Instructions for Form 1120-C (2006)

Purpose of Form

Use Form 1120-C, U.S. Income Tax Return for Cooperative Associations, to report income, gains, losses, deductions, credits, and to figure the income tax liability of the cooperative.

Who Must File

The regulations requiring all subchapter T cooperatives to file new Form 1120-C for tax years ending on or after December 31, 2006, were still proposed at the time Form 1120-C was released. The final regulations are currently being developed and are expected to be finalized in 2007. See Proposed Regulations section 1.6012-2(f). Until the regulations are final, all subchapter T cooperatives, including farmers' cooperatives, should file the 2006 Form 1120-C to satisfy their filing requirement for tax years ending on or after December 31, 2006.

Any corporation operating on a cooperative basis under IRC section 1381 (including farmers' cooperatives under section 521 whether or not it has taxable income) and allocating amounts to patrons on the basis of business done with or for such patrons should file Form 1120-C.

This does not apply to organizations which are:

Exempt from income tax under chapter 1 (other than exempt farmers' cooperatives under section 521);
Subject to part II (section 591 and following), subchapter H, chapter 1 (relating to mutual savings banks);
Subject to subchapter L (section 801 and following), chapter 1 (relating to insurance companies); or
Engaged in generating, transmitting, or otherwise furnishing electric energy or providing telephone service in rural areas.

Where To File

If the cooperative's principal business, office, or agency is located in the United States, file Form 1120-C with the Internal Revenue Service, Ogden, UT 84201-0027.

If the cooperative's principal business, office, or agency is located in a foreign country or a U.S. possession, file Form 1120-C with the Internal Revenue Service, P.O. Box 409101, Ogden, UT 84409.

When To File

A cooperative can file its income tax return by the 15th day of the 9th month after the end of its tax year provided it meets the requirements of section 6072(d) prior to filing. Any cooperative not meeting the requirements of section 6072(d) must file its income tax return by the 15th day of the 3rd month after the end of its tax year.

If the due date falls on a Saturday, Sunday, or legal holiday, the cooperative can file on the next business day.

Private delivery services. Cooperatives can use certain private delivery services designated by the IRS to meet the “timely mailing as timely filing/paying” rule for tax returns and payments. These private delivery services include only the following.

DHL Express (DHL): DHL Same Day Service, DHL Next Day 10:30 am, DHL Next Day 12:00 pm, DHL Next Day 3:00 pm, and DHL 2nd Day Service.
Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.
United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The private delivery service can tell you how to get written proof of the mailing date.

Private delivery services cannot deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any item to an IRS P.O. box address.

Extension of Time to File

File Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns, to request an automatic 6-month extension of time to file. Generally, file Form 7004 by the regular due date of the return.

Who Must Sign

The return must be signed and dated by:

The president, vice president, treasurer, assistant treasurer, chief accounting officer, or
Any other cooperative officer (such as tax officer) authorized to sign.

If a return is filed on behalf of a cooperative by a receiver, trustee, or assignee, the fiduciary must sign the return, instead of the cooperative officer. Returns and forms signed by a receiver or trustee in bankruptcy on behalf of a cooperative must be accompanied by a copy of the order or instructions of the court authorizing signing of the return or form.

If an employee of the cooperative completes Form 1120-C, the paid preparer's space should remain blank. Anyone who prepares Form 1120-C but does not charge the cooperative should not complete that section. Generally, anyone who is paid to prepare the return must sign it and fill in the “Paid Preparer's Use Only” area.

The paid preparer must complete the required preparer information and:

Sign the return in the space provided for the preparer's signature.
Give a copy of the return to the taxpayer.

A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program.

Paid Preparer Authorization

If the cooperative wants to allow the IRS to discuss its 2006 tax return with the paid preparer who signed it, check the “Yes” box in the signature area of the return. This authorization applies only to the individual whose signature appears in the “Paid Preparer's Use Only” section of the cooperative's return. It does not apply to the firm, if any, shown in that section.

If the “Yes” box is checked, the cooperative is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The cooperative is also authorizing the paid preparer to:

Give the IRS any information that is missing from the return,
Call the IRS for information about the processing of the return or the status of any related refund or payment(s), and
Respond to certain IRS notices about math errors, offsets, and return preparation.

The cooperative is not authorizing the paid preparer to receive any refund check, bind the cooperative to anything (including any additional tax liability), or otherwise represent the cooperative before the IRS. If the cooperative wants to expand the paid preparer's authorization, see Pub. 947, Practice Before the IRS and Power of Attorney.

The authorization will automatically end no later than the due date (excluding extensions) for filing the cooperative's 2007 tax return.

Assembling the Return

To ensure that the cooperative's tax return is correctly processed, attach all schedules and other forms after page 5, Form 1120-C, in the following order.

