Schedule C

Dividends and Special Deductions

For purposes of the 20% ownership test on lines 1 through 7, the percentage of stock owned by the cooperative is based on voting power and value of the common stock. Preferred stock described in section 1504(a)(4) is not taken into account. Cooperatives filing a consolidated return should see Regulations sections 1.1502-13, 1.1502-26, and 1.1502-27 before completing Schedule C.

Line 1, Column (a).   Enter dividends (except those received on debt-financed stock acquired after July 18, 1984 - see section 246A) that:

• Are received from less-than-20%-owned domestic corporations subject to income tax and
• Qualify for the 70% deduction under section 243(a)(1).

Also include on line 1:

• Taxable distributions from an IC-DISC or former DISC that are designated as eligible for the 70% deduction and certain dividends of Federal Home Loan Banks. See section 246(a)(2).
• Dividends (except those received on debt-financed stock acquired after July 18, 1984) from a regulated investment company (RIC). The amount of dividends eligible for the dividends-received deduction under section 243 is limited by section 854(b). The cooperative should receive a notice from the RIC specifying the amount of dividends that qualify for the deduction.

Report so-called dividends or earnings received from mutual savings banks, etc., as interest. Do not treat them as dividends.

Line 2, Column (a).   Enter on line 2:

• Dividends (except those received on debt-financed stock acquired after July 18, 1984) that are received from 20%-or-more-owned domestic corporations subject to income tax and that are subject to the 80% deduction under section 243(c) and
• Taxable distributions from an IC-DISC or former DISC that are considered eligible for the 80% deduction.

Line 3, Column (a).   Enter dividends that are:

• Received on debt-financed stock acquired after July 18, 1984, that are received from domestic and foreign corporations subject to income tax and that would otherwise be subject to the dividends-received deduction under sections 243(a)(1), 243(c), or 245(a). Generally, debt-financed stock is stock that the cooperative acquired by incurring a debt (e.g., it borrowed money to buy the stock).
• Received from a RIC on debt-financed stock. The amount of dividends eligible for the dividends-received deduction is limited by section 854(b). The cooperative should receive a notice from the RIC specifying the amount of dividends that qualify for the deduction.

Line 3, Columns (b) and (c).   Dividends received on debt-financed stock acquired after July 18, 1984, are not entitled to the full 70% or 80% dividends-received deduction. The 70% or 80% deduction is reduced by a percentage that is related to the amount of debt incurred to acquire the stock. See section 246A. Also see section 245(a) before making this computation for an additional limitation that applies to dividends received from foreign corporations. Attach a schedule to Form 990-C showing how the amount on line 3, column (c), was figured.

Line 4, Column (a).   Enter dividends received on the preferred stock of a less-than-20%-owned public utility that is subject to income tax and is allowed the deduction provided in section 247 for dividends paid.

Line 5, Column (a).   Enter dividends received on preferred stock of a 20%-or-more-owned public utility that is subject to income tax and is allowed the deduction provided in section 247 for dividends paid.

Line 6, Column (a).   Enter the U.S.-source portion of dividends that:

• Are received from less-than-20%-owned foreign corporations and
• Qualify for the 70% deduction under section 245(a).

To qualify for the 70% deduction, the cooperative must own at least 10% of the stock of the foreign corporation by vote and value.

Also include dividends received from a less-than-20%-owned FSC that:

• Are attributable to income treated as effectively connected with the conduct of a trade or business within the United States (excluding foreign trade income) and
• Qualify for the 70% deduction provided in section 245(c)(1)(B).

Line 7, Column (a).   Enter the U.S.-source portion of dividends that are received from 20%-or-more-owned foreign corporations and that qualify for the 80% deduction under section 245(a). Also include dividends received from a 20%-or-more-owned FSC that:

• Are attributable to income treated as effectively connected with the conduct of a trade or business within the United States (excluding foreign trade income) and
• Qualify for the 80% deduction provided in section 245(c)(1)(B).

Line 8, Column (a).   Enter dividends that are received from wholly owned foreign subsidiaries and that are eligible for the 100% deduction provided in section 245(b).

In general, the deduction under section 245(b) applies to dividends paid out of the earnings and profits of a foreign corporation for a tax year during which:

• All of its outstanding stock is owned (directly or indirectly) by the domestic cooperative receiving the dividends and
• All of its gross income from all sources is effectively connected with the conduct of a trade or business within the United States.

Line 9, Column (c) - Limitation on dividends-received deduction.   Generally, line 9, column (c), may not exceed the amount from the worksheet below. However, in a year in which an NOL occurs, this limitation does not apply even if the loss is created by the dividends-received deduction. See sections 172(d) and 246(b).

