U.S. Code > Title 26 Internal Revenue Code > Subtitle A—Income Taxes (§§ 1—1564) > CHAPTER 1—NORMAL TAXES AND SURTAXES (§§ 1—1400U3) > Subchapter T—Cooperatives and Their Patrons (§§ 1381—1388) > PART II—TAX TREATMENT BY PATRONS OF PATRONAGE DIVIDENDS AND PER-UNIT RETAIN ALLOCATIONS (§ 1385) > § 1385. Amounts includible in patron’s gross income

§ 1385. Amounts includible in patron’s gross income

(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 notice 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 distributions by tax-exempt farmers’ cooperatives), which is paid in money, a qualified written notice 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)(1), and
(3) the amount of any per-unit retain allocation which is paid in qualified per-unit retain certificates and which is received by him during the taxable year from an organization described 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 notice 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 adjustment to basis of property, or
(2) is attributable to personal, living, or family items.
(c) Treatment of certain nonqualified written notices of allocation and certain nonqualified per-unit retain certificates
(1) Application of subsection
This subsection shall apply to—
(A) any nonqualified written notice of allocation which—
(i) was paid as a patronage dividend, or
(ii) was paid by an organization described 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 certificate which was paid as a per-unit retain allocation.
(2) Basis; amount of gain
In the case of any nonqualified written notice of allocation or nonqualified per-unit retain certificate to which this subsection applies, for purposes of this chapter—
(A) the basis of such written notice of allocation or per-unit retain certificate in the hands of the patron to whom such written notice of allocation or per-unit retain certificate was paid shall be zero,
(B) the basis of such written notice of allocation 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 allocation or per-unit retain certificate by any person shall, to the extent that the stated dollar amount of such written notice of allocation or per-unit retain certificate exceeds its basis, be considered as ordinary income.