US WORKER COOPERATIVES: A DIRE NEED FOR A PROFOUND REVISION OF THEIRTAX REGULATION AT A FEDERAL LEVEL

Abstract

Cooperatives in the USA (US) contribute in important ways to many sectors of society not only 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 aresubject to different tax laws, which should not be considered a handout but an understanding of their differences and fair compensation for their contribution to society.In the US, the taxation of cooperatives constitutes a verypeculiar regime with great differences from that of many other countries. The system, however, is not that different compared to other US entities, as in many instances the fact that an entity is a cooperative makes 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 vast majority of systems adopted for cooperatives around the world.Thus, the tax treatment of cooperatives in theUS can be regarded as an unusual one with certain peculiarities that originate from the tax clauses in the Internal Revenue Code and judicial doctrine. This happens because how a business is taxed at the federal level in the United States ispartly dependent on how it is organized. This is not an easy topic to study but a worthwhile one.First, because unlike in most legislations where the cooperative form is legally recognized, in the US it is not. What counts when considering anentity a cooperative is not the fact that it has 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 all cooperatives but several ones, as different tax provisions may apply depending on the legal and 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 tocooperatives, which derive from the type of cooperative they are (as regards their social object). For example, tax measures foragricultural cooperativesdo not apply to worker cooperatives or electricity ones. Some of the measures in thissystem date back to the first half of the twentieth century, so the protection of certain activities that appeared reasonable back then may no longer be sotoday;Third,because there are different levels of taxation due to the fact that the US is a multi-level system. There is a federal regime for each of the different legal forms a cooperative may take. Furthermore, there are 47 States and the Districtof Columbia with their state tax regimes. There are also many more local ones, as several municipalitiesimpose corporate income tax.Fourth, certain provisions are only applicable depending on each cooperative’s bylaws, so these need to be acknowledged in advance.Fifth, the regime is made more complex because the different tax measures passed in the Tax Cuts and Jobs Act of 2017 and other measures recently adopted as COVID-19 relief may also apply to cooperatives.Fifth, because there is nocomprehensiveandsubstantive regulatory framework that deals with cooperatives, some of these entities are also regulated by the judicial interpretation of sections 1381–1388 in Subchapter T of the Internal Revenue Code.In summary, the US has different tax measures both in general andspecifically concerning cooperatives that make understanding taxation hard not only for scholars but also especially for cooperatives.This paper has two aims: on one hand,to provide an overview of this very peculiar system froma tax law perspective, concentrating only on cooperatives’ Income Tax. It should be added that many other typesof taxes apply to cooperatives that are not taken into account here, such as Property tax (real estate and personal), Payroll tax or Sales tax (States and local), and License and Excise taxes. There may also be employment taxes such as Social Security andMedicare taxes and Income Tax Withholding and Federal unemployment tax not taken into account for this paper with the purpose of simplification.On theother hand, the paper seeks to delve into the regulation of cooperatives, analyzing their low resiliencedue to lack of proper regulations and the frequent inadequacy of their measures, and suggest a different approach.