Item C - Consolidated Return

Cooperatives filing a consolidated return must attach Form 851 and other supporting statements to the return. For details, see Other Forms, Returns, Schedules and Statements That May Be Required, on page 2. Do not check this box if the Section 521 box is checked in Item D.

Item D - Type of Cooperative

Check the Tax exempt (section 521) box if the cooperative is a tax-exempt farmers', fruit growers', or like association, organized and operated on a cooperative basis and is described in section 521.

If the cooperative has submitted Form 1028, Application for Recognition of Exemption, but has not received a determination letter from the IRS, check the Tax exempt (section 521) box, and write Application Pending at the top of page 1 of Form 990-C.

All other farmers', etc., cooperatives organized and operated as described under Who Must File on page 2 of the instructions should check the Nonexempt box.

Cooperatives organized and operated for purposes other than those described in section 521 should not file Form 990-C. See the instructions for Form 1120, U.S. Corporation Income Tax Return, for information about filing requirements.

Item E - Initial Return, Final Return, Name Change, Address Change, or Amended Return

• If this is the cooperative's first return, check the Initial return box.
• If the cooperative ceases to exist, file Form 990-C and check the Final return box.
• If the cooperative changed its name since it last filed a return, check the box for Name change. Generally, a cooperative also must have amended its articles of incorporation and filed the amendment with the state in which it was incorporated.
• If the cooperative has changed its address since it last filed a return, check the box for Address change.

Note.   If a change in address occurs after the return is filed, use Form 8822, Change of Address, to notify the IRS of the new address.

Income

Except as otherwise provided in the Internal Revenue Code, gross income includes all income from whatever source derived. Gross income, however, does not include extraterritorial income that is qualifying foreign trade income. Use Form 8873, Extraterritorial Income Exclusion, to figure the exclusion. Include the exclusion in the total for Other Deductions on line 26.

Line 1. Gross receipts or sales.   Enter gross receipts or sales from all business operations except items of income required to be reported on lines 4a through 10. In general, advance payments are reported in the year of receipt. For how to report income from long-term contracts, see section 460. For special rules for reporting certain advance payments for goods and long-term contracts, see Regulations section 1.451-5. For permissible methods for reporting certain advance payments for services by an accrual method cooperative, see Rev. Proc. 71-21, 1971-2 C.B. 549.

Installment sales.   Generally, the installment method cannot be used for dealers dispositions of property. A dealer disposition is: (a) any disposition of personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan or (b) any disposition of real property held for sale to customers in the ordinary course of the taxpayer's trade or business.

These restrictions on using the installment method do not apply to dispositions of property used or produced in a farming business or sales of timeshares and residential lots for which the cooperative elects to pay interest under section 453(I)(3).

For sales of timeshares and residential lots reported under the installment method, the cooperative's income tax is increased by the interest payable under section 453(l)(3). To report this addition to tax, see the instructions for line 9, Schedule J.

Enter on line 1 (and carry to line 3), the gross profit on collections from installment sales for any of the following:

• Dealer dispositions of property before March 1, 1986.
• Dispositions of property used or produced in the trade or business of farming.
• Certain dispositions of timeshares and residential lots reported under the installment method.

Attach a schedule showing the following information for the current and the 3 preceding years: (a) gross sales, (b) cost of goods sold, (c) gross profits, (d) percentage of gross profits to gross sales, (e) amount collected, and (f) gross profit on the amount collected.

Nonaccrual experience method.   Cooperatives that qualify to use the nonaccrual experience method (explained on page 4) should attach a schedule showing total gross receipts, the amount not accrued as a result of the application of section 448(d)(5), and the net amount accrued. Enter the net amount on line 1a.

Note.   Certain cooperatives that have gross receipts of $10 million or more and have patronage and nonpatronage source income and deductions, must complete and attach Form 8817, Allocation of Patronage and Nonpatronage Income and Deductions, to their return.

Line 2. Cost of goods sold.   Enter the cost of goods sold on line 2, page 1. Before making this entry, complete Schedule A on page 2 of Form 990-C. See the Schedule A instructions on page 12.

