The Internal Revenue Service has determined that voluntary charitable contributions by cooperative members of patronage-based distributions from their co-op qualify for deduction at the member level to the extent provided in I.R. Code sec. 170.

The cooperative, which sells consumer products to its members and the general public, is somewhat unique in that it distributes earnings as patronage refunds which can be redeemed either for cash or merchandise from the cooperative.  It also sponsors a credit card program under which its members earn rebates based on a percentage of their purchases with the card.  These rebates can also be redeemed for cash or used to purchase merchandise from the co-op.

The cooperative wants to offer its members a third option as to both payments, to allow members to direct the cooperative to transfer the amount of the payments to a charity.  A member asked the Service to rule on whether such payments from the cooperative to the charity, under the direction of the member, would qualify for the charitable contribution deduction at the member level under sec. 170.

The ruling, PLR 200817018 (released 4/25/08), discusses both situations and provides a favorable determination for the cooperative and its members.  The Service said:
1.  If a patron directs a cooperative to transfer to a charity the amount of a patronage dividend redeemable by the patron in cash, the amount so transferred is a charitable contribution deductible at the member level under sec. 170.
2.  If a patron directs a cooperative to transfer to a charity rebates earned as the result of making purchases with the cooperative's credit card, the amount so transferred is also a charitable contribution deductible at the member level under sec. 170.
The Service added reasonable clarification language that (1) the charitable contributions will be treated as made when the cooperative transfers the payments to the charity, not when the member directs the cooperative to remit them, (2) the contributions are deductible only if all other requirements under sec. 170 (including substantiation) are met, and (3) the percentage limitation on total charitable deductions by the member is not exceeded.

While probably not of great significance, the Service does note that the amount of any patronage dividend that is attributable to personal, living, or family items (the types of items handled by this cooperative) is not included in gross income under sec. 1385(b)(2).

The letter ruling is posted on the IRS web site at http://www.irs.gov/pub/irs-wd/0817018.pdf.  NSAC wishes to acknowledge KPMG for calling this ruling to its attention.