US Worker Cooperatives: a dire need for a profound revision of their tax regulation at a federal level

Abstract

Cooperatives in the USA (US) contribute in important ways to many sectors of society notonly from a financial point of view but also, above all, from a non-financial one.Because cooperatives do not act like normal corporations, in many countries they are subjectto different tax laws, which should not be considered a handout but an understanding of theirdifferences and fair compensation for their contribution to society.In the US, the taxation of cooperatives constitutes a very peculiar regime with greatdifferences from that of many other countries. The system, however, is not that differentcompared to other US entities, as in many instances the fact that an entity is a cooperativemakes no difference for taxation.Therefore, the US system can be considered peculiar in the sense that both its taxation and,above all, its substantive regime are very different from the pattern followed by the vastmajority of systems adopted for cooperatives around the world.Thus, the tax treatment of cooperatives in the US can be regarded as an unusual one withcertain peculiarities that originate from the tax clauses in the Internal Revenue Code andjudicial doctrine. This happens because how a business is taxed at the federal level in theUnited States is partly dependent on how it is organized. This is not an easy topic to study buta worthwhile one.First, because unlike in most legislations where the cooperative form is legally recognized, inthe US it is not. What counts when considering an entity a cooperative is not the fact that ithas been constituted or registered as such, but that the entity acts on a cooperative basis.Thus, depending on the possible forms that the entity acting on a cooperative basis takes,there are different choices of taxation. This means that there is no single special regime for allcooperatives but several ones, as different tax provisions may apply depending on the legaland tax form chosen. These include both general provisions for those entities and, sometimes,particular ones for acting on a cooperative basis.Second, the regime is complex because different legal provisions apply to cooperatives,which derive from the type of cooperative they are (as regards their social object). Forexample, tax measures for agricultural cooperatives do not apply to worker cooperatives orelectricity ones. Some of the measures in this system date back to the first half of thetwentieth century, so the protection of certain activities that appeared reasonable back thenmay no longer be so today;Third, because there are different levels of taxation due to the fact that the US is a multi-levelsystem. There is a federal regime for each of the different legal forms a cooperative may take. Furthermore, there are 47 States and the District of Columbia with their state tax regimes.There are also many more local ones, as several municipalities impose corporate income tax.Fourth, certain provisions are only applicable depending on each cooperative’s bylaws, sothese need to be acknowledged in advance.Fifth, the regime is made more complex because the different tax measures passed in the TaxCuts and Jobs Act of 2017 and other measures recently adopted as COVID-19 relief may alsoapply to cooperatives.Fifth, because there is no comprehensive and substantive regulatory framework that dealswith cooperatives, some of these entities are also regulated by the judicial interpretation ofsections 1381–1388 in Subchapter T of the Internal Revenue Code.In summary, the US has different tax measures both in general and specifically concerningcooperatives that make understanding taxation hard not only for scholars but also especiallyfor cooperatives.This paper has two aims: on one hand, to provide an overview of this very peculiar systemfrom a tax law perspective, concentrating only on cooperatives’ Income Tax. It should beadded that many other types of taxes apply to cooperatives that are not taken into accounthere, such as Property tax (real estate and personal), Payroll tax or Sales tax (States andlocal), and License and Excise taxes. There may also be employment taxes such as SocialSecurity and Medicare taxes and Income Tax Withholding and Federal unemployment taxnot taken into account for this paper with the purpose of simplification. On the other hand,the paper seeks to delve into the regulation of cooperatives, analyzing their low resilience dueto lack of proper regulations and the frequent inadequacy of their measures, and suggest adifferent approach