TaxNewsFlash-Cooperatives

October 30, 2008
No. 2008-25

IRS Determines Distribution of Gain on Building’s Sales Proceeds Is Patronage Dividend

The IRS recently issued a letter ruling that provides that a cooperative’s distribution of gain recognized from the sale of a building to its current and former members, based on their respective annual patronage percentages, will be treated as a patronage dividend and deductible by the cooperative for federal income tax purposes. PLR 200842011, dated July 11, 2008, and released October 17, 2008.

For an electronic version of the letter ruling: PLR 200842011

Summary

Membership in the cooperative was restricted to retail merchants / shops located within a metropolitan area.

The purpose of the cooperative was to consolidate and share the delivery resources of its members, in order to develop a spoke-hub distribution network and increase the efficiency of deliveries throughout the area. Under this plan, the cooperative acquired a warehouse to allow for a certain level of permanence for the centrally located hub of its broad ranging spoke-hub distribution network.

Because the cooperative’s membership declined in recent years, as a result of market and industry factors, the cooperative sold its warehouse building (for which, it recognized gain). The cooperative intends to distribute, on a compound patronage basis, the net proceeds of the building’s sale to the current and former members for the period during which the cooperative owned the building.

The cooperative requested a ruling that its distribution of the gain from the warehouse sale to its current and former members based on compound patronage (their respective average annual patronage percentages), for the period during which the cooperative owned the warehouse will be treated as a patronage dividend and deductible by the cooperative for federal income tax purposes.

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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