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IRS Ruling Addresses Distribution to Members of Gain on Sale of Property Prior to Winding Down of Operations
The IRS issued a private letter ruling that provides that amounts relating to the gain realized on the sale of a cooperative’s real property that is distributed to the cooperative current members represents patronage source income that is eligible for the patronage dividend exclusion and deductible by the cooperative as patronage dividends. The property was sold by the cooperative under a plan to wind down operations. PLR 200935019 (dated May 14, 2009, and publicly released August 24, 2009).
For an electronic version of the letter ruling:
PLR 200935019
Background
The cooperative owned and operated a warehouse that was used as its primary warehouse and distribution center. The cooperative’s business office was in a separate building on the property adjacent to the warehouse. Because the Board of Directors believed that the property was too large and too expensive to support in light of the cooperative’s current business activities, the cooperative entered into a contract to sell all of its buildings and related land to an unrelated investment group, and then subsequently to lease back the office building and a portion of the warehouse.
The cooperative intends to wind down operations following the expiration of the lease, and also has entered into a separate transaction agreement with another cooperative that will purchase its remaining inventory and assets. Most members of the current cooperative signed agreements to become members of the other cooperative on the eventual winding down of operations.
The cooperative proposed to distribute the net proceeds from the sale of the property to its current members as a patronage dividend, with at least 20% of the dividends to be paid in cash, and the remainder to be paid in the form of qualified written notices of allocation. The method of distribution would be based on the current members’ patronage over the cooperative’s holding period of the property. Members who withdrew from the cooperative before the allocation date would not receive any distribution of the proceeds related to the property even if the member had patronage activities during the holding period.
The cooperative specifically represented that:
- Its computerized and paper records accurately tracked membership and patronage during the period the cooperative owned the property being sold.
- Its membership had been relatively stable over this period.
- The inclusion of the former members would have a small effect on how proceeds would be distributed both because the dollar volume of patronage dividends has generally been larger in recent years and because the current members would be entitled to the largest distribution based on their tenure and patronage.
- Many of the former members no longer exist, and it would be difficult to identify and locate successors.
- A former member’s rights in the cooperative cease on termination except for payment of the cooperative’s “rebate notes.”
- The cooperative sold the property in a strategic move to cease operations, and the costs of the termination would be borne by current members.
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IRS’s Conclusion
The IRS ruled that:
- The gain from the sale of the property represents patronage source income that may be eligible for a patronage dividend exclusion under section 1382(b)(1) and the related regulations.
- The cooperative’s method of distributing the proceeds in the form of patronage dividends resulting from the gain was a practicable and reasonable method of distributing the proceeds to the persons who were patrons during the tax years in which the property was owned.
- The amounts paid by the cooperative to its members will be deductible as patronage dividends under section 1382(b)(1) and the related regulations.
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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