Schedule N (Form 1120), Foreign Operations of U.S. Corporation.
Form 8302, Electronic Deposit of Tax Refunds of $1 Million or More.
Schedule O (Form 1120), Consent Plan and Apportionment Schedule for a Controlled Group.
Form 4136, Credit for Federal Tax Paid on Fuels.
Form 4626, Alternative Minimum Tax—Corporations.
Form 851, Affiliations Schedule.
Additional schedules in alphabetical order.
Additional forms in numerical order.

Complete every applicable entry space on Form 1120-C. Do not write “See Attached” instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets, using the same size and format as the printed forms. If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms. Enter the cooperative's name and EIN on each supporting statement or attachment.

Depository Methods of Tax Payment

The cooperative must pay any tax due in full no later than the 15th day of the 9th month after the end of the tax year. The two methods of depositing taxes are discussed below.

Electronic Deposit Requirement. The cooperative must make electronic deposits of all depository taxes (such as employment tax, excise tax, and corporate income tax) using the Electronic Federal Tax Payment System (EFTPS) in 2007 if:

The total deposits of such taxes in 2005 were more than $200,000, or
The cooperative was required to use EFTPS in 2006.

If the cooperative is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. If the cooperative is not required to use EFTPS, it can participate voluntarily. To enroll in or get more information about EFTPS, call 1-800-555-4477. To enroll online, visit www.eftps.gov.

Depositing on time. For EFTPS deposits to be made timely, the cooperative must initiate the transaction at least 1 business day before the date the deposit is due.

Deposit with Form 8109. If the cooperative does not use EFTPS, deposit cooperative income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit Coupon. If you do not have a preprinted Form 8109, use Form 8109-B to make deposits. You can get this form by calling 1-800-829-4933 or visiting an IRS taxpayer assistance center. Have your EIN ready when you call or visit.

Do not send deposits directly to an IRS office; otherwise, the cooperative may have to pay a penalty. Mail or deliver the completed Form 8109 with the payment to an authorized depositary (a commercial bank or other financial institution authorized to accept federal tax deposits). Make checks or money orders payable to the depositary.

If the cooperative prefers, it may mail the coupon and payment to: Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Make the check or money order payable to “Financial Agent.”

To help ensure proper crediting, enter the cooperative's EIN, the tax period to which the deposit applies, and “Form 1120” on the check or money order. Darken the “1120” box under “Type of Tax” and the appropriate “Quarter” box under “Tax Period” on the coupon. Records of these deposits will be sent to the IRS. For more information, see “Marking the Proper Tax Period” in the instructions for Form 8109.

If the cooperative owes tax when it files Form 1120-C, do not include the payment with the tax return. Instead, mail or deliver the payment with Form 8109 to an authorized depositary or use EFTPS, if applicable.

Estimated Tax Payments

Generally, the following rules apply to the cooperative's payments of estimated tax.

The cooperative must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more.
The installments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day.
Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax.
If the cooperative does not use EFTPS, use the deposit coupons (Forms 8109) to make deposits of estimated tax.
If the cooperative overpaid estimated tax, it may be able to get a quick refund by filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax.

See the instructions for lines 29b and 29c, Form 1120-C.

Estimated tax penalty. A cooperative that does not make estimated tax payments when due may be subject to an underpayment penalty for the period of underpayment. Generally, a corporation is subject to the penalty if its tax liability is $500 or more and it did not timely pay the smaller of:

Its tax liability for 2006, or
Its prior year's tax.

See section 6655 for details and exceptions, including special rules for large corporations.

Use Form 2220, Underpayment of Estimated Tax by Corporations, to see if the cooperative owes a penalty and to figure the amount of the penalty. Generally, the cooperative does not have to file this form because the IRS can figure the amount of any penalty and bill the cooperative for it. However, even if the cooperative does not owe the penalty, complete and attach Form 2220 if:

The annualized income or adjusted seasonal installment method is used, or
The cooperative is a large corporation computing its first required installment based on the prior year's tax. See the Instructions for Form 2220 for the definition of a large corporation.

Also, see the instructions for line 30, Form 1120-C.

Interest and Penalties

Interest. Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction understatements from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Late filing of return. A cooperative that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. The penalty will not be imposed if the cooperative can show that the failure to file on time was due to reasonable cause. Cooperatives that file late should attach a statement explaining the reasonable cause.

Late payment of tax. A cooperative that does not pay the tax when due generally may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the cooperative can show that the failure to pay on time was due to reasonable cause.

Trust fund recovery penalty. This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on:

Form 720, Quarterly Federal Excise Tax Return;
Form 941, Employer's QUARTERLY Federal Tax Return;
Form 943, Employer's Annual Federal Tax Return for Agricultural Employees;
Form 945, Annual Return of Withheld Federal Income Tax.

