Understanding IRS Form 1028: Farmers’ Cooperative Exemption Application Guide

1. Introduction – What is Form 1028?

IRS Form 1028, officially titled “Application for Recognition of Exemption Under Section 521 of the Internal Revenue Code,” is an online federal tax application administered by the Internal Revenue Service (IRS), an agency of the U.S. Department of the Treasury.

It is the official application form used by agricultural cooperatives (such as farmers’, fruit growers’, and livestock co-ops) to apply for formal federal tax-exempt recognition as a Section 521 farmers’ cooperative association.

2. Purpose of the Form – Why Does Form 1028 Exist?

Agricultural cooperatives allow independent farmers, ranchers, and growers to pool resources, market crops collectively, and purchase farm equipment or supplies in bulk at lower costs. While all cooperatives operate under Subchapter T of the Internal Revenue Code, Section 521 grants specialized tax privileges to qualifying agricultural cooperatives.

Form 1028 exists to verify that a farmers’ cooperative meets strict federal statutory standards. By filing Form 1028, a cooperative proves that it operates on a non-profit cooperative basis, treats members and non-members equally, limits capital stock dividends, and restricts non-member business volumes. Once approved, the IRS issues a determination letter granting Section 521 status, allowing the cooperative to claim enhanced tax deductions on Form 1120-C.

3. Who Needs to File This Form

Form 1028 must be completed by agricultural cooperative associations seeking formal IRS recognition under Internal Revenue Code (IRC) Section 521. Eligible organizations include:

• Farmers’ Marketing Cooperatives: Associations organized to market agricultural products (crops, livestock, dairy, poultry, timber) for farmers, returning net sales proceeds back to producers based on patronage volume.
• Farmers’ Purchasing Cooperatives: Associations organized to purchase farm equipment, seed, fertilizer, fuel, and agricultural supplies for farmers, turning them over at actual cost plus necessary operating expenses.
• Combined Marketing & Purchasing Cooperatives: Agricultural associations operating both crop marketing and supply purchasing divisions for farmers.

4. Who Is Exempt / Not Required to File

You do not need or are not permitted to file Form 1028 if your organization falls into any of these exempt categories:

• Non-Exempt Subchapter T Cooperatives: General commercial cooperatives or agricultural co-ops that choose to operate as non-exempt cooperatives under Subchapter T without seeking Section 521 status (these file Form 1120-C directly without filing Form 1028).
• 501(c)(3) Charitable Organizations: Agricultural education non-profits or research groups apply on Form 1023.
• 501(c)(5) Agricultural Organizations: Farm bureaus, county fair associations, and agricultural advocacy groups apply on Form 1024.
• For-Profit Farming Enterprises: Standard commercial corporate farms, partnerships, or sole proprietorships.

5. When to File

Form 1028 is a one-time federal application submitted when an agricultural cooperative seeks formal federal Section 521 tax exemption recognition.

The application can be submitted at any point after the cooperative is legally incorporated under state cooperative laws and has established initial business operations. Tax-exempt status can be granted retroactively back to the original legal formation date of the cooperative, provided the association operated in full compliance with Section 521 rules since inception.

6. Where and How to File

Form 1028 is an electronic-only application submitted through the federal Pay.gov portal.

Paper Form 1028 submissions are no longer accepted by the IRS and will be returned. Applicants must create an account on Pay.gov, complete Form 1028 online, upload required organizing documents in PDF format, and pay the mandatory IRS user fee (currently $600) electronically via credit card, debit card, or ACH bank transfer prior to submission.

7. Step-by-Step Instructions to Fill the Form

Form 1028 consists of core organizational disclosures, operational activity questions, and multi-year financial statements. The table below outlines the primary sections on the form.

Form Section	Section Name	Instruction / Description
Part I	Applicant Identification	Provide legal cooperative name, Employer Identification Number (EIN), address, primary officer contact, and accounting year end.
Part II	Organizational Structure	Detail state cooperative statutes, capital stock structure, voting rights per member, and attach Articles of Incorporation and Bylaws.
Part III	Business Operations	Describe marketing/purchasing activities, non-member business volumes, and verify capital stock dividend caps (capped at 8%).
Part IV	Financial Data	Report 3 to 4 years of historical (or projected) revenues, operating expenses, patronage dividend payouts, and balance sheets.
Parts V–IX	Section 521 Compliance Checks	Verify equal treatment of non-members, patronage allocation formulas, inventory valuation methods, and reserve fund accounts.

Detailed Filling Steps

1. Provide Applicant Information (Part I): Enter your official legal cooperative name exactly as registered with the state, street address, nine-digit EIN, primary contact details, and accounting year end date.
2. Confirm Corporate Structure & Voting (Part II): Upload PDF copies of your state-stamped Articles of Incorporation and Bylaws. Verify that member voting rights follow cooperative rules (e.g., one member, one vote).
3. Detail Business Activity & Dividend Limits (Part III): Describe marketing and purchasing operations. Confirm that capital stock dividend payouts are contractually capped at **8% per annum** (or the legal rate of interest in your state of incorporation, whichever is greater).
4. Verify Equal Treatment of Non-Members: Confirm that non-member patrons are charged the same fees and receive patronage dividends on the same basis as voting members.
5. Provide Financial Data (Part IV): Complete the 3-to-4-year financial revenue and expense statement, breaking down patronage refunds paid to members versus non-members.
6. Pay User Fee & Submit on Pay.gov: An authorized corporate officer must electronically sign the application attestation and pay the $600 IRS user fee on Pay.gov.