Line 4a. Income from patronage dividends and per-unit retain allocations.   Attach a schedule listing the name of each declaring association from which the cooperative received income from patronage dividends and per-unit retain allocations, and the total amount received from each association.

Include the items listed below:

1. Patronage dividends received in:
   • Money,
   • Qualified written notices of allocation, or
   • Other property (except nonqualified written notices of allocation).
2. Nonpatronage distributions received on a patronage basis from tax-exempt farmers' cooperatives in:
   • Money,
   • Qualified written notices of allocation, or
   • Other property (except nonqualified written notices of allocation), based on earnings of that cooperative either from business done with or for the United States or any of its agencies (or from sources other than patronage, such as investment income).
3. Qualified written notices of allocation at their stated dollar amounts and property at its fair market value (FMV).
4. Amounts received on the redemption, sale, or other disposition of nonqualified written notices of allocation.
   Generally, patronage dividends from purchases of capital assets or depreciable property are not includible in income but must be used to reduce the basis of the assets. See section 1385(b) and the related regulations.
5. Amounts received (or the stated dollar value of qualified per-unit retain certificates received) from the sale or redemption of nonqualified per-unit retain certificates.
6. Per-unit retain allocations received (except nonqualified per-unit retain certificates). See section 1385.

Note.   Payments from the Commodity Credit Corporation to a farmers' cooperative for certain expenses of the co-op's farmers-producers under a reseal program of the U.S. Department of Agriculture are patronage-source income that may give rise to patronage dividends under section 1382(b)(1). See Rev. Rul. 89-97, 1989-2 C.B. 217, for more information.

Line 4b. Dividends.   See the instructions for Schedule C on page 13, then complete Schedule C and enter on line 4b, the amount from Schedule C, line 17.

Line 5. Interest.   Enter taxable interest on U.S. obligations and on loans, notes, mortgages, bonds, bank deposits, corporate bonds, tax refunds, etc.

Do not offset interest expense against interest income.

Special rules apply to interest income from certain below-market rate loans. See section 7872 for more information.

Note.   Interest income is generally nonpatronage income to nonexempt cooperatives (Regulations section 1.1382-3(c)(2)). As such, a patronage dividend deduction may not be allowable.

Line 6. Gross rents.   Enter the gross amount received from the rental of property. Deduct expenses such as repairs, interest, taxes, and depreciation on the applicable lines.

Note.   Generally, gross rents are considered nonpatronage income to nonexempt cooperatives (Regulations section 1.1382-3(c)(2)). As such, a patronage dividend deduction may not be allowable.

Line 8. Capital gain net income.   Every sale or exchange of a capital asset must be reported in detail on Schedule D (Form 1120), Capital Gains and Losses, even if there is no gain or loss. Generally, capital gains and losses are considered nonpatronage source.

Line 10. Other income.   Enter any other taxable income not reported on lines 1 through 9. List the type and amount of income on an attached schedule. If the cooperative has only one item of other income, describe it in parentheses on line 10. Examples of other income to report on line 10 are:

• Recoveries of bad debts deducted in prior years under the specific charge-off method.
• The amount of credit for alcohol used as fuel (determined without regard to the limitation based on tax) that was entered on Form 6478, Credit for Alcohol Used as Fuel.
• Refunds of taxes deducted in prior years to the extent they reduced income subject to tax in the year deducted (see section 111). Do not offset current year taxes against tax refunds.
• The amount of any deduction previously taken under section 179A that is subject to recapture. The cooperative must recapture the benefit of any allowable deduction for clean-fuel vehicle property (or clean-fuel vehicle refueling property), if, within 3 years of the date the property was placed in service, it ceases to qualify. See Regulations section 1.179A-1 for details.
• For cooperatives described in section 1381 that are shareholders in an FSC, include the nonexempt portion of foreign trade income from the sale or other disposition of agricultural or horticultural products by the FSC for the tax year that includes the last day of the FSC's tax year, even though the FSC is not required to distribute such income until the due date of its income tax return.
• Ordinary income from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset ordinary losses against ordinary income. Instead, include the losses on line 26, Form 990-C. Show the partnership's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one partnership, identify the amount from each partnership.

