So, what is the benefit? This could allow your cooperative to pass the section 199 deduction through to your members, which enhances their cooperative patronage. This could allow the cooperative to reduce its qualified patronage allocation, which allows the cooperative to retain equity, thereby strengthening the balance sheet. And there is no question that it would generate a Federal Net Operating Loss which can be carried over for 20 years (under current law) which would provide for virtually unlimited income tax planning to minimize your Federal (and in some cases State) income tax. In laymen’s terms, it would generate additional working capital for the cooperative– potentially an increase in working capital of millions of dollars.

As we all know, tax laws change frequently. Under current law, we can compute and deduct (or allocate to your members) this section 199 deduction. In fact, this deduction even increases for tax year 2009 to 9% of adjusted taxable income before PURPIMs and allocated qualified patronage (currently 6%).

We feel that this ruling, coupled with IRS instructions regarding effective dates of electing the enhanced section 199 calculation, provide a clear authority to amending cooperative returns for purposes of computing and deducting the larger section 199 deduction.

The Internal Revenue Service rulings are clear that for Federal Tax purposes, under code section 1382, payments made by a marketing cooperative to its patrons for product are considered Per Unit Retains Paid in Money or PURPIMs.

Since the IRS issued Internal Legal Memorandum 200806011 in early 2008, which provided guidance on computing the section 199 deduction for both pooling and non-pooling cooperatives, we at Gardiner Thomsen have spent many hours researching this issue to provide the best possible tax service to our cooperative clients.

So far, there have been several private letter rulings dealing with section 199. These rulings have been issued on pooling cooperatives, although a thorough review of the facts indicates that all of the cooperatives involved have been conducting their business like non-pooling marketing cooperatives and are pooling cooperatives in name only.