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Cooperatives Annotations (Agricultural Law and Tax)

Posted June 13, 2016

Co-op Patronage Application and Eligibility Process Forms Can Be Filed Electronically. The taxpayer is a grain marketing and supply cooperative that provides member services. It proposed to revise its patronage eligibility process to allow members to file patronage application and eligibility forms online by means of the taxpayer’s website instead of by paper. The taxpayer sought a ruling from the IRS that allowing patrons to consent electronically would satisfy the requirement of I.R.C. §1382(c)(2)(A) that the consent be in “writing.” The IRS determined that it would, noting that the Code did not specify how cooperatives are to obtain a “consent in writing” from patrons and there was no guidance as to whether electronic consent satisfied the requirement. The IRS noted that nothing in the Code or Regulations precluded electronic consent. Priv. Ltr. Rul. 201619003 (Feb. 10, 2016).

Posted April 1, 2016

LLC, As Licensed Grain Dealer, Cannot Treat Grain Purchases As PURPIM. The taxpayer was a nonexempt ag co-op that bought, stored, marketed and sold grain. The grain was purchased from the co-op's members (farmers) and was sold to grain processors. The co-op, along with two other co-ops, formed an LLC. The LLC was the licensed grain dealer and was classified as a partnership for tax purposes, but was not a cooperative. After the LLC was formed, the taxpayer got out of the grain business and surrendered its grain licenses under a non-compete agreement with the LLC. The taxpayer's patrons could continue to sell to the LLC. The taxpayer wanted to treat the LLC's purchases of grain as its own, the LLC's payments as patronage allocations and that the purchases were deductible on the taxpayer's return as PURPIMs. The IRS determined that such treatment was not allowed because the purchases were by an entity that was not subject to cooperative taxation under Subchapter T. The IRS also determined that there were no facts that provided an argument that the LLC was acting as the taxpayer's agent. IRS noted that a payment to a co-op patron for grain cannot be treated as PURPIM unless it is paid by means of an agreement between a co-op and the patron. That didn't exist. F.S.A. 20150801F (Apr. 22, 2014).


Written Notices of Allocation Can Be Sent Electronically or Over the Web. In this private letter ruling, the IRS has said that a cooperative can use email or a website to send notices to members about patronage dividends. The cooperative had many members that bought personal and family items from the cooperative. Patronage dividends were paid annually in nonqualified written notices of allocation. Historically, the cooperative had used the U.S. mail to send the notices. To cut down on costs, the cooperative proposed to send the notices via email or their website. The IRS approved using the website or email to send the notices and that the cooperative could take an exclusion or deduction under I.R.C. Sec. 1382(b)(2) or tax benefit under I.R.C. Sec. 1383(a)(2) when the nonqualified written notice is paid or redeemed. Priv. Ltr. Rul. 201413002 (Mar. 6, 2014).


Reclassified Grain Sales Do Not Reduce Nonpatronage Income. Under I.R.C. §1382(b), a cooperative can reduce its patronage-sourced income by the amounts paid to its patrons during the payment period. It cannot reduce nonpatronage-sourced income by amounts paid to patrons. Amounts paid to patrons include patronage dividends paid in money, qualified written notices of allocation, or other property paid with respect to patronage during the tax year, and per unit retain allocations paid in money, qualified per-unit retain certifications, or other property with respect to marketing occurring during the tax year. A per-unit retain allocation is an allocation by a cooperative to a patron with respect to products marketed for the patron. Here, a grain marketing and supply cooperative marketed grain on a patronage basis for its members (farmers and local grain cooperatives). The cooperative treated all payments made to members and nonmembers for grain purchases and not as PURPIMS. The cooperative filed an amended return seeking to increase its DPAD based on the reclassification of amounts previously characterized as grain purchases as PURPIMS. However, the IRS determined that the DPAD resulting from the reclassification of amounts previously classified as grain purchases as PURPIMs is a deduction incurred in connection with the conduct of patronage business and is inherently patronage-based. Thus, the amount can only be used to reduce patronage-sourced income, not non-patronage–sourced income. C.C.M. 20132701F (May 16, 2013).


DPAD Not Computed By Aggregating Patronage and Nonpatronage Income. A taxable cooperative filed Form 1120C that claimed DPAD for patronage income and no DPAD for nonpatronage income. The taxpayer simply computed the DPAD by aggregating patronage and nonpatronage sourced activities. Nonpatronage activities had negative QPAI that would not have produced a DPAD, but by virtue of aggregating patronage and nonpatronage activities, the taxpayer converted the portion of wages attributable to nonpatronage activity into wages associated with qualified activities. Since cooperatives compute gross patronage sourced income for DPAD purposes without deducting PURPIMS, patronage sourced income is higher than it otherwise would be which gives cooperatives an advantage over corporations. While the statute does not require separate computations, the IRS concluded that the DPAD is a deduction only against patronage sourced income. Thus, the taxpayer cannot compute the DPAD by aggregating patronage and nonpatronage sourced income. F.S.A. 20131802F (Feb. 27, 2013).