Deductions

Limitations on deductions

Section 263A uniform capitalization rules.   The uniform capitalization (UNICAP) rules of section 263A require cooperatives to capitalize, or include in inventory, certain costs incurred in connection with:

• The production of real property and tangible personal property held in inventory or held for sale in the ordinary course of business.
• Real property or personal property (tangible and intangible) acquired for resale.
• The production of real property and tangible personal property by a cooperative for use in its trade or business or in an activity engaged in for profit.

Tangible personal property produced by a cooperative includes a film, sound recording, videotape, book, or similar property.

Cooperatives subject to the UNICAP rules are required to capitalize not only direct costs but an allocable part of most indirect costs (including taxes) that (a) benefit the assets produced or acquired for resale or (b) are incurred by reason of the performance of production or resale activities.

For inventory, some of the indirect expenses that must be capitalized are:

• Administration expenses.
• Taxes.
• Depreciation.
• Insurance.
• Compensation paid to officers attributable to services.
• Reworked labor.
• Contributions to pension, stock bonus, and certain profit-sharing, annuity, or deferred compensation plans.

Regulations section 1.263A-1(e)(3) specifies other indirect costs that relate to production or resale activities that must be capitalized and those that may be currently deductible.

Interest expense paid or incurred during the production period of designated property must be capitalized and is governed by special rules. For more details, see Regulations sections 1.263A-8 through 1.263A-15.

The costs required to be capitalized under section 263A are not deductible until the property (to which the costs relate) is sold, used, or otherwise disposed of by the cooperative.

Exceptions. Section 263A does not apply to:

• Personal property acquired for resale if the cooperative's average annual gross receipts for the 3 prior tax years were $10 million or less.
• Timber.
• Most property produced under a long-term contract.
• Certain property produced in a farming business.
• Research and experimental costs under section 174.
• Intangible drilling costs for oil, gas, and geothermal property.
• Mining exploration and development costs.
• Inventoriable items accounted for in the same manner as materials and supplies that are not incidental. See Cost of Goods Sold on page 12 for details.

For more details on the UNICAP rules, see Regulations sections 1.263A-1 through 1.263A-3. See Regulations section 1.263A-4 and Pub. 225, Farmer's Tax Guide, for rules for property produced in a farming business.

Transactions between related taxpayers.   Generally, an accrual basis taxpayer may only deduct business expenses and interest owed to a related party in the year payment is included in income of the related party. See sections 163(e)(3), 163(j), and 267 for the limitations on deductions for unpaid interest and expenses.

Section 291 limitations.   Cooperatives may be required to adjust deductions for depletion of iron ore and coal, intangible drilling, exploration and development costs, and the amortizable basis of pollution control facilities. See section 291 to determine the amount of the adjustment. Also see section 43.

Golden parachute payments.   A portion of the payments made by a cooperative to key personnel that exceeds their usual compensation may not be deductible. This occurs when the cooperative has an agreement (golden parachute) with these key employees to pay them these excess amounts if control of the cooperative changes. See section 280G.

Business start-up expenses.   Business start-up expenses must be capitalized unless an election is made to amortize them over a period of 60 months. See section 195 and Regulations section 1.195-1.

Passive activity limitations.   Limitations on passive activity losses and credits under section 469 apply to closely held cooperatives.

A cooperative is a closely held cooperative if at any time during the last half of the tax year more than 50% in value of its outstanding stock is owned, directly or indirectly, by or for not more than 5 individuals. Certain organizations are treated as individuals for purposes of this test. See section 542(a)(2). For rules of determining stock ownership, see section 544 (as modified by section 465(a)(3)).

Generally, the two kinds of passive activities are:

• Trade or business activities in which the cooperative did not materially participate and
• Rental activities, regardless of its participation.

For exceptions, see Form 8810.