The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the Instructions for Form 720, Pub. 15 (Circular E), Employer's Tax Guide, or Pub. 51 (Circular A), Agricultural Employer's Tax Guide, for details, including the definition of responsible persons.

Other penalties. Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. See sections 6662, 6662A, and 6663.

Accounting Methods

Figure taxable income using the method of accounting regularly used in keeping the cooperative's books and records. In all cases, the method used must clearly show taxable income. Permissible methods include:

Cash,
Accrual, or
Any other method authorized by the Internal Revenue Code.

See Pub. 538, Accounting Periods and Methods, for more information.

Change in accounting method. To change the method of accounting used to report taxable income (for income as a whole or for the treatment of any material item), the cooperative must file Form 3115, Application for Change in Accounting Method. For more information on accounting methods, see Form 3115, Pub. 538, and Pub. 542, Corporations.

Accounting Period

A cooperative must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a cooperative uses to keep its records and report its income and expenses. Generally, cooperatives can use a calendar year or a fiscal year.

Change of tax year. Generally, a cooperative must get the consent of the IRS before changing its tax year by filing Form 1128, Application to Adopt, Change, or Retain a Tax Year. However, under certain conditions, a cooperative can change its tax year without getting a consent.

For more information about accounting periods, tax year, and change of tax year, see Form 1128 and Pub. 538.

Rounding Off to Whole Dollars

The cooperative can round off cents to whole dollars on its return and schedules. If the cooperative does round to whole dollars, it must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar (for example, $1.39 becomes $1 and $2.50 becomes $3).

If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.

Recordkeeping

Keep the cooperative's records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Usually, records that support an item of income, deduction, or credit on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Keep records that verify the cooperative's basis in property for as long as they are needed to figure the basis of the original or replacement property.

The cooperative should also keep copies of all returns. They help in preparing future and amended returns.

Other Forms and Statements That May Be Required

Reportable transaction disclosure statement. Disclose information for each reportable transaction in which the cooperative participated. Form 8886, Reportable Transaction Disclosure Statement, must be filed for each tax year that the federal income tax liability of the cooperative is affected by its participation in the transaction. The cooperative may have to pay a penalty if it is required to file Form 8886 and does not do so. The following are reportable transactions.

Any listed transaction, which is a transaction that is the same as or substantially similar to tax avoidance transactions identified by the IRS.
Any transaction offered under conditions of confidentiality for which the cooperative paid an advisor a fee of at least $250,000.
Certain transactions for which the cooperative has contractual protection against disallowance of the tax benefits.
Certain transactions resulting in a loss of at least $10 million in any single year or $20 million in any combination of years.
Certain transactions resulting in a tax credit of more than $250,000, if the cooperative held the asset generating the credit for 45 days or less.

Penalties.

The cooperative may have to pay a penalty if it is required to disclose a reportable transaction under section 6011 and fails to properly complete and file Form 8886. The penalty is $50,000 ($200,000 if the reportable transaction is a listed transaction) for each failure to file Form 8886 with its return or for failure to provide a copy of Form 8886 to the Office of Tax Shelter Analysis (OTSA). Other penalties, such as an accuracy-related penalty under section 6662A, may also apply. See the Instructions for Form 8886 for details.

Reportable transactions by material advisors. Until further guidance is issued, material advisors who provide material aid, assistance, or advice with respect to any reportable transaction, must use Form 8264, Application for Registration of a Tax Shelter, to disclose reportable transactions in accordance with interim guidance provided in Notice 2004-80, 2004-50 I.R.B. 963; Notice 2005-17, 2005-8 I.R.B. 606; and Notice 2005-22, 2005-12 I.R.B. 756.

Transfers to a cooperative controlled by the transferor. If a person receives stock of a cooperative in exchange for property, and no gain or loss is recognized under section 351, the person (transferor) and the transferee must each attach to their tax returns the statements required by Temporary Regulations section 1.351-3T.

Dual consolidated losses. If a cooperative incurs a dual consolidated loss (as defined in Regulations section 1.1503-2(c)(5)), the cooperative (or consolidated group) may need to attach an elective relief agreement and/or an annual certification as provided in Temporary Regulations section 1.1503-2T(g)(2).

Election to reduce basis under section 362(e)(2)(C). The transferor and transferee in certain section 351 transactions can make a joint election under section 362(e)(2)(C) to limit the transferor's basis in the stock received instead of the transferee's basis in the transferred property. The transferor and transferee may make the election by attaching the statement as provided in Notice 2005-70, 2005-41 I.R.B. 694, to their tax returns filed by the due date (including extensions) for the tax year in which the transaction occurred. Once made, the election is irrevocable. See section 362(e)(2)(C) and Notice 2005-70.

Other forms and statements. See Pub. 542 for a list of other forms and statements that the cooperative may need to file in addition to the forms and statements discussed throughout these instructions.

General Instructions