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U.S. Tax Court: Cooperative’s payments to patrons, section 199-related computations

U.S. Tax Court: Cooperative’s payments to patrons

The U.S. Tax Court today issued an opinion concluding that soybean and grain payments that a cooperative made to its patrons (and similar payments that the cooperative itself received as a member of another cooperative) constituted “per-unit retain allocations paid in money” (PURPIMs) for purposes of section 1388(f) and had to be treated as such for purposes of the “domestic production activities deduction” (DPAD) computation under section 199.

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The case is: Ag Processing, Inc. v. Commissioner, 153 T.C. No. 3 (October 16. 2019). Read the Tax Court’s opinion [PDF 156 KB] (52 pages)

Summary

The Tax Court summarized the facts in this case, as follows:

  • A non-exempt cooperative—subject to the rules under subchapter T (sections 1381 through 1388)—during the tax years 2006 through 2009 made soybean and grain payments to its members for products that it processed and marketed for the members.
  • The amounts of the payments were fixed without reference to net earnings, under the agreement between the cooperative and each member.
  • The cooperative received similar payments from a separate cooperative of which it was a member.
  • In a private letter ruling issued to the cooperative in 2009, the IRS characterized these payments as “per-unit retain allocations paid in money” (PURPIMs) for purposes of sections 1382(b)(3) and 1388(f) and for purposes of the cooperative’s “domestic production activities deduction” (DPAD) under section 199.
  • The cooperative reported the payments as PURPIMs in computing its tax income and treated the payments as PURPIMs in computing its DPAD for its current tax year, 2009, and its open tax year under extension, 2008.
  • The cooperative also filed amended returns for prior tax years 2006 and 2007, and reported the payments made with respect to those years as PURPIMs and treated them as such in computing its taxable income and DPAD.
  • The IRS determined that the payments that the cooperative made to its members did not qualify as PURPIMs for tax years 2006, 2007, and 2008. In addition, the IRS determined that the cooperative (since it was a non-exempt cooperative) was required to compute two separate DPAD amounts—one for its patronage activities and one for its non-patronage activities. The IRS determined deficiencies of approximately $278,000, $10.9 million, and $764,000 for the cooperative’s tax years ended from September 1, 2006, through August 31, 2009.

The Tax Court today issued an opinion holding that the payments that the cooperative made to its members—as well as the similar payments that it received from the cooperative of which it was itself a member—were PURPIMs for purposes of sections 1382(b)(3) and 1388(f), and that the cooperative must treat them as such in computing its DPAD under section 199. In other words, the soybean and grain payments that the cooperative made to its patrons (and the similar payments that it received as a member of the other cooperative) constituted PURPIMs for purposes of section 1388(f) and had to be treated as such for purposes of its DPAD computation.

As the Tax Court explained, section 199(d)(3) does not require the cooperative to compute separate DPAD amounts for its patronage and non-patronage activities. Once the DPAD is computed under section 199, this amount must be allocated under the rules of subchapter T between the patronage and non-patronage accounts.

Finally, the court found that under the general rules of section 172(d)(7), the cooperative’s DPAD could not be used to create or increase a net operating loss (NOL).


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

David Antoni | +1 (267) 256-1627 | dantoni@kpmg.com


Or Associate National Director of KPMG’s Cooperative Tax Services:

Brett Huston | +1 (916) 554-1654 | bhuston@kpmg.com

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