An activity is a trade or business activity if it is not a rental activity and

• The activity involves the conduct of a trade or business (i.e., deductions from the activity would be allowable under section 162 if other limitations, such as the passive loss rules, did not apply) or
• The activity involves research and experimental costs that are deductible under section 174 (or would be deductible if the cooperative chose to deduct rather than capitalize them).

Cooperatives subject to the passive activity limitations must complete Form 8810 to compute their allowable passive activity loss and credit. Before completing Form 8810, see Temporary Regulations section 1.163-8T, which provides rules for allocating interest expense among activities. If a passive activity is also subject to the earnings stripping rules of section 163(j) or the at-risk rules of section 465, those rules apply before the passive loss rules. For more information, see section 469, the related regulations, and Pub. 925, Passive Activity and At-Risk Rules.

Reducing certain expenses for which credits are allowable.   For each credit listed below, the cooperative must reduce the otherwise allowable deductions for expenses used to figure the credit by the amount of the current year credit.

• Work opportunity credit.
• Research credit.
• Enhanced oil recovery credit.
• Disabled access credit.
• Empowerment zone and renewal community employment credit.
• Indian employment credit.
• The employer credit for social security and Medicare taxes paid on certain employee tips.
• Orphan drug credit.
• Welfare-to-work credit.
• New York Liberty Zone business employee credit.

If the cooperative has any of these credits, first figure each current year credit, then figure the remaining deduction for the expense upon which the credit is based.

Line 12. Compensation of officers.   Enter deductible officer's compensation on line 12. Before entering an amount on line 12, complete Schedule E if the cooperative's total receipts (line 1a plus lines 4 through 10, page 1) are $500,000 or more. Do not include compensation deductible elsewhere on the return, such as amounts included in cost of goods sold, elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

Include only the deductible part of each officers' compensation on Schedule E. Complete Schedule E, line 1, columns (a) through (f), for all officers. The cooperative determines who is an officer under the laws of the state where it is incorporated.

If a consolidated return is filed, each member of an affiliated group must furnish this information.

Disallowance of deduction for employee compensation in excess of $1 million.   Publicly held cooperatives may not deduct compensation to a covered employee to the extent that the compensation exceeds $1 million.

For details, see section 162(m) and Regulations section 1.162-27.

Line 13. Salaries and wages.   Enter the amount of salaries and wages paid for the tax year, reduced by:

• Any work opportunity credit from Form 5884,
• Any empowerment zone and renewal community employment credit from Form 8844,
• Any Indian employment credit from Form 8845,
• Any welfare-to-work credit from Form 8861, and
• Any New York Liberty Zone business employee credit from Form 8884.

See the instructions for these forms for more information. Do not include salaries and wages deductible elsewhere on the return, such as amounts included in cost of goods sold, elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

If the cooperative provided taxable fringe benefits to its employees, such as personal use of a car, do not deduct as wages the amount allocated for depreciation and other expenses claimed on lines 20 and 26.

Line 14. Repairs and maintenance.   Enter the cost of incidental repairs, such as labor and supplies, that do not add to the value of the property or appreciably prolong its life. New buildings, machinery, or permanent improvements that increase the value of the property are not deductible here. They must be depreciated or amortized.

Line 15. Bad debts.   Enter the total debts that became worthless in whole or in part during the tax year. A cash method taxpayer may not claim a bad debt deduction unless the amount was previously included in income.

Line 17. Taxes and licenses.   Enter taxes paid or accrued during the tax year, but do not include the following.

• Federal income taxes.
• Foreign or U.S. possession income taxes if a tax credit is claimed (however, see the Instructions for Form 5735 for special rules for possession income taxes).
• Taxes not imposed on the cooperative.
• Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of property (these taxes are treated as part of the cost of the acquired property, or in the case of a disposition, as a reduction in the amount realized on the disposition).
• Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).
• Taxes deducted elsewhere on the return, such as those reflected in cost of goods sold.

See section 164(d) for apportionment of taxes on real property between the seller and purchaser.

