1. (a) Election to Consider as Income. A taxpayer who receives noncash patronage allocations (as defined in subsection (g)) may elect to include such patronage allocations in gross income for the taxable year received. If a taxpayer elects to include such noncash patronage allocations in gross income as received, their face amount shall be reported as gross income. If, upon redemption of noncash patronage allocations, the taxpayer does not and cannot recover the full amount of the noncash patronage allocations previously reported, any loss sustained may be deducted from gross income in the taxable year during which the allocations are redeemed.
2. (b) Election to Exclude from Gross Income. In lieu of reporting noncash patronage allocations (as provided in subsection (a)), a taxpayer may elect to exclude noncash patronage allocations (as defined in subsection (g)) from gross income until redeemed or realized upon. In case noncash patronage allocations are excluded from gross income, only the amount realized when redeemed is required to be included in gross income. If such allocations bear interest, the interest is not includible in gross income until the allocations are redeemed or realized upon, unless prior to redemption interest thereon is paid in cash. For the method of electing to exclude noncash patronage allocations, see subsection (c).

3. (c) Elections. If a taxpayer includes in his gross income for his first taxable year beginning after December 31, 1956, any amount attributable to noncash patronage allocations, he shall be deemed to have elected to include the face amount of such allocations in gross income for such year and all subsequent taxable years. Furthermore, a taxpayer shall be deemed to have elected to include all noncash patronage allocations in gross income, if less than the face amount of such allocations are reported, or if noncash allocations have been received from more than one cooperative organization and allocations attributable to one or more cooperatives were included in gross income.

   A taxpayer shall be deemed to have elected to exclude noncash patronage allocations from gross income if he omits the amount of such allocations from gross income for the first taxable year beginning after December 31, 1956, during which any noncash patronage allocations are received. The amount of patronage allocations which are excluded must be disclosed in the return or by a written statement filed with the return. If such written statement has not previously been filed, it must be filed before a taxpayer will be permitted to exclude noncash patronage allocations from gross income.

   The elections provided for by this subsection may be made, regardless of the taxpayer's method of accounting. Once an election has been made, it may be changed only with the consent of the Franchise Tax Board. Application for permission to change an election shall be filed within 90 days after the beginning of the taxable year to be covered by the return.

4. (d) Statute of Limitations. Whenever a taxpayer has elected to exclude noncash patronage allocations from gross income until such allocations are redeemed or realized upon, the statutory period prescribed in Section 19057 for the assessment of any deficiency attributable to amounts excluded will not expire prior to the expiration of four years from the date the Franchise Tax Board is notified by the taxpayer that such deferred allocations have been redeemed or realized upon. Such deficiency may be assessed prior to the expiration of such four-year period notwithstanding the provisions of any other law or rule of law which might bar such assessment.

   A taxpayer shall notify the Franchise Tax Board that deferred noncash patronage allocations have been realized or redeemed by including the amount of such allocations in gross income for the taxable year that such amounts are redeemed or realized upon.

5. (e) Records. A taxpayer electing to exclude noncash patronage allocations from gross income for the year that such allocations are made must maintain such records as are necessary to clearly reflect income in accordance with this regulation and Section 17551 (relating to accounting periods and methods of accounting under Subchapter E of Chapter 1 of Subtitle A of the Internal Revenue Code).
6. (f) Cross-reference. If a taxpayer who has elected to exclude patronage allocations from gross income dies before noncash patronage allocations are redeemed or realized upon, the amount realized, when redeemed, constitutes income in respect of a decedent that is subject to tax in the manner and to the extent provided for by Section 17731 (relating to rules applicable to estates, trusts, beneficiaries, and decedents under Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code.).
7. (g) Noncash Patronage Allocations Defined. For purposes of this regulation the term “noncash patronage allocations” means amounts allocated on the basis of the business done with or for a patron by any cooperative organization, other than cash or merchandise, evidenced by any document which discloses the dollar amount of such allocations, such as capital stock, revolving fund certificates, certificates of indebtedness, retain certificates, or letters of advice.

Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17086, Revenue and Taxation Code.

History

1. Editorial renumbering and amendment of former Section 17117.5 to Section 17086 filed 4-17-85; effective thirtieth day thereafter (Register 85, No. 16). For prior history of Section 17117.5, see Registers 81, No. 52 and 64, No. 25.

2. Change without regulatory effect amending subsections (d)-(f) and Note filed 8-18-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 34).