On December 22, 2006, the IRS posted on its website a revised Draft Form 1120-C, "U.S. Income Tax Return for Cooperative Organizations."   Note that the new Form will have to be filed by ALL cooperatives, not just agricultural cooperatives as was the case with Form 990-C.  Form 990-C will no longer be accepted for years ended on or after December 31, 2006.  Cooperatives that have used Form 1120 will have to convert to the Form 1120-C.

The IRS initially posted a Draft Form 1120-C in October and asked for comments. A working group of the National Council of Farmer Cooperative’s LTA Committee developed comprehensive comments on the Draft.  The group included many members of the NSAC Tax Committee as well.  The working group identified numerous problems with the draft form and instructions, including several instances in which the form and instructions contradict the Internal Revenue Code. NCFC requested that the IRS revise portions of the form and instructions and delay implementation of the form.

The revised draft (see IRS website) is virtually identical to the original draft; only one minor change was made in response to NCFC's comments. The revised draft is an indication that the IRS plans to go forward with the requirement that cooperatives begin using the new form for taxable years ended on or after December 31, 2006.  The form will not have to be e-filed this year, but the IRS intends to require e-filing next year for the larger cooperatives.

In response to our inquiries, an IRS official confirmed that the new form will be effective for taxable years ending on or after December 31, 2006, and said: "These were the only changes we could make this late in the year." The official also said the IRS will consider NCFC's other suggestions for next year's form.  Work will begin on the 2007 form in February. 

Some tax return software vendors have been advised of this new requirement, but as yet, we have not heard that any one of the vendors has definite plans to program the new form.  We recommend that you discuss this new requirement with your tax return software vendor and encourage them to program the form in anticipation of the e-filing mandate for 2007 returns.

If you have any suggestions for the new Form or the instructions, please feel free to contact Teree Castanias, Tax Committee Chairman, at tcastanias@kpmg.com or (916) 554-1146.