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There are (were?) lots of taxi co-ops. Unfortunately, they've been demutualizing over the last 50 years. The issue, in the US at least, is the IRS. There's a f

There are (were?) lots of taxi co-ops. Unfortunately, they've been demutualizing over the last 50 years. The issue, in the US at least, is the IRS. There's a fairly massive legal grey area in how to treat patronage (distributed profits) for members of a worker co-op. Are they dividends? If so, they should be taxed at the capital rate. Or are they bonuses? Then they're taxed at the income rate. But the IRS doesn't want to give any guidance on this and other issues it created with co-ops. You literally only find out the day they sue you whether you've been doing it right. And, if you put up a fight, they always settle instead of pursuing the case to judgement, in fear of setting a precedent. Oh, and good luck finding a lawyer or accountant specializing in co-op law to help you out. The problem with worker co-ops is not that they're infeasible. It's that decades of lobbying and IRS paranoia have hobbled the model. Ironically, they work fantastically well here in the developing world. It's an extremely efficient way of pooling risk, aggregating labor, and achieving economies of scale without selling off a massive stake to VCs.

dragonwriter 10y ago
AFAICT, the IRS has consistently treated them as non-dividend income for income tax purpose, with the main unclear (and changing over time) question being whether they would insist they were subject to either self-employment tax or employer-based payroll tax, or neither.
- monodeldiablo 10y ago
  Ah, that's right. Thanks for pulling me up on that. It's been awhile since I've looked at this. I believe another bone of contention is whether the IRS even allows worker cooperatives to exempt patronage dividends from their taxable profit, to avoid double taxation (corporate, then personal income tax). Technically (under Subchapter T), they should be allowed to. But the IRS is pretty sue-happy about this and refuses to issue much guidance. The last clear ruling was in 1971 and only allowed dividends to be issued on the basis of hours worked, not value earned (or other metrics).
  - dragonwriter 10y ago
    I think you have the impact of the 1971 decisidn almost backwards. Patronage on the basis of earnings derived from work done with the member is explicitly allowed in the statute, hours worked is not an explicitly allowed bases, and it wasn't initio 1971 that there IRS issues a ruling that goes worker was a valid basis for patronage under one of the statutory categories. OTOH, the IRS has been accused of being reluctant (even after a court decision allowing it with specific standard) to allow weighting of work hours vs. flat work hours in determining the amount of earnings attributable to members as a whole (vs nonmembers) in determining how much of the forms revenue is eligible for inclusion in patronage distribution. This may be because actual mechanisms that came before it did not meet the standards of objectivity set on the court decision (that the problem is the application methods it's seen and not the concept entirely seems closest as they've indicated that weighting contribution of different jobs proportional to an applicable union pay scale would be acceptable.) This is an issue for coops with both member and non-member employees.

dragonwriter 10y ago

AFAICT, the IRS has consistently treated them as non-dividend income for income tax purpose, with the main unclear (and changing over time) question being whether they would insist they were subject to either self-employment tax or employer-based payroll tax, or neither.

monodeldiablo 10y ago
Ah, that's right. Thanks for pulling me up on that. It's been awhile since I've looked at this. I believe another bone of contention is whether the IRS even allows worker cooperatives to exempt patronage dividends from their taxable profit, to avoid double taxation (corporate, then personal income tax). Technically (under Subchapter T), they should be allowed to. But the IRS is pretty sue-happy about this and refuses to issue much guidance. The last clear ruling was in 1971 and only allowed dividends to be issued on the basis of hours worked, not value earned (or other metrics).
- dragonwriter 10y ago
  I think you have the impact of the 1971 decisidn almost backwards. Patronage on the basis of earnings derived from work done with the member is explicitly allowed in the statute, hours worked is not an explicitly allowed bases, and it wasn't initio 1971 that there IRS issues a ruling that goes worker was a valid basis for patronage under one of the statutory categories. OTOH, the IRS has been accused of being reluctant (even after a court decision allowing it with specific standard) to allow weighting of work hours vs. flat work hours in determining the amount of earnings attributable to members as a whole (vs nonmembers) in determining how much of the forms revenue is eligible for inclusion in patronage distribution. This may be because actual mechanisms that came before it did not meet the standards of objectivity set on the court decision (that the problem is the application methods it's seen and not the concept entirely seems closest as they've indicated that weighting contribution of different jobs proportional to an applicable union pay scale would be acceptable.) This is an issue for coops with both member and non-member employees.