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

Source: OLRC release point 119-134 <https://uscode.house.gov/us/usc/119-134/t26/s1385>. Cite pinpoints as 26 U.S.C. § 1385(a)(1).

## § 1385(a) General rule

Except as otherwise provided in subsection (b), each person shall include in gross income—

**§ 1385(a)(1)** the amount of any patronage dividend which is paid in money, a qualified written notice of allocation, or other property (except a nonqualified written notice of allocation), and which is received by him during the taxable year from an organization described in section 1381(a),

**§ 1385(a)(2)** any amount, described in section 1382 (c)(2)(A) (relating to certain nonpatronage distributions by tax-exempt farmers’ cooperatives), which is paid in money, a qualified written notice of allocation, or other property (except a nonqualified written notice of allocation), and which is received by him during the taxable year from an organization described in section 1381(a)(1), and

**§ 1385(a)(3)** the amount of any per-unit retain allocation which is paid in qualified per-unit retain certificates and which is received by him during the taxable year from an organization described in section 1381(a).

## § 1385(b) Exclusion from gross income

Under regulations prescribed by the Secretary, the amount of any patronage dividend, and any amount received on the redemption, sale, or other disposition of a nonqualified written notice of allocation which was paid as a patronage dividend, shall not be included in gross income to the extent that such amount—

**§ 1385(b)(1)** is properly taken into account as an adjustment to basis of property, or

**§ 1385(b)(2)** is attributable to personal, living, or family items.

## § 1385(c) Treatment of certain nonqualified written notices of allocation and certain nonqualified per-unit retain certificates

**§ 1385(c)(1) Application of subsection.** This subsection shall apply to—

**§ 1385(c)(1)(A)** any nonqualified written notice of allocation which—

**§ 1385(c)(1)(A)(i)** was paid as a patronage dividend, or

**§ 1385(c)(1)(A)(ii)** was paid by an organization described in section 1381(a)(1) on a patronage basis with respect to earnings derived from business or sources described in section 1382(c)(2)(A), and

**§ 1385(c)(1)(B)** any nonqualified per-unit retain certificate which was paid as a per-unit retain allocation.

**§ 1385(c)(2) Basis; amount of gain.** In the case of any nonqualified written notice of allocation or nonqualified per-unit retain certificate to which this subsection applies, for purposes of this chapter—

**§ 1385(c)(2)(A)** the basis of such written notice of allocation or per-unit retain certificate in the hands of the patron to whom such written notice of allocation or per-unit retain certificate was paid shall be zero,

**§ 1385(c)(2)(B)** the basis of such written notice of allocation or per-unit retain certificate which was acquired from a decedent shall be its basis in the hands of the decedent, and

**§ 1385(c)(2)(C)** gain on the redemption, sale, or other disposition of such written notice of allocation or per-unit retain certificate by any person shall, to the extent that the stated dollar amount of such written notice of allocation or per-unit retain certificate exceeds its basis, be considered as ordinary income.

## Regulations

- [Treas. Reg. § 1.1385-1](/26/reg/1.1385-1.md): Amounts includible in patron's gross income. (interprets § 1385)

## Leading cases

- [Riverfront Groves, Inc. v. Commissioner, 60 T.C. 435 (1973)](https://www.courtlistener.com/opinion/4703685/riverfront-groves-inc-v-commissioner/)
- [Coastal Chemical Corp. v. United States, 546 F.2d 110 (5th Cir. 1977)](https://www.courtlistener.com/opinion/340935/coastal-chemical-corporation-v-united-states/)
- [Fortin v. Commissioner, T.C. Memo. 1989-353](https://www.courtlistener.com/opinion/4810103/fortin-v-commissioner/)

## Connections

Cites: § 1381 Organizations to which part applies; § 1382 Taxable income of cooperatives

Cited by: § 199A Qualified business income; § 1388 Definitions; special rules

## Amendments

- 1962-10-16: [Pub. L. 87-834](/26/act/87-834.md), 76 Stat. 1048
- 1966-11-13: [Pub. L. 89-809](/26/act/89-809.md), 80 Stat. 1582
- 1976-10-04: [Pub. L. 94-455](/26/act/94-455.md), 90 Stat. 1793