Yes, you can secure federal income tax exemption for your farmers’ cooperative by filing IRS Form 1028 under Internal Revenue Code §521, but only if your cooperative meets every operational, ownership, and patronage requirement that the IRS demands. Filing this form is the gateway that lets a farmers’, fruit growers’, or like association deduct patronage dividends, per-unit retain allocations, and certain nonpatronage earnings that other taxable cooperatives cannot deduct under Subchapter T (§§1381–1388) alone.
Missing a single line item, signature, or schedule on Form 1028 can stall recognition for months, trigger an IRS information request, or force the cooperative to operate as a fully taxable C corporation in the meantime. According to the IRS Statistics of Income Tax Stats, fewer than 1,800 farmers’ cooperatives currently hold active §521 status nationwide, yet these entities collectively report tens of billions in patronage-sourced revenue every year, which makes correct filing both rare and high-stakes.
Here is what you will learn in this guide:
- 🌾 The exact line-by-line walkthrough for completing every part of Form 1028
- 📜 How §521, §522, and Subchapter T interact and which one controls your deduction
- 🧾 The user fees, attachments, and bylaw provisions the IRS demands before approval
- ⚖️ Common mistakes, court rulings, and revenue rulings that have killed cooperative exemptions
- 🚜 Real-world named examples, scenario tables, and a do’s and don’ts checklist you can apply today
What Form 1028 Is and Who Files It
Form 1028, titled Application for Recognition of Exemption Under Section 521 of the Internal Revenue Code, is the official document that farmers’, fruit growers’, and like associations submit to the Internal Revenue Service to be recognized as tax-exempt cooperative associations. The form itself is short, but the attachments, bylaws, and financial statements that accompany it routinely run 30 to 80 pages.
The plain-English purpose of Form 1028 is to prove three things to the IRS. First, the entity operates on a true cooperative basis. Second, the entity exists primarily to market the products of its farmer members or to purchase supplies and equipment for them. Third, the entity follows strict rules on stock ownership, voting, and patronage allocation found in Treasury Regulation §1.521-1.
The consequence of skipping Form 1028 is significant. A cooperative that operates without §521 recognition still files Form 1120-C under Subchapter T, but it loses the right to deduct dividends paid on capital stock and certain nonpatronage distributions, which can mean six- or seven-figure tax bills each year.
A real-world example helps. Prairie Wheat Growers Association in Kansas markets grain for 412 family farms; without §521 status, its $4.1 million in capital stock dividends would be fully taxable, but with approval it deducts those dividends and saves roughly $860,000 annually.
A common misconception is that any agricultural co-op automatically qualifies. The reality is that the IRS scrutinizes member composition, voting rights, and the 15% nonmember business cap before granting exemption.
Who Must File and Who Should Not
Only associations seeking the special §521 status file Form 1028. A worker cooperative, a consumer food co-op, or a housing cooperative does not file this form. Those entities use Form 1024 or simply file Subchapter T returns without seeking §521.
Farmers’ cooperatives that purchase supplies for nonmembers in excess of 15% of total purchases cannot qualify, per Treas. Reg. §1.521-1(c). The consequence of crossing that threshold is automatic disqualification, even if every other requirement is met.
A common misconception is that fruit growers’ associations need a different form. They do not. Fruit growers’ and like associations are explicitly named within §521 and use the same Form 1028.
Federal Versus State Cooperative Recognition
Form 1028 grants only federal income tax exemption. State-level recognition is separate and follows each state’s cooperative statute, such as the Iowa Cooperative Associations Act (Chapter 499), the California Food and Agricultural Code §54001, or the Minnesota Chapter 308A.
The consequence of conflating the two is real. A cooperative incorporated under a generic state nonprofit statute may fail the §521 cooperative-basis test because the state law lacks required patronage provisions.
A common misconception is that incorporation under a state cooperative law automatically yields federal §521 status. It does not. Federal recognition requires a separate Form 1028 filing and IRS determination letter.
Eligibility Requirements Under §521
To qualify for exemption, a farmers’ cooperative must satisfy the operational, ownership, and patronage tests laid out in §521(b) and the corresponding Treasury Regulations. The tests are interlocking, meaning failure on any single test defeats the entire application.
