Did a former poultry-marketing cooperative remain eligible for the historical cooperative deduction after ending cooperative operations and entering liquidation?

Plain-English summary

California Legal Ruling 284 held that a former farmers' cooperative did not remain operated on a cooperative or mutual basis after it stopped marketing products and entered liquidation.

The historical special deduction required qualifying operations, not merely organization under cooperative documents or a bylaw obligation to distribute proceeds to members.

During liquidation, the association's income came from rents, dividends, interest, salvage sales, and installment gains on asset sales. FTB concluded those activities did not satisfy the statutory marketing or purchasing tests.

Facts addressed by the ruling

The taxpayer was organized in 1925 as a farmers' cooperative to market poultry products.

The ruling says its active membership terminated those operations in June 1957 and affiliated with another marketing organization. The taxpayer then began liquidating toward ultimate dissolution.

Its bylaws required net operating proceeds to be allocated and distributed according to members' interests in the association's capital funds.

The 1958 and later balance sheets showed liquidation of members' advance-fund certificates but no distribution from members' retain funds. The retain funds represented profits accumulated after marketing operations ceased.

Income during liquidation

After the cooperative stopped marketing, its reported income consisted of:

• rents;
• dividends from the bank for cooperatives;
• proceeds from salvaged supplies and scrap;
• installment gains from asset sales; and
• interest.

The ruling found that none of those sources met the special deduction's marketing or purchasing requirements.

Why cooperative organization was insufficient

The ruling stated that cooperative marketing associations were taxable like other corporations unless an express law provided otherwise.

Former sections 24404 and 24405 required the association to be organized and operated, at least in part, on a cooperative or mutual basis for one or both of these purposes:

1. marketing products of members or other producers; or
2. purchasing or producing supplies and equipment for members or others.

The taxpayer had historically operated as a cooperative, but it no longer performed either qualifying function during liquidation.

Historical 1959 amendment

Before 1959, the ruling said profit-making nonmember income was not deductible from gross income.

A 1959 amendment to former section 24404 allowed a special deduction for amounts allocated to members during the income year. The ruling nevertheless required the recipient association to meet the statute's operational tests.

Source-date inconsistency

The official text first says the active membership terminated marketing operations in June 1957. Later passages state that the corporation had not performed the qualifying functions "since 1956."

This page preserves both statements and does not attempt to resolve the discrepancy.

What this means for you

Cooperatives winding down

Under the historical ruling, cooperative status did not automatically continue through liquidation. Actual ongoing marketing or purchasing operations were essential to the special deduction.

Liquidating businesses

Passive income and proceeds from disposing of property were evaluated according to what the entity was doing during liquidation, not solely what it had done before winding down.

Accountants and tax professionals

Identify the date active operations ended, the character of each post-cessation income item, member allocations, retained funds, and the statute applicable to the tax year. Reconcile source-date conflicts before applying a historical ruling to a live matter.

Common questions

Q: Did the association remain a cooperative merely because it was originally organized as one?

A: No. The ruling required qualifying cooperative operations during the period at issue.

Q: Did a bylaw requiring distributions to members establish eligibility?

A: No. The ruling focused on whether the corporation was actually marketing products or purchasing or producing supplies and equipment.

Q: What income did the corporation earn during liquidation?

A: Rents, dividends, interest, salvage proceeds, and installment gains from asset sales.

Q: Did that income satisfy the statutory tests?

A: No, according to the ruling.

Q: When did cooperative operations cease?

A: The source says June 1957 in its factual history but later says the qualifying activities had not occurred since 1956. The official text is internally inconsistent on that date.

Citations and references

• Former Cal. Rev. & Tax. Code §§ 24404 and 24405

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 284

Original ruling text

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Legal Ruling 1965-284

California Franchise Tax Board
Legal Ruling No. 284

April 23, 1965

Franchise-Cooperative: Marketing Operations Ceased

Cooperative marketing association in liquidation deriving its income from rents, dividends, etc., is not operated in whole or in part on a cooperative basis.

Taxpayer was organized as a farmers cooperative in 1925 for the purpose of cooperative marketing of poultry products. In June of 1957, the active membership terminated these operations, and affiliated with another marketing organization. Since June of 1957, taxpayer has been in the process of liquidating as a step toward ultimate dissolution. Pursuant to its bylaws, all net proceeds from operations are required to be allocated and distributed to members on the basis of their interests in the capital funds of the association.  In its 1958 and subsequent returns, the balance sheets show that the association has been liquidating "members' advance fund certificates", but that it has not made any distribution on its "members' retain funds". This latter represents an accumulation of net profits realized since it ceased its marketing operations. The income reported since June 1957 is made up of rents, dividends received from the bank for cooperatives, sales of sundry salvaged supplies and scrap, gains on sales of its assets reported on the installment basis and interest.

Was subject corporation operated in whole or in part on a cooperative or mutual basis subsequent to 1956 within the meaning of Sections 24404 or 24405 of the Bank and Corporation Tax Law?

Under the Bank and Corporation Tax Law cooperative marketing associations are not exempt from taxation but are taxable like other corporations in the absence of an express provision of law conferring immunity.

Prior to 1959 nonmember income from business done on a profit basis was not deductible from gross income. In 1959 Section 24404 was amended to allow a special deduction of all amounts allocated to members during the income year.

The special deduction is only extended to those cooperative marketing associations which meet prescribed statutory requirements, i.e., the association must be organized and operated in whole or in part on a cooperative or mutual basis, (a) for the purpose of marketing the products of members or other producers . . . (b) for the purpose of purchasing, or producing, supplies and equipment for the use of members or other persons . . . .

The facts clearly disclose that subject corporation is not and has not marketed the products of members or other producers since 1956 and has not purchased or produced supplies and equipment for the use of members or other persons since 1956. It has not been operated in whole or in part on a cooperative or mutual basis since 1956 within the meaning of Sections 24404 or 24405 of the Bank and Corporation Tax Law.

Subject corporation was organized and did operate as a cooperative marketing association prior to 1957 but since 1956 it has been in liquidation and has derived its income from rents, dividends, salvage sales, etc., none of which income appears to meet the marketing and purchasing tests for the said special deduction.

Last updated: 09/24/2025