The Internal Revenue Service has released a Market Segment Specialization Program Audit Guide for "Farming--Specific Income Issues and Farm Cooperatives." 98 TNT 193-44 (July 15, 1998) (Document 98-28761 (36 pages)).
Regarding farming, the guide points out that various income items including the sale of by-products and secondary income sources are often unreported by farmers. The guide lists such income items and how to relate expenses reported to these income items.
The guide also includes chapters on examining farmer income records; gross v. net proceeds; government farm programs; rules of thumb and other information on farming covering specific livestock and row crop issues; and other farm related issues including agricultural labor, discharge of qualified farm indebtedness, family partnerships, fertilizer costs, involuntary conversions, land clearing expenses, accounting for farm corporations, recapture of soil conservation and land clearing expenses and unharvested crops sold with land.
Under the chapter on cooperatives, the guide begins with a background discussion on the role cooperatives play in the farm economy and how they operate. The general discussion of operations includes the topics of operating at cost, patronage distributions, revolving retained patronage, discounted redemptions of retained patronage and retained patronage account transfer issues.
The guide then goes into a discussion of delivery debentures. These debentures have been used by cooperatives to raise money for facility expansions and to control deliveries. The debentures consist of two parts. The top portion is a registered note with a specified interest rate and maturity date. The bottom portion is a delivery privilege contract that gives the owner a right over other patrons without contracts to deliver a specific commodity to the cooperative. The note portion of the debenture is a liability of the cooperative and does not represent an equity interest in the cooperative.
The next cooperative topic covered by the guide is base capital plans. The structure of such plans is discussed, including the determination of the amount of equity needed in a cooperative's operations, the computation of each member's portion of that capital requirement based on each member's patronage portion of the total cooperative patronage business, and how an individual member's base capital shares are paid in or paid back if over-funded. This portion of the guide also includes a discussion of qualified and non-qualified patronage allocations.
The cooperative chapter of the guide concludes with a section on specific audit techniques for cooperative transactions. Items mentioned include undeposited cash payments received by farmers from their cooperatives; patronage refunds and Form 1099 PATR; information not included on Form 1099 PATR such as payments to farmers under a purchase pool arrangement for grain sold and forward contract payments; checks payable jointly to a lien holder and a farmer; expenses related to a cooperative other than those reflected on Form 1099; and unallocated reserve certificates.
Michael D. McIntyre