Taxpayer is organized on a cooperative basis.  Its membership consists of persons engaged in harvesting timber.  Its purpose is to purchase supplies and services for its members on a cooperative basis.

The cooperative filed a request for exemption with IRS on two grounds.  First, that it is a farmers' cooperative eligible for special tax treatment under Code section 521.  Second, that it is an agricultural organization eligible for true tax exempt status under Code sec. 501(c)(5).

IRS issued a letter ruling rejecting both of the co-op's grounds for exemption on the same basis, that the harvesting of trees is not an agricultural activity (Ltr 200834022, dated March 5, 2008, released August 22, 2008).  IRS cited Code section 464(e)(1) which states, in part, "…trees (other than trees bearing fruit or nuts) shall not be treated as an agricultural or horticultural commodity."  IRS also cited several sections of the Regulations and previous rulings on similar facts in this letter ruling.

It is worth noting that the eligibility of a timber-related organization to use Subchapter T tax treatment if it is "operating on a cooperative basis" was not questioned by the Service.  The Service only denied this association access to favorable tax treatment reserved for agricultural entities.

NSAC wishes to thank KPMG for calling this development to our attention. The full text of this letter ruling is available at http://www.irs.gov/pub/irs-wd/0834022.pdf.