TaxNewsFlash-Cooperatives

August 26, 2008
No. 2008-19

IRS Concludes Timber-Related Organization Fails to Qualify as Farmers’ Cooperative or as Farm Bureau

The IRS recently issued a letter ruling that concluded that a timber-related organization did not qualify as a farmers’ cooperative under section 521 or as a farm bureau under section 501(c)(5). PLR 200834022, released August 22, 2008, and dated March 5, 2008.

For an electronic version of the IRS letter ruling: PRL 200834022

Summary

The IRS noted that membership in the organization seeking to be classified as a cooperative consisted solely of persons involved in the timber-harvesting business (including haulers of forest products, forest road contractors, and those in the business of preparing forest sites for planting, fertilizing, and other activities). As the IRS noted, section 464(e)(1) defines “farming” as:

. . . the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity including the raising, shearing, feeding, caring for, training, and management of animals. For purposes of the preceding sentence, trees (other than trees bearing fruit or nuts) shall not be treated as an agricultural or horticultural commodity.

Thus, the IRS concluded that the entity did not qualify as a farmers’ cooperative organization under section 521 because the harvesting of trees was not within the meaning of farming.

After being notified by the IRS that organization failed to qualify as a farmers’ cooperative, the entity asserted that it could qualify as an agricultural organization under section 501(c)(5). The IRS disagreed and stated that the entity was not a farm bureau because it was not organized at the state or county level to work on behalf of members at state or local levels of government. Also, as the IRS noted, harvesting timber is not an agricultural activity, and the principal purpose of the organization was to provide a direct business service for its members’ economic benefit.

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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