Worksheet for Schedule C, line 9 (keep for your records)

1.	Refigure line 28, page 1, Form 990-C, without any adjustment under section 1059 and without any capital loss carryback to the tax year under section 1212(a)(1)
2.	Complete lines 10 and 11, column (c) and enter the total here
3.	Subtract line 2 from line 1
4.	Multiply line 3 by 80%
5.	Add lines 2, 5, 7, and 8, column (c) and the part of the deduction on line 3, column (c) that is attributable to dividends received from 20%-or-more-owned corporations
6.	Enter the smaller of line 4 or line 5. If line 5 is greater than line 4, stop here; enter the amount from line 6 on line 9, column (c). Do not complete the rest of this worksheet
7.	Enter the total amount of dividends received from 20%-or-more-owned corporations that are included on lines 2, 3, 5, 7, and 8, column (a)
8.	Subtract line 7 from line 3
9.	Multiply line 8 by 70%
10.	Subtract line 5 from line 9, column (c)
11.	Enter the smaller of line 9 or line 10
12.	Dividends-received deduction after limitation (section 246(b)). Add lines 6 and 11. Enter the result here and on line 9, column (c)

Line 10, Column (a).   Enter dividends from FSCs that are attributable to foreign trade income and that are eligible for the 100% deduction provided in section 245(c)(1)(A).

Line 11, Columns (a) and (c).   Enter only those dividends that qualify under section 243(b) for the 100% dividends-received deduction described in section 243(a)(3). Cooperatives taking this deduction are subject to the provisions of section 1561.

The 100% deduction does not apply to affiliated group members that are joining in the filing of a consolidated return.

Line 12, Column (a).   Enter foreign dividends not reportable on lines 3, 6, 7, 8, or 10 of column (a). Include on line 12 the cooperative's share of the ordinary earnings of a qualified electing fund from Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, line 1c.

Line 13, Column (a).   Include income constructively received from controlled foreign corporations under subpart F. This amount should equal the total of amounts reported on Schedule I, Form 5471.

Line 14, Column (a).   Include gross-up for taxes deemed paid under sections 902 and 960.

Line 15, Column (a).   Enter taxable distributions from an IC-DISC or former DISC that are designated as not eligible for a dividends-received deduction.

No deduction is allowed under section 243 for a dividend from an IC-DISC or former DISC (as defined in section 992(a)) to the extent the dividend:

1. Is paid out of the cooperative's accumulated IC-DISC income or previously taxed income or
2. Is a deemed distribution under section 995(b)(1).

Line 16, Column (a).   Include the following:

1. Dividends (other than capital gain distributions reported on Schedule D (1120) and exempt-interest dividends) that are received from RICs that are not subject to the 70% deduction.
2. Dividends from tax-exempt organizations.
3. Dividends (other than capital gain dividends) received from a REIT that, for the tax year of the trust in which the dividends are paid, qualifies under sections 856 through 860.
4. Dividends not eligible for a dividends-received deduction because of the holding period of the stock or an obligation to make corresponding payments with respect to similar stock.

   Two situations in which the dividends-received deduction will not be allowed on any share of stock are:

   • If the cooperative held it for less than 46 days during the 90-day period beginning 45 days before the stock became ex-dividend with respect to the dividend (see section 246(c)(1)(A)) or
   • To the extent the cooperative is under an obligation to make related payments for substantially similar or related property.
5. Any other taxable dividend income not properly reported above (including distributions under section 936(h)(4)).

Schedule H

Deductions and Adjustments Under Section 1382

Cooperatives may, under section 1388(j)(1), use losses from one or more allocation units to offset earnings of one or more other allocation units, as permitted by their bylaws, but only to the extent that the earnings and losses are from business done with or for patrons. If a cooperative exercises this option, it must provide the information specified in section 1388(j)(3) by written notice to its patrons.

Special rules also apply if a cooperative has acquired the assets of another cooperative under a section 381(a) transaction. See section 1388(j) for more information. Cooperatives may net earnings and losses under section 1388(j) and still be eligible for tax-exempt treatment. See section 521(b)(6).

If the cooperative sells qualifying foreign trade property, no deduction is allowed for patronage dividends, per-unit retain allocations, and nonpatronage distributions related to foreign trade income. For details, see section 941(b)(2).

Any patronage dividends or per-unit retain allocations that are allocated to qualifying foreign trade income of the cooperative may be treated as qualifying foreign trade income of the patron. In order to qualify, the amount must be designated by the cooperative in a written notice mailed to its patrons not later than the 15th day of the 9th month following the close of the tax year. For more details, see section 943(g).

