26 U.S.C. § 1385 — Amounts includible in patron’s gross income

(a) General rule. Unless subsection (b) provides otherwise, each person must include in gross income: (1) a patronage dividend received during the tax year from an organization described in section 1381(a), if paid in money, a qualified written notice of allocation, or other property, but not a nonqualified written notice of allocation; (2) an amount described in section 1382(c)(2)(A), concerning certain nonpatronage distributions by tax-exempt farmers’ cooperatives, if received during the tax year from an organization described in section 1381(a)(1) and paid in money, a qualified written notice of allocation, or other property, but not a nonqualified written notice; and (3) a per-unit retain allocation received during the tax year from an organization described in section 1381(a), if paid in qualified per-unit retain certificates. (b) Exclusion. Under the Secretary’s regulations, a patronage dividend, and an amount received when a nonqualified written notice of allocation paid as a patronage dividend is redeemed, sold, or otherwise disposed of, is not included in gross income to the extent the amount: (1) is properly treated as an adjustment to the basis of property; or (2) comes from personal, living, or family items. (c) Certain nonqualified notices and certificates. (1) This subsection applies to: (A) a nonqualified written notice of allocation that (i) was paid as a patronage dividend, or (ii) was paid by an organization described in section 1381(a)(1) on a patronage basis for earnings from the business or sources described in section 1382(c)(2)(A); and (B) a nonqualified per-unit retain certificate paid as a per-unit retain allocation. (2) For this chapter, for a covered notice or certificate: (A) its basis in the hands of the patron who received it is zero; (B) if acquired from a deceased person, its basis is the basis it had in that person’s hands; and (C) gain from its redemption, sale, or other disposition is ordinary income to the extent its stated dollar amount exceeds its basis.