|
IRS Again Addresses Calculation of Cooperatives’ Section 199 Deduction
The IRS recently issued a letter ruling that addresses the interplay between the subchapter T rules concerning the taxation of cooperatives and their patrons and the calculation of a cooperative’s section 199 deduction.
PLR 200843016, dated July 21, 2008, and released October 24, 2008.
In the letter ruling, the IRS concluded a cooperative must compute the entire section 199 deduction at the cooperative level and that none of the distributions—whether patronage dividends or per-unit retain allocations received from the cooperative—will be eligible for section 199 treatment in the patron’s hands. In other words, the patron cannot count the qualified payment received from the cooperative in the patron’s own section 199 computation whether or not the cooperative keeps or passes through the section 199 deduction.
Instead, because section 199(d)(3) allows certain payments from a cooperative to its patrons to be added back for purposes of computing the cooperative’s deduction under section 199, the IRS ruled that an agricultural cooperative must include all “net proceeds” payments or allocations made to its patrons—including amounts that are advanced to its members and the final patronage dividend—in the cooperative’s computation of the section 199 deduction.
For an electronic version of the eight-page letter ruling:
PLR 200843016
KPMG Observation
The letter ruling—in which KPMG assisted—provides useful guidance to cooperatives and their patrons in the computation of the section 199 deduction. In February 2008, the IRS issued an Internal Legal Memorandum (see
TaxNewsFlash-Cooperatives 2008-01) which reached a similar conclusion.
In certain industries, the practice has been to capitalize, for both book and tax purposes, some of the payments to members as part of the inventory of the cooperative. But under the marketing agreement, the cooperatives are required to pay the “net proceeds” to the members. Thus, although the advances appear to be a fixed payment to the members, they are in fact not under the marketing agreement. At the end of each fiscal year, the cooperatives close the books and pay a final payment (i.e., patronage dividend) to the members. Thus, the cooperative makes full “net proceeds” payments in the form of the advances during the year and the patronage dividend at the end of the year.
These recent IRS rulings continue the IRS’s treatment—see
TaxNewsFlash-Cooperatives 2008-21—that both an advance payment (known as the “c Check” in the ruling) and the patronage dividend are added back for purposes of determining the section 199 deduction. It also confirms that this is the
exclusive method for computing the section 199 deduction. These results mean that the members cannot use the receipts from the cooperative in their own section 199 deduction computation, but can only take the pass-through from the cooperative on his/her individual return.
Lastly, the IRS reached similar conclusions in See also
PLR 200843015, dated July 21, 2008, and released October 24, 2008, and
PLR 200843023, released October 24 2008, and dated July 24 2008. [Electronic versions are available at the hyperlinks above.]
|
For more information, contact KPMG’s National Director of Cooperative Tax Services:
Teree Castanias, in Sacramento, (916) 554-1146,
tcastanias@kpmg.com
|
