Could a qualified California farmers' cooperative deduct income from activities outside its marketing, purchasing, and producing functions when it properly allocated that income to members?

Plain-English summary

California Legal Ruling 389 affirmed that a qualified farmers' cooperative could deduct all income properly allocated to members, regardless of the income's source.

The income did not have to come from the cooperative's marketing, purchasing, producing, or other traditional cooperative activities. Under FTB's interpretation of former section 24404, allocation—not source—controlled the deduction.

The question FTB answered

Former section 24404 allowed a special deduction for income from specified cooperative activities, whether or not derived from patronage, when allocated to members during the income year.

FTB was asked whether income from other activities also could be deducted after allocation to members.

The agency answered yes and affirmed its existing administrative practice.

Why source did not control

FTB looked to the legislative history of the 1959 amendment to section 24404.

The ruling said the amendment's purpose was to tax all cooperative income once:

• at the cooperative level before allocation; or
• in the members' hands after allocation.

That purpose covered income not derived from cooperative activities. Denying the deduction based only on source would undermine the one-tax treatment FTB found in the amendment.

Administrative interpretation

FTB said it had allowed deductions for all properly allocated income for several years following the amendment.

The ruling relied on the principle that courts give great weight to an agency's long-standing construction of a statute and do not depart from it unless clearly erroneous or unauthorized.

FTB concluded that its allocation-based interpretation was neither clearly erroneous nor unauthorized and formally affirmed it.

What this means for you

Farmers' cooperatives

Under the historical ruling, properly allocating income to members could support a deduction even when the income came from outside the cooperative's usual member-service activities.

Cooperative managers and accountants

The key record was the allocation to members. Maintain documentation showing what income was allocated, to whom, when, and under what cooperative authority.

Tax professionals

This ruling states a broad source-independent deduction but does not itself provide detailed rules for late allocations or unallocated income. Apply current statutes and allocation requirements.

Common questions

Q: Did income have to come from patronage to qualify?

A: No. The ruling said all properly allocated income was deductible regardless of source.

Q: Could income from activities outside marketing, purchasing, or producing qualify?

A: Yes, if properly allocated to members under the former statute.

Q: Why did FTB allow the deduction?

A: It read the 1959 amendment as intending to tax the income once, either before allocation at the cooperative level or after allocation to members.

Q: Did the ruling rely only on a new interpretation?

A: No. It affirmed an administrative practice FTB said it had followed for several years.

Q: Does this establish current cooperative deduction rules?

A: No. It applies former section 24404 and a 1959 amendment; current law must be checked.

Citations and references

• Former Cal. Rev. & Tax. Code § 24404
• 1959 SB 886, Stats. 1959, ch. 923
• 26 Cal. App. 3d 970 (1972)
• 231 Cal. App. 2d 278 (1964)

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 389

Original ruling text

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Legal ruling 389

STATE OF CALIFORNIA
Franchise Tax Board - Legal Division

March 13, 1975

Franchise - Farmers' Cooperative Associations - Income Deductible - A Farmers' Cooperative Association May Deduct from its Gross Income All Income, Regardless of Source, Which is Properly Allocated

Section 24404 of the Bank and Corporation Tax Law provides to qualified farmers' cooperative associations a special deduction for all income resulting from or arising out of certain business activities, whether or not derived from patronage, allocated to members during the income year.

Advice has been requested whether farmers' cooperative associations may deduct allocated income accruing from activities other than the marketing, purchasing and producing activities described in Section 24404(a) and (b).

The legislative history of the second paragraph of Section 24404, which was enacted in 1959 (Senate Bill No. 886, Chap. 923), suggests that the intent was to tax all income, including income not derived from cooperative activities, of a farmers' cooperative association once, either before allocation at the corporate level, or after allocation when in the hands of the members.

For several years the Franchise Tax Board has acknowledged the amendment to Section 24404 by permitting farmers' cooperative associations to deduct all properly allocated income.

The courts have given "great weight" to administrative construction of statutes, and "will not depart from such construction unless it is clearly erroneous or unauthorized." (Handerly v. Franchise Tax Board, 26 Cal.App. 3d 970,982 (1972); Whittell v. Franchise Tax Board, 231 Cal.App. 2d 278, 286 (1964).)

It cannot be said that the prevailing administrative construction of Section 24404 is clearly erroneous or unauthorized; accordingly, the practice of allowing deductions to farmers' cooperative association based upon the allocation, rather than the source, of the income is affirmed.

Last updated: 09/24/2025