L. 94–455, title XIX, §§ 1901(b)(3)(I), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1793, 1834.) Editorial Notes AMENDMENTS 1976—Subsec. (b). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Secretary’’. Subsec. (c)(2)(C). Pub. L. 94–455, § 1901(b)(3)(I), sub- stituted ‘‘ordinary income’’ for ‘‘gain from the sale or exchange of property which is not a capital asset’’. 1966—Subsec. (a)(3). Pub. L. 89–809, § 211(b)(1), added par. (3). Subsec. (c). Pub. L. 89–809, § 211(b)(2)–(4), inserted ‘‘and certain nonqualified per-unit retain certificates’’ in heading, inserted provisions to par. (1) for the appli- cation of the subsection to any nonqualified per-unit retain certificates which were paid as per-unit retain allocations, and inserted references to per-unit retain certificates in par. (2). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1901(b)(3)(I) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89–809 applicable to per-unit retain allocations made during taxable years of an or- ganization described in section 1381(a) of this title (re- lating 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 sec- tion 17(c) of Pub. L. 87–834, set out as a note under sec- tion 1381 of this title. PART III—DEFINITIONS; SPECIAL RULES Sec. 1388. Definitions; special rules. Editorial Notes AMENDMENTS 1962—Pub. L. 87–834, § 17(a), Oct. 16, 1962, 76 Stat. 1049, added heading of part III and item 1388. § 1388. Definitions; special rules (a) Patronage dividend For purposes of this subchapter, the term ‘‘pa- tronage 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 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 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 pur- poses 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 ex- tent that the articles of incorporation or bylaws of such organization or other contract with pa- trons provide that such dividends are in addition to amounts otherwise payable to patrons which are derived from business done with or for pa- trons during the taxable year. (b) Written notice of allocation For purposes of this subchapter, the term ‘‘written notice of allocation’’ means any cap- ital stock, revolving fund certificate, retain cer- tificate, certificate of indebtedness, letter of ad- vice, 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— Page 2474 TITLE 26—INTERNAL REVENUE CODE § 1388 (A) a written notice of allocation which may be redeemed in cash at its stated dollar amount at any time within a period begin- ning on the date such written notice of allo- cation is paid and ending not earlier than 90 days from such date, but only if the dis- tributee 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 ac- count at its stated dollar amount as pro- vided in section 1385(a). Such term does not include any written notice of allocation which is paid as part of a patron- age 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 divi- dend, 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 con- stitutes such consent, and (ii) he has received a written notification and copy of such bylaw, or (C) if neither subparagraph (A) nor (B) ap- plies, endorsing and cashing a qualified check, paid as a part of the patronage divi- dend or payment of which such written no- tice 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 organiza- tion 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 orga- nization occurring (determined with the application of section 1382(e)) during the taxable year of the organization during which such consent is made and all subse- quent 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 orga- nization occurring (determined without the application of section 1382(e)) after he received the notification and copy de- scribed 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 revoca- tion shall be effective with respect to pa- tronage occurring on or after the first day of the first taxable year of the organiza- tion 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 dis- tributee 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 with- out 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 provi- sion 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 en- dorsement and cashing of the check (or other instrument) constitutes the consent of the payee to include in his gross income, as pro- vided in the Federal income tax laws, the stat- ed dollar amount of the written notice of allo- cation which is a part of the patronage divi- dend 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 de- scribed 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 deter- mining 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 alloca- tion, 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 be- tween the organization and the patron. Page 2475 TITLE 26—INTERNAL REVENUE CODE § 1388 (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 stat- ed 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 dis- tributee has agreed, in the manner provided in paragraph (2), to take into account at its stat- ed 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 con- stitutes 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 tax- able 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 para- graph (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 or- ganization 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 dis- tributee shall not be effective as to any products which were delivered to the organi- zation by the distributee before such revoca- tion. (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 de- scribed 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 sub- chapter applies— (1) Optional netting of patronage gains and losses permitted The net earnings of such organization may, at its option, be determined by offsetting pa- tronage 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, geo- graphic, or otherwise) against patronage earn- ings 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 de- scribed in section 381(a), the acquiring organi- zation may, in computing its net earnings for taxable years ending after the date of acquisi- tion, 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 ex- tent— (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 exer- cises its option under paragraph (1) for any taxable year, such organization shall, on or before the 15th day of the 9th month fol- lowing the close of such taxable year, pro- vide 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 incorpora- tion, or bylaws, or under any provision of law. (B) Certain information need not be provided An organization may exclude from the in- formation 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 deter- mines would disclose commercially sensitive information which— (i) could result in a competitive dis- advantage to such organization, or (ii) could create a competitive advantage to the benefit of a competitor of such orga- nization. Page 2476 TITLE 26—INTERNAL REVENUE CODE § 1388 1 So in original. Probably should be ‘‘mean’’. (C) Failure to provide sufficient notice If the Secretary determines that an orga- nization failed to provide sufficient notice under this paragraph— (i) the