A recent IRS letter ruling permits a pooling cooperative to add back its "per-unit retains paid in money" when calculating its Section 199 deduction.  The National Council of Farmer Cooperatives has secured a copy of the ruling and is making it available to NSAC members.

 The co-op that requested the ruling accepts member product throughout the year.  The co-op pools member product on a fiscal year basis and pays members once a month for product delivered to the co-op.  These payments are advances on the total net proceeds due each member for the year under the marketing agreement between the co-op and each member.

The co-op treats these monthly payments as "per-unit retains paid in money."  A final payment made for the pool year, issued after the fiscal year ends and the audited financial statements are approved by the Board of Directors, is considered a "patronage dividend."

In the letter ruling, IRS determines that the full amount of both the monthly "per-unit retains paid in money" payments for product and the year-end "patronage dividend" "…are section 1382(b) payments and may be deducted on the income tax return and may be added back for purposes of computing the section 199 deduction."

This ruling can significantly increase the amount of the qualified production activity income deduction that a pooling cooperative can pass through to its members under Code section 199(c)(3).  While the ruling has not as yet been publicly issued, interested NSAC members can secure a copy by contacting NCFC General Counsel Marlis Carson at mcarson@ncfc.org.