TaxNewsFlash-Cooperatives

March 2, 2009
No. 2009-01

IRS Finds Farmers' Cooperatives Must Compute the Section 199 Deduction at Cooperative Level—Not at Patron Level

The IRS recently publicly released two private letter rulings addressing the interplay concerning the taxation of cooperatives and their patrons and the calculation of the section 199 deduction for certain cooperatives. PLR 200909016 (released February 27, 2009, and dated November 24, 2008); and PLR 200909020, (released February 27, 2009, and dated November 26, 2008).

In these letter rulings, the IRS ruled that the farmers’ cooperatives 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—is eligible for section 199 in the patron’s hands.

For electronic versions of the letter rulings: PLR 200909016 and PLR 200909020

Summary

With these recent letter rulings, the IRS confirmed its position (as provided in earlier letter rulings) that based on the facts as presented in the rulings, the “c check” represents a per-unit retain paid in money under section 1382(b)(3) which must be added back for purposes of determining the cooperative’s section 199 deduction for the year. In addition, a cooperative’s patrons may not count the qualified payment received from the cooperative in their own section 199 computation—whether or not the cooperative keeps or passes through the section 199 deduction. The only way that a patron can claim a section 199 deduction for a qualified payment received from a cooperative is for the cooperative to pass through the section 199 amount in the manner and within the time limits set by section 199(d)(3).*

Additionally, in one of the rulings, the IRS clarified that a cooperative may allocate an estimated amount of the section 199 deduction before year-end with a final allocation and true-up after year end, allowing the cooperative’s members to realize the benefit of the passthrough deduction sooner.

* Section 199(d)(3)(A)(ii) requires the cooperative to designate the patron’s portion of the income allocable to the QPAI (qualified production activities income) of the organization in a written notice by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the tax year.

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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