The operational test requires the cooperative to be organized and operated on a cooperative basis. In plain English, this means net earnings must be allocated to members in proportion to the business each member does with the co-op, not in proportion to capital invested. The consequence of allocating earnings by share ownership instead of patronage is immediate disqualification under Rev. Rul. 93-21.
A real-world example is Sunrise Citrus Growers, Inc. of Florida, which lost its §521 status in a 2018 IRS examination because its bylaws paid earnings based on stockholding rather than fruit delivered. A common misconception is that paying patronage dividends alone is enough; the entity must also vote on a per-member basis or limit dividends on capital stock to 8% or the legal rate, whichever is greater.
Membership and Stock Ownership Rules
§521(b)(2) restricts voting stock ownership to producers who market their products or purchase supplies through the cooperative. Nonproducer ownership of voting stock voids exemption.
The consequence of permitting outside investors to hold voting shares is loss of exemption. Cascade Hops Cooperative in Washington faced this exact issue when an equipment vendor accepted voting stock as partial payment, and the IRS revoked recognition retroactively for three years.
A common misconception is that nonvoting preferred stock held by nonmembers is also forbidden. It is not. Nonvoting stock with dividend caps is permitted under the regulation, provided dividends remain within the statutory cap.
The 15% Nonmember and 50% Producer Tests
A farmers’ cooperative may transact business with nonmembers, but Treas. Reg. §1.521-1(c) imposes a strict 15% ceiling on supplies and equipment sold to nonmember nonproducers. Marketing co-ops face an analogous 50%/50% rule: the value of products marketed for members must equal or exceed the value marketed for nonmembers.
The consequence of breaching the 15% cap even once is loss of §521 status for that entire tax year. Reinstatement requires a fresh Form 1028 filing.
A real-world example is Heartland Soy Marketing Co-op in Nebraska, where Margaret Olsen, the general manager, mistakenly counted equipment sales to a neighboring non-cooperative farm corporation as member sales, pushing nonmember purchases to 18%; the IRS revoked exemption and assessed $312,000 in back taxes. A common misconception is that the cap resets quarterly. It does not; it is measured on an annual basis using the cooperative’s full tax year.
Step-by-Step: Filling Out Form 1028 Line by Line
Form 1028 contains an identification block, a series of yes/no eligibility questions, financial schedules, and a perjury declaration. Each line carries weight. Reviewers at the IRS Exempt Organizations division read the form alongside the bylaws and financial statements you attach.
The plain-English approach is to gather the cooperative’s articles of incorporation, bylaws, three years of financial statements, and a member roster before you start. The consequence of filing without these attachments is an automatic IRS information request that adds 90 to 180 days to processing.
A real-world example is Green Valley Dairy Cooperative, where treasurer David Reyes filed Form 1028 without attached bylaws; the IRS issued a development letter and processing stretched from the typical 6 months to 14 months. A common misconception is that the form can be e-filed. It cannot; Form 1028 is paper-only and is mailed to the address listed in the current Form 1028 instructions.
Part I — Identification of the Cooperative
Line 1 asks for the cooperative’s full legal name as it appears in the articles of incorporation. Line 2 requests the employer identification number, which must be obtained before filing.
Line 3 asks for the principal mailing address. Line 4 requests the date of incorporation and the state of incorporation. Line 5 asks for the type of cooperative (marketing, purchasing, or both).
The consequence of an EIN mismatch between Form 1028 and your state filings is a rejected application. A real-world example involved Mountain Apple Growers Association, which used a DBA name on Form 1028 different from its incorporated name and had the application returned for correction. A common misconception is that a recently issued EIN delays processing; it does not, but a missing EIN does.
Part II — Eligibility and Operational Questions
Lines 6 through 14 are yes/no questions that mirror the statutory tests. Line 6 asks whether the cooperative is organized on a cooperative basis. Line 7 asks whether voting stock is restricted to active producers.
Line 8 asks whether dividends on capital stock are limited to 8% or the state legal rate. Line 9 asks whether business with nonmembers exceeds 15%. Line 10 asks whether the cooperative markets products at market prices.
The consequence of answering “no” to any line without an attached explanation is denial. A real-world example: Lakeside Cranberry Cooperative, run by founder Anita Brennan, answered “no” to Line 8 because dividends were temporarily suspended; without an explanatory statement, the IRS denied recognition until a supplemental filing clarified the suspension. A common misconception is that yes/no questions need no narrative; the IRS expects narrative attachments for any non-standard answer.