Secretary shall notify such orga- nization, and (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 treat- ment of the organization under any provi- sion 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 1 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 sub- chapter, the marketing of the products of mem- bers 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. (Added Pub. L. 87–834, § 17(a), Oct. 16, 1962, 76 Stat. 1049; amended Pub. L. 89–809, title II, § 211(c), Nov. 13, 1966, 80 Stat. 1582; Pub. L. 91–172, title IX, § 911(b), Dec. 30, 1969, 83 Stat. 722; Pub. L. 94–455, title XIX, § 1901(a)(153), Oct. 4, 1976, 90 Stat. 1789; Pub. L. 95–600, title III, § 316(b)(3), Nov. 6, 1978, 92 Stat. 2830; Pub. L. 99–272, title XIII, § 13210(a), Apr. 7, 1986, 100 Stat. 323; Pub. L. 101–508, title XI, § 11813(b)(24), Nov. 5, 1990, 104 Stat. 1388–555; Pub. L. 108–357, title III, §§ 312(a), 316(a), Oct. 22, 2004, 118 Stat. 1467, 1469.) Editorial Notes AMENDMENTS 2004—Subsec. (a). Pub. L. 108–357, § 312(a), inserted at end of concluding provisions ‘‘For purposes of para- graph (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 by- laws of such organization or other contract with pa- trons provide that such dividends are in addition to amounts otherwise payable to patrons which are de- rived 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 be- tween 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 en- actment 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 re- tain 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 sub- secs. (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 sec- tion [amending this section] shall apply to distribu- tions 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 appli- cable 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 AMENDMENT Amendment 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 ac- count under section 46(d) of this title, and any property described in section 46(b)(2)(C) of this title, as such sec- tions 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 tax- able 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 en- actment of this Act [Apr. 7, 1986]. ‘‘(3) NO INFERENCE.—Nothing in the amendments made by this section [amending this section and sec- tion 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 AMENDMENT Amendment 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 AMENDMENT Amendment 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 AMENDMENT Amendment by Pub. L. 89–809 applicable to per-unit retain allocations made during taxable years of an or- ganization described in section 1381(a) of this title (re- lating 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 sec- Page 2477 TITLE 26—INTERNAL REVENUE CODE § 1391 tion 17(c) of Pub. L. 87–834, set out as a note under sec- tion 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 liabil- ity for tax for periods ending after Nov. 5, 1990, see sec- tion 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 pa- tron 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. Subchapter U—Designation and Treatment of Empowerment Zones, Enterprise Commu- nities, and Rural Development Investment Areas Part I. Designation. II. Tax-exempt facility bonds for empowerment zones and enterprise communities. III. Additional incentives for empowerment zones. IV. Incentives for education zones. V. Regulations. Editorial Notes PRIOR PROVISIONS A prior subchapter U consisted of sections 1391 to 1397, prior to repeal by Pub. L. 99–514, title XIII, § 1303(a), Oct. 22, 1986, 100 Stat. 2658. AMENDMENTS 1997—Pub. L. 105–34, title II, § 226(b)(1), Aug. 5, 1997, 111 Stat. 824, added items for parts IV and V and struck out former item for part IV ‘‘Regulations’’. PART I—DESIGNATION Sec. 1391. Designation procedure. 1392. Eligibility criteria. 1393. Definitions and special rules. § 1391. Designation procedure (a) In general From among the areas nominated for designa- tion under this section, the appropriate Secre- taries may designate empowerment zones and enterprise communities. (b) Number of designations (1) Enterprise communities The appropriate Secretaries may designate in the aggregate 95 nominated areas as enter- prise communities under this section, subject to the availability of eligible nominated areas. Of that number, not more than 65 may be des- ignated in urban areas and not more than 30 may be designated in rural areas. (2) Empowerment zones The appropriate Secretaries may designate in the aggregate 11 nominated areas as em- powerment zones under this section, subject to the availability of eligible nominated areas. Of that number, not more than 8 may be des- ignated in urban areas and not more than 3 may be designated in rural areas. If 8 em- powerment zones are designated in urban areas, no less than 1 shall be designated in an urban area the most populous city of which has a population of 500,000 or less and no less than 1 shall be a nominated area which in- cludes areas in 2 States and which has a popu- lation of 50,000 or less. The Secretary of Hous- ing and Urban Development shall designate empowerment zones located in urban areas in such a manner that the aggregate population of all such zones does not exceed 1,000,000. (c) Period designations may be made A designation may be made under subsection (a) only after 1993 and before 1996. (d) Period for which designation is in effect (1) In general Any designation under this section shall re- main in effect during the period beginning on the date of the designation and ending on the earliest of— (A)(i) in the case of an empowerment zone, December 31, 2025, or (ii) in the case of an enterprise commu- nity, the close of the 10th calendar year be- ginning on or after such date of designation, (B) the termination date designated by the State and local governments as provided for in their nomination, or (C) the date the appropriate Secretary re- vokes the designation. (2) Revocation of designation The appropriate Secretary may revoke the designation under this section of an area if such Secretary determines that the local gov- ernment or the State in which it is located— (A) has modified the boundaries of the area, or (B) is not complying substantially with, or fails to make progress in achieving the benchmarks set forth in, the strategic plan under subsection (f)(2). (e) Limitations on designations No area may be designated under this section unless— (1) the area is nominated by 1 or more local governments and the State or States in which it is located for designation under this section, (2) such State or States and the local gov- ernments have the authority— (A) to nominate the area for designation under this section, and (B) to provide the assurances described in paragraph (3), (3) such State or States and the local gov- ernments provide written assurances satisfac- tory to the appropriate Secretary that the strategic plan described in the application under subsection (f)(2) for such area will be implemented, (4) the appropriate Secretary determines that any information furnished is reasonably accurate, and (5) such State or States and local govern- ments certify that no portion of the area nom-