Subchapter T or Section 521?

Cooperatives that perform marketing or purchasing functions for farmers, fruit growers, or similar groups may need to consider whether to be taxed as a Subchapter T (non-exempt) or Section 521 (exempt) cooperative.  Below are factors to consider when determining whether a co-op should apply for Section 521 status, in addition to the eligibility requirements for Section 521 status:

  • Proportion of member vs. non‐member business
  • Whether the cooperative is organized as a stock or non-stock cooperative
  • Non-patronage income
  • Size of net income
  • Non‐member business activities ( 50‐50‐15 rule)
  • Effect on other cooperatives. (The primary concern here is the application on a federation because all member cooperatives must be exempt for the federation to be exempt.)

According to the publication by the University of Kentucky’s Department of Agricultural Economics, “The Farmer’s Cooperative Yardstick: Should Your Cooperative be “Exempt” or “Non-exempt,” exempt status is most advantageous to farmers cooperatives which:

  • “Have large capital stock and subsequent stock dividends payable; stock transfers that are numerous for documentary stamp purposes.
  • Conduct a substantial amount of business with the U.S. Government.
  • Issue stock which otherwise would be regulated under SEC.
  • Receive substantial amounts of non-patronage income.
  • Do not have a large volume of non-member business. . . .
  • Have extensive ICC-Covered business.” (1987, p. 4).

Consumer Cooperatives

Patronage refunds from consumer cooperatives, such as food cooperatives, are not considered taxable income for members.



Hahn, D. (n.d.). “Taxes- Cooperatives and the Internal Revenue Service.” Columbus, OH. The Ohio State University.

Williamson, L. (1987). “The Farmer’s Cooperative Yardstick: Should Your Cooperative be “Exempt” or “Non-Exempt.” University of Kentucky College of Agriculture Cooperative Extension Service Publication No. AEC-53. Retrieved from