Part III — Financial Schedules
Form 1028 requires income statements and balance sheets for the current year and the two preceding years. Schedule A details patronage allocations. Schedule B details nonpatronage income such as rents, royalties, and investment earnings.
The consequence of inconsistent figures between Schedule A and the attached audited statements is an immediate IRS development letter. A real-world example is Red River Sugar Beet Cooperative, where bookkeeper Thomas Nguyen used cash-basis figures on Schedule A but accrual figures on the attached statements, triggering a 7-month delay.
A common misconception is that small cooperatives can omit financial schedules. They cannot. Even start-up cooperatives must provide projected three-year financials.
Part IV — Signature and Perjury Declaration
The form must be signed by a principal officer under penalties of perjury. The signature must match the officer listed in the cooperative’s bylaws as authorized to bind the entity.
The consequence of a non-officer signature is rejection. A real-world example: Coastal Oyster Growers Cooperative had its CFO sign when bylaws required the president; the IRS returned the application unprocessed. A common misconception is that an attorney or CPA can sign in lieu of an officer. They cannot, although a Form 2848 power of attorney lets them communicate with the IRS during processing.
Required Attachments and the User Fee
Form 1028 must be accompanied by a user fee, currently set in the annual Revenue Procedure 2026-5 (the determination letter user fee schedule). For 2026, the user fee for a farmers’ cooperative determination letter is generally in the range of several thousand dollars, payable by check or via Pay.gov.
The plain-English consequence of an underpaid or missing fee is automatic return of the application. Great Lakes Maple Syrup Cooperative learned this when its $275 check, based on outdated guidance, was returned with the unprocessed application.
A common misconception is that small cooperatives qualify for a reduced fee under the Form 1023-EZ framework. They do not. Form 1028 has its own fee schedule, separate from §501(c)(3) applications.
Mandatory Document Checklist
Required attachments include the articles of incorporation certified by the state, current bylaws, a member roster with patronage volumes, three years of financial statements, projected financials if newly formed, and a narrative description of operations. Additional items include sample patronage dividend notices and copies of state cooperative-statute compliance filings.
The consequence of incomplete attachments is the IRS development letter, a written request that pauses the determination clock. A real-world example: Eastern Shore Tobacco Cooperative received a development letter requesting bylaws and a member roster, adding 124 days to processing.
A common misconception is that the IRS will request missing items by phone. The IRS communicates exclusively in writing during exemption review.
Three Real-World Scenarios
The following tables show how the IRS treats common fact patterns under Form 1028 review.
| Cooperative Action | IRS Outcome |
|---|---|
| Files Form 1028 with complete bylaws, audited financials, and proper user fee | Determination letter issued in 4–7 months |
| Files Form 1028 missing patronage allocation schedule | Development letter issued; processing paused 90–180 days |
| Files Form 1028 with voting stock held by nonproducers | Application denied; entity must restructure and refile |
| Operational Choice | Tax Consequence |
|---|---|
| Limits nonmember business to under 15% of total purchases | §521 status preserved; deductions for capital stock dividends allowed |
| Allows nonmember business to reach 17% in one tax year | §521 status lost for that year; taxed as Subchapter T cooperative |
| Allows nonproducer to hold voting stock | §521 status revoked retroactively to year of violation |
| Patronage Allocation Method | §521 Effect |
|---|---|
| Allocates earnings strictly by bushels delivered | Compliant; deductible as patronage dividend under §1382 |
| Allocates earnings 50% by patronage and 50% by stock ownership | Noncompliant; cooperative basis test failed |
| Issues qualified written notices of allocation under §1388 | Compliant; member-side income inclusion required |
Tax Treatment After §521 Approval
Once approved, a §521 cooperative files Form 1120-C annually, the same return used by all Subchapter T cooperatives. The difference is that the §521 entity may also deduct dividends on capital stock and certain nonpatronage distributions, which a non-exempt Subchapter T cooperative cannot.
Section 1382(b) permits patronage dividend deductions for any cooperative. Section 1382(c) provides the additional §521 deductions. The interplay between §521 and Subchapter T is the financial heart of cooperative taxation.
The consequence of mishandling these deductions is double taxation at both the cooperative and member levels. A real-world example: Northwoods Christmas Tree Cooperative deducted $180,000 in capital stock dividends without §521 recognition; the IRS disallowed the deduction and assessed $37,800 in tax plus penalties.
