Patronage dividends from worker cooperatives

[appelman]

A client works for a collective bakery and received a 1099-PATR showing patronage dividends in Box 1. These would appear to be fully taxable, but it is less clear whether they are subject to SE tax. There seems to be a history of conflicting rulings on this point. Anybody have some words of wisdom on this? And if they are not SE-taxable, would they just be reported on Line 21?

[Bill Tubbs]

how were the expenses treated?

Patronage dividends are basically a rebate on the purchases at the co-op. If the expenses at the co-op were personal expenses, then the dividends are not taxable. If the expenses at the co-op were Sch C expenses, then the dividends are income on the Sch C. I personally have never put them on Line 21, but I suppose it could happen...

Bill

[erchess]

You appear to know more than I do

I didn't know there was any option other than to put them on Sch C or F depending on the nature of the activity.

[appelman]

There are no "purchases."

This is basically an employee rebate. There is also no "business" that my client was engaged in, other than his work as an employee/member of the collaborative. It is perhaps a bit analogous to a draw by a shareholder/officer of a corporation. Apparently, there have been several IRS rulings on this, all more or less in disagreement with one another.