Clover Farm Stores Corporation, 17 T.C. 1265, 1276, 1277; Colony Farms Cooperative Dairy, Inc., 17 T.C. 688, 692; United Cooperatives, Inc., 4 T.C. 93, 106. This rule applies only if the members' rights to patronage refunds existed at the time the members transacted business with the corporation and were not dependent upon any subsequent corporate action.

United Cooperatives, Inc., 4 T.C. 93, followed. John W. Cragun, Esq., for the petitioner.

(emphasis added). In United Coops., Inc. v. Commissioner, 4 T.C. 93, 107–108, 1944 WL 10 (1944), we held that an agricultural cooperative was entitled to exclude from gross income as a patronage dividend the excess of its net income available for distribution to its patrons (and to which they had a right) over the amount of that income that the cooperative had discretion to pay as dividends on its common stock. We said:

Sec. 1388(a). They have been excluded from the cooperative's gross income on several theories: (1) Since cooperatives distribute patronage dividends pursuant to existing legal obligations, they are merely conduits of income; see Dr. P. Phillips Cooperative v. Commissioner, 17 T.C. 1002, 1010 (1951); United Cooperatives, Inc. v. Commissioner, 4 T.C. 93, 105 (1944); (2) the cooperative is acting as an agent or trustee for money which belongs to the patron from the beginning. See San Joaquin Valley Poultry Products Association v. Commissioner, 136 F.2d 382, 385 (9th Cir. 1943); Harbor Plywood Corp. v. Commissioner, 14 T.C. 158, 161 (1950); (3) the cooperative is essentially like a large partnership in which all of the patrons are members.

United States V. Mississippi Chemical Co., 326 F.2d 569, 571 (C.A. 5, 1964); see also United Cooperatives, Inc., 4 T.C. 93, 107-108(1944); Southwest Hardware Co., 24 T.C. 75, 83(1955); Clover Farms Stores Corporation, 17 T.C. 1265, 1279-1289(1952); Colony Farms Cooperative Dairy, Inc., 17 T.C. 688, 693-694(1951); Fountain City Cooperative Creamery Association, 9 T.C. 1077, 1080-1081(1947), affd. 172 F.2d 666 (C.A. 7, 1949). Thus, even under petitioner's view, only that part of its patronage distributions which exceeded the sum of (1) the amount set aside for the general reserve and (2) an amount equal to 5 percent of the par value of petitioner's capital stock could have been paid ‘under an obligation of such organization to pay such amount, which obligation existed before the organization received this amount so paid.’

See, for example, Pomeroy Cooperative Co., 31 T.C. 674, affirmed on this point 288 F.2d 326 (C.A. 8); Smith & Wiggins Gin, Inc. v. Commissioner, 351 F.2d 341, (C.A. 5), affirming 37 T.C. 861; United States v. Mississippi Chemical Co., 326 F.2d 569 (C.A. 5); Clover Farm Stores Corporation, 17 T.C. 1265, 1277; Dr. P. Phillips Cooperative, 17 T.C. 1002, 1010; United Cooperatives, Inc., 4 T.C. 93, 106; Midland Cooperative Wholesale, 44 B.T.A. 824, 830; Fruit Growers Supply Co., 21 B.T.A. 315, 326, affd. 56 F.2d 90 (C.A. 9); and Farmers Cooperative Co. v. Birmingham, 86 F.Supp. 201 (N.D. Iowa). In the case of Dr. P. Phillips Cooperative, supra, this Court said:

Cf. United Cooperatives, Inc., 4 T.C. 93, 108 (1944), and Colony Farms Cooperative Dairy, Inc., 17 T.C. 688, 694 (1951). The resolution adopted in 1955 dealt with the 1954 earnings and apparently was considered by petitioner up to the time of trail as being a dividend declared in 1954.

Cf. United Cooperatives, Inc., 4 T.C. 93, 108 (1944), and Colony Farms Cooperative Dairy, Inc., 17 T.C. 688, 694 (1951). The resolution adopted in 1955 dealt with the 1954 earnings and apparently was considered by petitioner up to the time of trial as being a dividend declared in 1954.

Pomeroy Cooperative Grain Co., 31 T.C. 674; Clover Farm Stores Corporation, 17 T.C. 1265; Dr. P. Phillips Cooperative, 17 T.C. 1002; United Cooperatives, Inc., 4 T.C. 93; Uniform Printing & Supply Co. v. Commissioner, 88 F.2d 75. To qualify for exclusion, however, the allocation of earnings must have been made pursuant to a preexisting legal obligation.

Pomeroy Cooperative Grain Co., 31 T.C. 674; Clover Farm Stores Corporation, 17 T.C. 1265; Dr. P. Phillips Cooperative, 17 T.C. 1002; United Cooperatives, Inc., 4 T.C. 93; Uniform Printing & Supply Co. v. Commissioner, 88 F.2d 75. To qualify for exclusion, however, the allocation of earnings must have been made pursuant to a preexisting legal obligation.