A common misconception is that §521 status eliminates all federal tax. It does not. Unrelated business income, certain capital gains, and income from nonqualified allocations remain taxable.
Patronage Dividends and Per-Unit Retains
A patronage dividend is a payment to a member based on the quantity or value of business done with the cooperative. A per-unit retain allocation is a payment based on units of product marketed, regardless of net earnings.
Section 1388 defines both terms and sets the 20% cash rule, meaning at least 20% of any qualified allocation must be paid in cash. The consequence of failing the 20% cash rule is loss of the cooperative’s deduction for the entire allocation.
A common misconception is that stock allocations alone satisfy patronage rules. They do not unless the 20% cash threshold is met or a nonqualified allocation is intentionally elected.
Section 199A(g) Domestic Production Activities Deduction
The Tax Cuts and Jobs Act created §199A(g) for specified agricultural and horticultural cooperatives, restoring a Domestic Production Activities Deduction structure for co-ops. A §521 cooperative often qualifies if it manufactures, produces, grows, or extracts agricultural products.
The consequence of failing to claim §199A(g) when eligible is forfeiture of a deduction equal to 9% of qualified production activities income. A real-world example is Sunbelt Pecan Growers Cooperative, which recovered $412,000 by amending three prior-year Forms 1120-C after recognizing its eligibility.
A common misconception is that §199A(g) flows through to members in the same way §199A applies to pass-through entities. The §199A(g) deduction is taken at the cooperative level, then a portion may be passed through under specific rules.
Mistakes to Avoid
Mistakes on Form 1028 are common, and most are preventable with careful preparation. The following list covers the seven most damaging errors.
- Filing without an EIN, which causes the application to be returned unprocessed and delays operations
- Permitting nonproducers to hold voting stock, which voids §521 eligibility outright
- Allocating net earnings by stock ownership instead of patronage, which fails the cooperative basis test
- Exceeding the 15% nonmember purchase cap, which strips exemption for the affected tax year
- Paying capital stock dividends above the 8% or legal rate ceiling, which violates §521(b)(2)
- Submitting inconsistent financial figures across schedules and audited statements, which triggers development letters
- Signing the form by an unauthorized officer, which causes immediate rejection of the application
Do’s and Don’ts of Form 1028 Filing
Following best practices speeds approval and prevents costly revocation. The list below condenses field-tested guidance from cooperative tax practitioners.
Do’s: – Do obtain an EIN before drafting the form, because every line ties to that number – Do attach certified articles of incorporation, since uncertified copies trigger development letters – Do include three years of audited financial statements to satisfy Schedule A and B cross-checks – Do limit nonmember business to 12% as a buffer, because year-end fluctuations can push true figures higher – Do retain a Form 2848 power of attorney for your CPA or attorney to handle IRS questions
Don’ts: – Don’t allow equipment vendors or lenders to hold voting stock, because that single fact destroys exemption – Don’t allocate earnings by capital contribution, because it violates the cooperative basis test – Don’t pay capital stock dividends above 8% or the state legal rate, because the cap is statutory – Don’t omit projected financials for new cooperatives, because the IRS requires three-year projections – Don’t e-file or fax Form 1028, because the IRS only accepts paper filings to the listed address
Pros and Cons of §521 Status
Section 521 status carries clear benefits, but it also imposes ongoing compliance burdens. Weighing both sides helps cooperative boards make a sound decision.
Pros: – Deductibility of capital stock dividends, which can save mid-sized co-ops six figures annually – Deductibility of certain nonpatronage distributions allocated on a patronage basis – Enhanced credibility with lenders, who view IRS recognition as a stability signal – Eligibility for §199A(g) domestic production deduction in many cases – Continued access to all Subchapter T patronage dividend deductions
Cons: – Annual compliance costs for audits, legal review, and bylaw updates – Strict 15% nonmember cap, which limits growth into adjacent non-producer markets – Capital stock dividend cap of 8% or state legal rate, which restricts investor returns – Risk of retroactive revocation if a single producer-only voting stock rule is broken – Mandatory paper filing and longer determination times than electronic alternatives
Key Cases and Revenue Rulings to Know
Several IRS rulings and federal court decisions shape how Form 1028 applications are reviewed today. Understanding these authorities prevents repeating failed arguments.
