Retained patronage

Definition

The part of a co-op's patronage dividend paid in stock or certificates, cashed on the co-op's own schedule.

Why It Matters

Rebate income arrives later from the co-op, and in a cooperative not all of it arrives as money. Federal tax law calls the payment a patronage dividend and lets part of it be paid in capital stock, retain certificates or other written notices of allocation. A notice is qualified only when at least twenty percent of the dividend is paid in money and the member has consented, which membership itself can do under a bylaw. The store takes a qualified notice into account at its stated dollar amount in the year it receives it, while the cash waits for the co-op to redeem it. A nonqualified notice has a zero basis, and its redemption is ordinary income. So the co-op equity on a seller's balance sheet is paper, often taxed already, payable when the co-op chooses. Its bylaws decide whether that paper passes to a buyer. A buying group that is not a cooperative corporation sits outside the statute. Price the paper at what it will pay, and when.