Both the cooperative and its patrons know prior to any transaction that net margins from the transaction will be paid in whole or in part as a patronage refund. The preexisting legal obligation must be in enforceable written form. It can be included in a cooperative's bylaws, articles of incorporation, marketing agreement, sales receipts, or other written contract obligating the cooperative to make the payments. If a State law makes patronage refunds mandatory, that law also is considered a valid obligation. Fourth, patronage refunds are distributions of net margins derived from business with or for patrons.
Patronage refunds can come only from business done with or for patrons.
Income a cooperative may receive from business unrelated to patronage cannot be included in patronage refunds under definitions of the Internal Revenue Code. A review of 521 status is beyond the scope of this pamphlet. A thorough discussion of section 521 can be found in Legal Phases of Farmer Cooperatives, FCS Information 100, beginning at page 381. T. It may simply pay out all of its earnings in cash. This is usually done by cooperatives that do not need to generate additional capital, or those whose members finance by other methods.