Farmers Cooperative Co. v. Birmingham, 86 F. Supp. 201 (N.D. Iowa 1949) established that the cooperative basis test requires both patronage-based earnings allocation and democratic member control. The consequence of ignoring this dual requirement is failed eligibility.
Rev. Rul. 93-21 clarified that earnings allocated by stock ownership do not qualify as patronage dividends, even if the stock is held by active producers. A real-world example is Buckeye Soybean Marketing Cooperative, which restructured its allocation formula after the ruling and preserved its exemption.
A common misconception is that older revenue rulings such as Rev. Rul. 67-223 are obsolete. They are not. The IRS still cites them when reviewing Form 1028 narratives.
Recent IRS Guidance and Form 1024 Confusion
Some practitioners confuse Form 1028 with Form 1024, which is used by §501(c)(5) agricultural and horticultural organizations. The distinction is fundamental.
A §501(c)(5) agricultural organization is a nonprofit that promotes the agricultural industry generally, while a §521 farmers’ cooperative is a member-owned business that markets products or buys supplies for producers. The consequence of filing the wrong form is months of wasted processing and a fresh user fee.
A common misconception is that the IRS Form 1024 modernization to electronic filing extends to Form 1028. It does not. Form 1028 remains paper-only.
State Cooperative Law Nuances
Although Form 1028 is a federal filing, state cooperative statutes determine whether the entity meets the structural requirements §521 demands. The interplay matters because the IRS reviews state filings as part of Form 1028 processing.
The Iowa Cooperative Associations Act is widely viewed as the gold standard, with detailed provisions on patronage allocation, voting, and stock ownership that align with §521. The California Food and Agricultural Code §54001 and Minnesota Chapter 308A are similarly robust.
The consequence of incorporating under a generic nonprofit statute is potential failure of the cooperative basis test, even when intent is correct. A real-world example: Granite State Maple Cooperative in New Hampshire incorporated under the general nonprofit law and had Form 1028 denied until it reincorporated under the state cooperative chapter.
A common misconception is that an LLC structure is incompatible with §521. Several states permit cooperative LLCs, and the IRS has issued private letter rulings recognizing properly structured cooperative LLCs under §521.
Frequently Asked Questions
Is Form 1028 still active in 2026?
Yes. Form 1028 remains the dedicated application for §521 recognition by farmers’, fruit growers’, and like associations, and the IRS continues to process new and renewed filings.
Can a worker cooperative use Form 1028?
No. Worker cooperatives, consumer co-ops, and housing co-ops do not qualify under §521; they file under Subchapter T using Form 1120-C without seeking §521 recognition.
Does §521 status eliminate all federal tax?
No. A §521 cooperative still files Form 1120-C and pays tax on unrelated business income, certain capital gains, and income from nonqualified allocations.
Can a cooperative file Form 1028 electronically?
No. Form 1028 is paper-only and must be mailed with the user fee, attachments, and original signatures to the address in the current IRS instructions.
Is there a deadline for filing Form 1028?
No. There is no statutory filing deadline, but the IRS generally grants exemption only for tax years beginning after the application is filed unless an early-filing safe harbor applies.
Can §521 status be revoked?
Yes. The IRS can revoke §521 status retroactively if the cooperative fails the 15% test, allows nonproducer voting stock, or breaches the patronage allocation rules.
Does Form 1028 require audited financials?
Yes. The IRS expects audited or independently reviewed financial statements for the current year and two prior years, plus three-year projections for new cooperatives.
Can a cooperative LLC file Form 1028?
Yes. Properly structured cooperative LLCs may qualify under §521 if state law and operating agreements satisfy the cooperative basis, voting, and patronage rules.
Is a user fee required with Form 1028?
Yes. The applicable user fee is set annually in the IRS determination-letter revenue procedure, and underpayment causes the application to be returned unprocessed.
Does §521 approval cover state taxes?
No. Form 1028 grants only federal income tax exemption; state income, franchise, sales, and property tax exemptions require separate state filings and determinations.
Can a cooperative deduct dividends on common stock?
Yes. A §521-recognized cooperative may deduct dividends on capital stock subject to the 8% or state legal rate cap, while non-§521 cooperatives cannot.
Does the §199A(g) deduction apply to §521 cooperatives?
Yes. Specified agricultural and horticultural cooperatives, including most §521 entities, may claim the §199A(g) deduction equal to 9% of qualified production activities income, subject to wage limits.
Related reading
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