TaxNewsFlash-Cooperatives

August 21, 2009
No. 2009-04

IRS Addresses How Grain Cooperative Is to Determine Its Section 199 Deduction

The IRS on October 16, 2009, publicly released the letter ruling described below as PRL 200942022 (dated July 9, 2009). For an electronic version of the publicly released version of the letter ruling: PLR 200942022

The IRS recently issued a private letter ruling (PLR) addressing the calculation of the section 199 deduction for a grain agricultural cooperative when certain cash advances or payments are made to growers and producers. The PLR is dated July 9, 2009, but has not yet been released publicly.

For an electronic version of text of the PRL: PLR (dated July 9, 2009)

Background

The cooperative sought guidance from the IRS as to how it must treat certain payments made in the form of cash for purposes of its section 199 computation. The ruling describes in detail how grain farmers deliver their product to the cooperative and how they are paid. It distinguishes the grain cooperative as non-pooling marketing cooperative when the price paid to one farmer for his product differs from another similarly situated farmer based on his contract with the cooperative and the timing of his sale of the grain to the cooperative.

The ruling requested confirmation from the IRS that the cash payments made by the cooperative for the grain would be classified as “per-unit retain allocations paid in money.” It also asserted that the unit retains paid in the form of per-unit certificates would be classified as “per-unit retain allocations paid in certificates.”

The cooperative asserted that payment of the final settlement in cash would be treated as a “patronage dividend paid in money.”

In the July 9th letter ruling, the IRS ruled that:

Payments made to members and participating patrons in the form of cash advances constitute “per-unit retain allocations paid in money.”

For purposes of computing its section 199 domestic activities production deduction, the cooperative must compute its qualified production activities income and taxable income without regard to any deduction made for the amounts paid in cash as advances.

The IRS reached similar conclusions in earlier letter rulings. See, for example, TaxNewsFlash-Cooperatives 2009-03.

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

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

David Antoni, in Philadelphia, (267) 256-1627, dantoni@kpmg.com

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