Line 18. Interest.  

Note.   The deduction for interest is limited when the cooperative is a policyholder or beneficiary with respect to a life insurance, endowment, or annuity contract issued after June 8, 1997. For details, see section 264(f). Attach a statement showing the computation of the deduction.

Do not deduct the following:

• Interest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from income tax. For exceptions, see section 265(b).
• For cash basis taxpayers, prepaid interest allocable to years following the current tax year (e.g., a cash basis calendar year taxpayer who in 2002 prepaid interest allocable to any period after 2002 can deduct only the amount allocable to 2002).
• Interest and carrying charges on straddles. Generally, these amounts must be capitalized. See section 263(g).
• Interest on debt allocable to the production of designated property by a cooperative for its own use or for sale. This interest must be capitalized. A cooperative must also capitalize any interest on debt allocable to an asset used to produce the above property. See section 263A(f) and Regulations sections 1.263A-8 through 1.263A-15 for definitions and more information.

Special rules apply to:

• Interest on which no tax is imposed (see section 163(j)).
• Forgone interest on certain below-market-rate loans (see section 7872).
• Original issue discount on certain high yield discount obligations (see section 163(e) to figure the disqualified portion).

Line 19. Charitable contributions.   Enter contributions or gifts actually paid in the tax year to or for the use of charitable and governmental organizations described in section 170(c) and any unused contributions carried over from prior years.

Cooperatives reporting taxable income on the accrual method may elect to treat any contributions paid by the 15th day of the 3rd month after the end of the tax year as paid during the current tax year if the contributions were authorized by the board of directors during the current tax year. Attach a declaration to the return, signed by an officer, stating that the resolution authorizing the contributions was adopted by the board of directors during the current tax year. Also, attach a copy of the resolution.

Limitation on deduction.   The total amount claimed may not be more than 10% of taxable income (line 30) computed without regard to the following:

• Any deduction for contributions;
• The special deductions on line 29b, Form 990-C;
• Any net operating loss (NOL) carryback to the tax year under section 172;
• Any capital loss carryback to the tax year under section 1212(a)(1); and
• The deduction allowed under section 249.

Carryover.   Charitable contributions over the 10% limitation may not be deducted for the current tax year but may be carried over to the next 5 tax years.

Special rules apply if the cooperative has an NOL carryover to the tax year. In figuring the charitable contributions deduction for an NOL year, the 10% limit is applied using the taxable income after taking into account any deduction for the NOL.

To figure the amount of any remaining NOL carryover to later years, taxable income must be modified (see sections 172(b) and (d)). To the extent that contributions are used to reduce taxable income for this purpose and increase an NOL carryover, a contributions carryover is not allowed. See section 170(d)(2)(B).

Substantiation requirements.   Generally, no deduction is allowed for any contribution of $250 or more unless the cooperative gets a written acknowledgment from the donee organization that shows the amount of cash contributed, describes any property contributed and gives an estimate of the value of any goods or services provided in return for the contribution. The acknowledgment must be obtained by the due date (including extensions) of the cooperative's return, or, if earlier, the date the return is filed. Do not attach the acknowledgment to the tax return, but keep it with the cooperative's records. These rules apply in addition to the filing requirements for Form 8283, Noncash Charitable Contributions, described later under Contributions of property other than cash.

For more information on substantiation and recordkeeping requirements, see the regulations under section 170 and Pub. 526, Charitable Contributions.

Contributions to organizations conducting lobbying activities.   Contributions made to an organization that conducts lobbying activities are not deductible if:

• The lobbying activities relate to matters of direct financial interest to the donor's trade or business and
• The principal purpose of the contribution was to avoid Federal income tax by obtaining a deduction for activities that would have been nondeductible under the lobbying expense rules if conducted directly by the donor.

Contributions of property other than cash.   If a cooperative contributes property other than cash and claims over a $500 deduction for the property, it must attach a schedule to the return describing the kind of property contributed and the method used to determine its FMV. Generally, cooperatives must complete and attach Form 8283 to their returns for all contributions of property (other than money) if the total claimed deduction for all property contributed was more than $5,000.

