26 U.S.C. § 1385 — Amounts includible in patron’s gross in-

Page 2472 TITLE 26—INTERNAL REVENUE CODE § 1383 § 1383. Computation of tax where cooperative re- deems nonqualified written notices of alloca- tion or nonqualified per-unit retain certifi- cates (a) General rule If, under section 1382(b)(2) or (4), or (c)(2)(B), a deduction is allowable to an organization for the taxable year for amounts paid in redemption of nonqualified written notices of allocation or nonqualified per-unit retain certificates, then the tax imposed by this chapter on such organi- zation for the taxable year shall be the lesser of the following: (1) the tax for the taxable year computed with such deduction; or (2) an amount equal to— (A) the tax for the taxable year computed without such deduction, minus (B) the decrease in tax under this chapter for any prior taxable year (or years) which would result solely from treating such non- qualified written notices of allocation or nonqualified per-unit retain certificates as qualified written notices of allocation or qualified per-unit retain certificates (as the case may be). (b) Special rules (1) If the decrease in tax ascertained under subsection (a)(2)(B) exceeds the tax for the tax- able year (computed without the deduction de- scribed in subsection (a)) such excess shall be considered to be a payment of tax on the last day prescribed by law for the payment of tax for the taxable year, and shall be refunded or cred- ited in the same manner as if it were an over- payment for such taxable year. (2) For purposes of determining the decrease in tax under subsection (a)(2)(B), the stated dollar amount of any nonqualified written notice of al- location or nonqualified per-unit retain certifi- cate which is to be treated under such sub- section as a qualified written notice of alloca- tion or qualified per-unit retain certificate (as the case may be) shall be the amount paid in re- demption of such written notice of allocation or per-unit retain certificate which is allowable as a deduction under section 1382(b)(2) or (4), or (c)(2)(B) for the taxable year. (3) If the tax imposed by this chapter for the taxable year is the amount determined under subsection (a)(2), then the deduction described in subsection (a) shall not be taken into account for any purpose of this subtitle other than for purposes of this section. (Added Pub. L. 87–834, § 17(a), Oct. 16, 1962, 76 Stat. 1047; amended Pub. L. 89–809, title II, § 211(a)(5)–(7), Nov. 13, 1966, 80 Stat. 1581.) Editorial Notes AMENDMENTS 1966—Pub. L. 89–809, § 211(a)(5), inserted ‘‘or non- qualified per-unit retain certificates’’ in section catch- line. Subsec. (a). Pub. L. 89–809, § 211(a)(6), substituted ‘‘section 1382(b)(2) or (4)’’ for ‘‘1382(b)(2)’’ and inserted references to per-unit retain certificates. Subsec. (b)(2). Pub. L. 89–809, § 211(a)(7), substituted ‘‘section 1382(b)(2) or (4)’’ for ‘‘section 1382(b)(2)’’ and in- serted references to per-unit retain certificates. Statutory Notes and Related Subsidiaries 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 II—TAX TREATMENT BY PATRONS OF PATRONAGE DIVIDENDS AND PER- UNIT RETAIN ALLOCATIONS Sec. 1385. Amounts includible in patron’s gross income. Editorial Notes AMENDMENTS 1962—Pub. L. 87–834, § 17(a), Oct. 16, 1962, 76 Stat. 1048, added heading of part II and item 1385. § 1385. Amounts includible in patron’s gross in- come (a) General rule Except as otherwise provided in subsection (b), each person shall include in gross income— (1) the amount of any patronage dividend which is paid in money, a qualified written no- tice of allocation, or other property (except a nonqualified written notice of allocation), and which is received by him during the taxable year from an organization described in section 1381(a), (2) any amount, described in section 1382 (c)(2)(A) (relating to certain nonpatronage dis- tributions by tax-exempt farmers’ coopera- tives), which is paid in money, a qualified written notice of allocation, or other property (except a nonqualified written notice of allo- cation), and which is received by him during the taxable year from an organization de- scribed in section 1381(a)(1), and (3) the amount of any per-unit retain alloca- tion which is paid in qualified per-unit retain certificates and which is received by him dur- ing the taxable year from an organization de- scribed in section 1381(a). (b) Exclusion from gross income Under regulations prescribed by the Secretary, the amount of any patronage dividend, and any amount received on the redemption, sale, or other disposition of a nonqualified written no- tice of allocation which was paid as a patronage dividend, shall not be included in gross income to the extent that such amount— (1) is properly taken into account as an ad- justment to basis of property, or (2) is attributable to personal, living, or fam- ily items. 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—