Note.   Lines 1 and 2 apply only to section 521 cooperatives.

Line 1.   Enter the amount actually or constructively paid as dividends during the tax year on:

• Common stock (whether voting or nonvoting),
• Preferred stock,
• Capital retain certificates,
• Revolving fund certificates,
• Letters of advice, or
• Other documentary evidence of a proprietary interest in the cooperative association.

See Regulations section 1.1382-3(b) for more information.

Line 2.   Enter amounts paid on a patronage basis to patrons from nonpatronage income. Payment may be in:

• Money,
• Qualified written notices of allocation, or
• Other property (except nonqualified written notices of allocation).

The amounts must be paid during the payment period that begins on the first day of the tax year and ends on the 15th day of the 9th month after the end of the tax year in which the income was earned.

Nonpatronage income   includes incidental income from sources not directly related to:

• Marketing,
• Purchasing,
• Service activities of the cooperative (such as income from the lease of premises, investments, or from the sale or exchange of capital assets), or
• Income from business done with or for the U.S. Government, or any of its agencies.

See Patronage dividends below for a definition of qualified written notice of allocation. See section 1382(c)(2)(B) for deductibility of amounts paid in redemption of nonqualified written notices of allocation.

Line 3.   To be deductible, patronage dividends must be paid during the payment period that begins on the first day of the tax year in which the patronage occurs and ends on the 15th day of the 9th month after the end of that tax year.

See sections 1382(e) and (f) for special rules for the time when patronage occurs if products are marketed under a pooling arrangement, or if earnings are includible in the gross income of the cooperative for a tax year after the year in which the patronage occurred.

Patronage dividends include any amount paid to a patron by a cooperative based on the quantity or value of business done with or for that patron under a pre-existing obligation of the cooperative to pay that amount. The amount is determined by reference to the net earnings of the organization from business done with or for its patrons.

Patronage dividends may be in:

• Money,
• Qualified written notices of allocation, or
• Other property (except nonqualified written notices of allocation).

A written notice of allocation means:

• Any capital stock,
• Revolving fund certificate,
• Retain certificate,
• Certificate of indebtedness,
• Letter of advice, or
• Other written notice, which states the dollar amount allocated to the patron by the cooperative and the part, if any, which is a patronage dividend.

In general, a qualified written notice of allocation is a written notice of allocation that is:

• Paid as part of a patronage dividend in money or by qualified check equal to at least 20% of the patronage dividend and
• One of the following conditions is met:

1. The patron must have at least 90 days from the date the written notice of allocation is paid to redeem it in cash, and must receive written notice of the right of redemption at the time the patron receives the allocation; or
2. The patron must agree to have the allocation treated as constructively received and reinvested in the cooperative. See section 1388(c)(2) and the related regulations for information on how the consent must be made.

If a written notice of allocation does not qualify, no deduction is allowable at the time it is issued. However, the cooperative is entitled to a deduction or refund of tax when the nonqualified written notice of allocation is finally redeemed, if that notice was paid as a patronage dividend during the payment period for the tax year during which the patronage occurred. The deduction or refund is allowed, but only to the extent that amounts paid to redeem the nonqualified written notice of allocation are paid in money or other property (other than written notices of allocation). They cannot be more than the stated dollar amounts of the nonqualified written notice of allocation. See section 1382(b) and related regulations. See also section 1383.

See Rev. Rul. 81-103, 1981-1 C.B. 447, for the redemption of nonqualified written notices of allocation issued to patrons by a payment of cash and a crediting of accounts receivable due from patrons.

Note.   See section 1383 for special rules for figuring the cooperative's tax in the year nonqualified written notices of allocation are redeemed. The cooperative is entitled to:

• A deduction in the tax year the nonqualified written notices of allocation are redeemed (if permitted under section 1382(b)(2) or (4) or section 1382(c)(2)(B)) or
• A tax credit based on a recomputation of tax for the year(s) the nonqualified written notices of allocation were issued. See instructions for line 32f.

Amounts paid to patrons are not patronage dividends if paid:

1. Out of earnings not from business done with or for patrons;
2. Out of earnings from business done with or for other patrons to whom no amounts or smaller amounts are paid for substantially identical transactions;
3. To redeem capital stock, certificates of indebtedness, revolving fund certificates, retain certificates, letters of advice, or other similar documents; or
4. Without reference to the net earnings of the cooperative organization from business done with or for its patrons.

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