The U.S. Tax Court today issued an opinion concluding that the taxpayer (an agricultural cooperative) for its 2009 and 2010 tax years was not required to compute separate section 199 domestic production activities deduction (DPAD) amounts for its patronage and nonpatronage activities.
The Tax Court further noted that:
The case is: Growmark, Inc. v. Commissioner, T.C. Memo 2019-161 (December 11, 2019). Read the Tax Court’s opinion [PDF 82 KB]
The taxpayer—an agricultural cooperative—sells fuels, lubricants, plant nutrients, crop protection products, seed, structures, and equipment. It also provides grain marketing assistance and other services. The taxpayer is member owned, and its members include farmer cooperatives and individual farmers.
The taxpayer does business with its members and certain nonmembers (patrons) on a patronage basis. Patrons are eligible to share in patronage dividends paid by the taxpayer. The taxpayer also does business with all other nonmembers (nonpatrons) on a nonpatronage basis, and nonpatrons are not eligible to share in patronage dividends.
In completing its Form 1120-C for 2009, the taxpayer allocated its domestic production gross receipts and the wages it reported on Form W-2 between the patronage and nonpatronage columns on its Schedule G. The taxpayer did not split its business operations on the basis of patronage and nonpatronage activities, nor did it dedicate specific assets or persons to patronage and nonpatronage activities. Rather, on Schedule G, the taxpayer allocated items between the patronage and nonpatronage columns on the basis of the volume of business done with members.
In computing its 2010 DPAD, the taxpayer did not separate any amounts as patronage and nonpatronage. Instead, it performed a single computation aggregating all amounts from the members of its expanded affiliated group. The taxpayer then allocated the DPAD between the patronage and nonpatronage columns on Schedule G on the basis of its qualified production activities income.
The IRS determined deficiencies of approximately $462,000 for 2009 and approximately $3 million for 2010. The taxpayer petitioned the Tax Court. At issue before the Tax Court included:
The Tax Court concluded that the taxpayer was not required to compute separate DPAD amounts for its patronage and nonpatronage activities, but that the taxpayer must allocate its aggregately computed DPAD between its patronage and nonpatronage accounts. The court also found the taxpayer must allocate the aggregate DPAD on its Schedule G using the same method it used for its other Schedule G allocations.
For more information, contact KPMG’s National Director of Cooperative Tax Services:
David Antoni | +1 (267) 256-1627 | firstname.lastname@example.org
Or Associate National Director of KPMG’s Cooperative Tax Services:
Brett Huston | +1 (916) 554-1654 | email@example.com
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