Co-ops

Definition

A cooperative is a business formed under state law that is owned and controlled by the people who use it and returns its earnings to them in proportion to their use (patronage). Under Subchapter T of the Internal Revenue Code, a cooperative may deduct the patronage dividends it pays, so those earnings are taxed to the members instead of the co-op.^[1]

Federal law

Formed under state law. No Act of Congress creates it; the federal laws below apply to it as described.

1. Revenue Act of 1962, Pub. L. 87-834, § 17, 76 Stat. 1045. Added Subchapter T (26 U.S.C. §§ 1381-1388): applies to any corporation operating on a cooperative basis and to farmers' cooperatives, and governs deduction of patronage dividends and their taxation to patrons. Official text: govinfo.gov, U.S. Government Publishing Office.
2. Internal Revenue Code of 1954, Pub. L. 83-591, ch. 736, § 521, 68A Stat. 176. Exempts qualifying farmers' cooperatives from tax except as provided in § 522 (26 U.S.C. § 521). Official text: govinfo.gov, U.S. Government Publishing Office.
3. Capper-Volstead Act, Act of Feb. 18, 1922, ch. 57, 42 Stat. 388. Authorizes agricultural producers to act together in associations for processing and marketing their products, if operated for members' mutual benefit with one-member-one-vote or an 8 percent dividend cap (7 U.S.C. §§ 291-292), the basis of agricultural co-ops' limited antitrust protection; applies only to agricultural co-ops. Official text: govinfo.gov, U.S. Government Publishing Office.