TaxNewsFlash-Cooperatives

April 28, 2008
No. 2008-09

IRS Addresses Tax Treatment of Patronage Dividends Transferred by Cooperative to Charity at Member’s Direction

The IRS has issued a letter ruling addressing transfers of patronage dividends by a cooperative to a charity at the direction of the cooperative’s members. The IRS concluded that when the cooperative transfers to the charity patronage dividends that would have been redeemable by an individual taxpayer in cash, the amount transferred will constitute a charitable contribution, deductible by the taxpayer to the extent provided in section 170. PLR 200817018, released on April 25, 2008, and dated January 24, 2008.

The IRS also ruled that when the cooperative transfers to a charity the amount of the credit card rebates redeemable by the taxpayer in cash, the amount transferred also will constitute a charitable contribution that is deductible by the taxpayer to the extent provided under section 170.

charitable contributions will be treated as made when the cooperative transfers the payments to the charity, not when the taxpayer directs the cooperative to remit them. Also, the charitable contributions that are the subject of this ruling request will be deductible only if all other requirements under section 170 (including substantiation) are satisfied and subject to the percentage limitations of section 170(b).

For an electronic version of text of the five-page letter ruling: PLR 200817018

Background

The taxpayer requesting the letter ruling is an individual and a member of a Subchapter T cooperative that is engaged in the business of selling consumer products to cooperative members and the general public. Membership in the cooperative is open to the general public and may be acquired by filling out an application and paying a one-time membership fee.

Currently, the cooperative distributes earnings annually to members as patronage dividends, which members can redeem either in cash or merchandise from the cooperative. The cooperative wants to allow a third option—to allow members to direct the cooperative to transfer the amount of patronage dividend to a charity.

The cooperative also sponsors a credit card program under which its members earn rebates based on a percentage of their purchases with the credit card. These credit card rebates can be used to purchase merchandise from the cooperative or have the rebates paid to them in cash or by check. The cooperative also wants to institute a third option—allowing card holders to direct the cooperative to transfer the amount to a charity.

The taxpayer plans to direct the cooperative to transfer some or all of his patronage dividends and/or rebates to the charity. The cooperative will provide the charity with the amount and date of the contribution, and the taxpayer’s name and address; in turn, the charity will provide the taxpayer with any written acknowledgments required under the Code.

For more information, contact KPMG’s National Director of Cooperative Tax Services:

Teree Castanias, in Sacramento, (916) 554-1146, tcastanias@kpmg.com

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