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PLR: Cooperative’s distribution of gain from sale of land, patronage-sourced income

Cooperative’s distribution of gain from sale of land

The IRS today publicly released a private letter ruling* that concludes that a cooperative’s proposed distribution of a percentage of gain realized on the sale of land by the cooperative to its member-patrons is patronage-sourced income and is eligible to be deducted as a patronage dividend.

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Read PLR 202035006 [PDF 89 KB] (release date August 28, 2020, and dated May 26, 2020)

*Private letter rulings are taxpayer-specific rulings furnished by the IRS Office of Chief Counsel in response to requests made by taxpayers and can only be relied upon by the taxpayer to whom issued. Pursuant to section 6110(k)(3), written determinations such as private letter rulings are not intended to be relied upon by third parties and may not be cited as precedent. These written determinations may, however, offer an indication of the IRS’s position on the issues addressed.

Summary

The cooperative—a non-exempt agricultural cooperative corporation that provides processing and marketing services for the agricultural products of its members-patrons—files a consolidated federal income tax return using a December 31 year-end and the accrual method of accounting. The cooperative’s bylaws require it to allocate patronage earnings among its member-patrons on a patronage basis.

  • The cooperative purchased some land many years ago to facilitate its processing and marketing cooperative purpose. The land is no longer necessary to the cooperative purpose, and the cooperative has agreed to sell the land to an unrelated, third-party buyer. The sale will result in a gain. The cooperative will be able to continue its processing and marketing cooperative purpose without the land.
  • The cooperative plans to use the sale proceeds to fund the cash portion of the patronage dividend allocated to member-patrons relating to the gain; pay down its debt; increase its capital for additional investment in the patronage business; and redeem qualified written notices of allocation previously issued to the member-patrons.
  • The cooperative will allocate a percentage of the member portion of the gain from the sale of the land to each member-patron based on the proportion of products marketed for the member-patron to the total products marketed for all member-patrons using a lookback period. The lookback period will limit the participation in the gain to those member-patrons who were active in the cooperative during the years to which the gain is attributable. The numbers of member-patrons have been relatively stable over the lookback period.
  • The percentage of the nonmember portion of the gain will be reported as nonpatronage income on its consolidated federal income tax return for the year of the sale.

The IRS ruled that:

  • The percentage of the member portion of the gain from the sale of the land is patronage-sourced income.
  • If the cooperative properly distributes the percentage of the member portion of the gain to each member-patron based on the proportion of products marketed for the member-patron to the total products marketed for all member-patrons during the lookback period, then the distribution is eligible to be deducted as a patronage dividend under section 1382(b)(1).


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

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


Associate National Director of KPMG’s Cooperative Tax Services:

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

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