8. Required Documents/Information Needed Before Filling

To prepare Form 1028 efficiently, gather the following organizational and accounting records before logging into Pay.gov:

• Employer Identification Number (EIN): Nine-digit federal tax ID issued by the IRS.
• State-Stamped Articles of Incorporation & Bylaws: Official corporate organizing documents establishing non-profit cooperative principles.
• Member Marketing & Purchasing Agreements: Copies of standard membership agreements and stock certificate templates issued to patrons.
• 3 to 4 Years of Financial Statements: Income statements, balance sheets, and patronage refund ledgers (or 3 years of detailed projected budgets for new co-ops).
• Member vs. Non-Member Business Breakdown: Ledgers verifying that non-member purchasing business does not exceed 50% of total purchases (and non-member non-producer purchases do not exceed 15%).
• Pay.gov Account & Payment Method: Registered Pay.gov login credentials and payment details for the $600 federal user fee.

9. Common Mistakes to Avoid

Errors on Form 1028 can lead to application rejections or loss of Section 521 status. Watch out for these frequent mistakes:

• Unequal Treatment of Non-Member Patrons: Charging non-members higher handling fees or excluding non-members from patronage dividend distributions. Section 521 strictly mandates equal treatment for members and non-members.
• Exceeding Capital Stock Dividend Limits: Paying stock dividends higher than 8% per year (or the maximum state legal interest rate).
• Exceeding Non-Member Business Limits: Allowing non-member purchasing business to exceed 50% of total supply sales, or allowing non-member non-producer purchasing to exceed 15%.
• Attempting Paper Submissions: Mailing paper Form 1028 forms to the IRS, which will be rejected under mandatory Pay.gov electronic filing rules.
• Incomplete Patronage Accounting: Failing to maintain detailed accounting ledgers tracking patronage refunds by individual patron business volume.

10. Penalties for Non-Filing or Errors

Submitting an improper Form 1028 application carries direct financial and tax consequences:

• Application Rejection & Loss of User Fee: Incomplete applications or non-compliant cooperative structures will be rejected by the IRS, and the $600 user fee will not be refunded.
• Loss of Section 1382(c) Tax Deductions: Without an approved Form 1028 determination, the cooperative loses special tax deductions for capital stock dividends and non-patronage earnings distributions on Form 1120-C.
• Corporate Tax Liability: Disallowed tax deductions result in standard corporate income tax liabilities, statutory interest, and failure-to-pay penalties assessed against the cooperative.

11. Related Forms or Schedules

Cooperative leaders working with Form 1028 frequently interact with these related federal tax forms:

• Form 1120-C: U.S. Income Tax Return for Cooperative Associations.
• Form 1099-PATR: Taxable Distributions Received From Cooperatives.
• Form 1024: Application for Recognition of Exemption Under Section 501(a) or Section 521 of the Internal Revenue Code.
• Form SS-4: Application for Employer Identification Number.
• Form 8718: User Fee for Exempt Organization Determination Letter Request.

12. Frequently Asked Questions

1. What is IRS Form 1028 used for?

Form 1028 is the online application used by agricultural marketing and purchasing cooperatives to apply for formal IRS recognition as a tax-exempt farmers’ cooperative under IRC Section 521.

2. What is the difference between a Section 521 cooperative and a non-exempt cooperative?

A Section 521 cooperative receives extra tax deductions on Form 1120-C for capital stock dividends and non-patronage distributions, but must satisfy strict rules regarding equal treatment of non-members and business volume caps.

3. What special tax benefits do Section 521 farmers’ co-ops receive?

Under IRC Section 1382(c), Section 521 co-ops can deduct capital stock dividends paid (up to 8%) and non-patronage income distributed to patrons, in addition to standard patronage dividend deductions.

4. What are the limits on non-member business for Section 521 co-ops?

Purchases made for non-members cannot exceed 50% of total supply purchases, and purchases made for non-members who are not agricultural producers cannot exceed 15% of total purchases.

5. How much is the IRS user fee for Form 1028?

The IRS user fee for Form 1028 is $600, paid electronically through Pay.gov at the time of application submission.

6. Is Form 1028 submitted online?

Yes. Federal law mandates that Form 1028 must be submitted electronically through the federal Pay.gov portal.

13. Conclusion – Key Takeaways

IRS Form 1028 is the essential qualification application for farmers’ marketing and purchasing cooperatives seeking formal tax-exempt recognition under IRC Section 521. By providing complete operational narratives, multi-year financial statements, state-approved cooperative bylaws, and verifying equal treatment for all patrons, cooperative leaders secure an official IRS determination letter. To ensure a successful application, cap capital stock dividends at 8%, maintain equal patronage dividend rules for non-members, organize 3 to 4 years of patronage financial records, and submit Form 1028 online via Pay.gov along with the $600 user fee.