If the cooperative made a qualified conservation contribution under section 170(h), also include the FMV of the underlying property before and after the donation, as well as the type of legal interest contributed, and describe the conservation purpose benefited by the donation.

If a contribution carryover was included, show the amount and how it was determined.

Reduced deduction for contributions of certain property.   For a charitable contribution of property, the cooperative must reduce the contribution by the sum of:

• The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and
• For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV.

The reduction for the long-term capital gain applies to:

• Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption and
• Contributions of any property to or for the use of certain private foundations, except for stock, for which market quotations are readily available (section 170(e)(5)).

Larger deduction.   A larger deduction is allowed for certain contributions of:

• Inventory and other property to certain organizations for use in the care of the ill, needy, or infants (see section 170(e)(3) and Regulations section 1.170A-4A);
• Scientific equipment used for research to institutions of higher learning or to certain scientific research organizations (other than by personal holding companies and service organizations) (see section 170(e)(4)); and
• Computer technology and equipment for educational purposes.

Contributions of computer technology and equipment for educational purposes.   A cooperative may take an increased deduction under section 170(e)(6) for qualified contributions of computer technology or equipment for educational purposes. Computer technology or equipment means computer software, computer or peripheral equipment, and fiber optic cable related to computer use. A contribution is a qualified contribution if:

• It is made to an eligible donee (see below);
• Substantially all of the donee property's use is:
  1. Related to the purpose or function of the donee,
  2. For use within the United States, and
  3. For educational purposes.
• The contribution is made not later than 3 years after the date the taxpayer acquired or substantially completed the construction of the property;
• The original use of the property is by the donor or the donee;
• The property is not transferred by the donee for money, services, or other property, except for shipping, transfer, and installation costs;
• The property fits productively into the donee's education plan; and
• The property meets standards, if any, that may be prescribed by future regulations, to assure it meets minimum functionality and suitability for educational purposes.

Eligible donee.   The term eligible donee means:

• An educational organization that normally maintains a regular faculty and curriculum and has a regularly enrolled body of pupils in attendance at the place where its educational activities are regularly conducted,
• A section 501(c)(3) entity organized primarily for purposes of supporting elementary and secondary education, or
• A public library (as described in section 170(e)(6)(B)(i)(III)).

Exceptions.   The following exceptions apply to the above rules for computer technology and equipment:

• Contributions to private foundations may qualify if the foundation contributes the property to an eligible donee within 30 days after the contribution and notifies the donor of the contribution. For details, see section 170(e)(6)(C).
• For contributions of property reacquired by the manufacturer of the property, the 3-year period begins on the date that the original construction of the property was substantially completed. Also, the original use of the property may be by someone other than the donor or the donee.

Line 20. Depreciation.   Besides depreciation, include on line 20 the part of the cost that the cooperative elected to expense under section 179 for certain tangible property placed in service during tax year 2002 or carried over from 2001. See Form 4562, Depreciation and Amortization, and its instructions.

Line 22. Depletion.   See sections 613 and 613A for percentage depletion rates applicable to natural deposits. Also, see section 291(a)(2) for the limitation on the depletion deduction for iron ore and coal (including lignite).

Attach Form T (Timber), Forest Activities Schedule, if a deduction for depletion of timber is taken.

Foreign intangible drilling costs and foreign exploration and development costs must either be added to the cooperative's basis for cost depletion purposes or be deducted ratably over a 10-year period. See sections 263(i), 616, and 617 for details.

Line 24. Pension, profit-sharing, etc., plans.   Enter the deduction for contributions to qualified pension, profit-sharing, or other funded deferred compensation plans. Employers who maintain such a plan generally must file one of the forms listed below, even if the plan is not a qualified plan under the Internal Revenue Code. The filing requirement applies even if the cooperative does not claim a deduction for the current tax year. There are penalties for failure to file these forms on time and for overstating the pension plan deduction. See sections 6652(e) and 6662(f).

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