Nonqualified Notices: An Alternative for Distributing Cooperative Earnings

Nonqualified written notices of allocation and per-unit retain certificates offer alternative means for distributing cooperative earnings and allocating patron equity that may have advantages over the methods used by most farmer cooperatives. Nonqualified written notices can be used to delay patron taxes and income and to avoid negative cash flows due to tax. Nonqualified notices also offer cooperatives an additional tool for managing taxes and handling losses. This report defines nonqualified written notices of allocation and per-unit retain certificates, illustrates the application of nonqualified notices, and discusses the extent of their use by U.S. farmer cooperatives. A computer cash flow analysis of qualified and nonqualified patronage refund distributions is conducted to identify characteristics of cooperatives and patrons that would benefit from using nonqualified notices. A number of additional features are discussed, including tax management, equity, and accounting considerations, the use of nonqualified notices in federated systems, factors limiting their use, and steps cooperatives should take in initiating their use.