26 CFR § 1.522-3 - Patronage dividends, rebates, or refunds; treatment as to cooperative associations entitled to tax treatment under section 522.

---
identifier: "/us/cfr/t26/s1.522-3"
source: "ecfr"
legal_status: "authoritative_unofficial"
title: "26 CFR § 1.522-3 - Patronage dividends, rebates, or refunds; treatment as to cooperative associations entitled to tax treatment under section 522."
title_number: 26
title_name: "Internal Revenue"
section_number: "1.522-3"
section_name: "Patronage dividends, rebates, or refunds; treatment as to cooperative associations entitled to tax treatment under section 522."
chapter_name: "INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY"
subchapter_number: "A"
subchapter_name: "INCOME TAX"
part_number: "1"
part_name: "INCOME TAXES"
positive_law: false
currency: "2026-04-05"
last_updated: "2026-04-05"
format_version: "1.1.0"
generator: "[email protected]"
authority: "26 U.S.C. 7805, unless otherwise noted."
regulatory_source: "T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960; T.D. 9989, 89 FR 17606, Mar. 11, 2024, unless otherwise noted."
cfr_part: "1"
---


# 1.522-3 Patronage dividends, rebates, or refunds; treatment as to cooperative associations entitled to tax treatment under section 522.

(a) *General rule.* Patronage dividends, refunds, or rebates, allocated by a cooperative association entitled to tax treatment under section 522 to a patron shall be taken into account in computing the gross income of such association for the taxable year, as an increase in its other cost of goods sold in the case of an association marketing products for patrons, or as a reduction in its gross receipts, in the case of an association purchasing supplies and equipment or performing services for patrons, as the case may be, if:

(1) The allocation is made in fulfillment and satisfaction of a valid obligation of such association to the patron, which obligation was in existence prior to the receipt by the cooperative association of the amount allocated, and

(2) The allocation is made on or before the 15th day of the ninth month following the close of the taxable year in which the amounts allocated were received by the cooperative association

For the purpose of subparagraph (1) of this paragraph, amounts allocated by a cooperative association entitled to tax treatment under section 522 will be deemed allocated in fulfillment and satisfaction of a valid enforceable obligation, if made pursuant to provisions of the bylaws, articles of incorporation, or other contract, whereby the association is obligated to make such allocation after the retention of *reasonable reserves* and after payment of dividends on capital stock or other proprietary capital interests. Notwithstanding the provisions of subparagraphs (1) and (2) of this paragraph, amounts allocated as patronage dividends, refunds, or rebates during the taxable year, on or before the 15th day of the ninth month following the close of such year, with respect to patronage for years preceding the taxable year, shall be taken into account as an increase in its other cost of goods sold, or as a reduction in gross receipts, for the taxable year, as the case may be, where retention as *reasonable reserves* of the amounts so allocated beyond the year in which earned was proper in accordance with the provisions of section 521 and where the allocation is made to the patron on a patronage basis is proportion insofar as is practicable, to the amount of business done by such patrons during the taxable year or years in which the retained amounts were received by the cooperative association.

(b) *Examples.* This section may be illustrated by the following examples: