Cooperative loss recovery plan and NOL carryforwards approved

Plain-English summary

A nonexempt farmers cooperative incurred a large loss consisting of patronage and nonmember or nonpatronage portions. It planned to waive the carryback period, carry each portion forward against the corresponding future income, and recover the patronage loss gradually by retaining part of future patronage earnings while continuing to distribute the rest. The IRS approved the patronage and nonpatronage loss carryforwards under section 172 and ruled that the remaining earnings could qualify as deductible patronage dividends under section 1382(b). It also ruled that the carryover would not require recomputing prior patronage-dividend deductions when determining the remaining loss. The gradual loss recovery plan was consistent with operating on a cooperative basis under section 1381(a)(2).

Ruling snapshot

• Question: May the cooperative use separate NOL carryforwards and a gradual patronage-earnings retention plan to recover its loss?
• Outcome: Approved
• Key authorities: IRC §§ 172, 1381, 1382, 1388; Rev. Rul. 65-106; Rev. Rul. 74-377

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201536011 Third Party Communication: None
Release Date: 9/4/2015 Date of Communication: Not Applicable
Index Numbers: 172.00-00, 1381.00-00
Person To Contact:
------------- ---------------------------, ID No. ---------------
---------------------------------------------------------- -----------------
---------------------------------------- Telephone Number:
------------------------------------------ --------------------
-------------------------------------- Refer Reply To:
CC:PSI:B05
PLR-143091-14
Date:
May 19, 2015

LEGEND:

Taxpayer = ----------------------------------------

Joint Venture = --------------------------------------------

State = ----------

a = -----------

b =

c = ------

Dear ------------:

   This is in response to a request for a ruling dated November 6, 2014, submitted

on behalf of Taxpayer by your authorized representative. The ruling concerns the
application of cooperative tax law and section 172 of the Internal Revenue Code to the
transaction described below.

   Taxpayer, a cooperative subject to the provisions of subchapter T of the Code

(sections 1381-1388), incurred a significant loss in its fiscal year ended December 31,
2013. Taxpayer requests guidance under subchapter T and section 172 with respect to
a plan Taxpayer is considering adopting for handling that loss.

  Taxpayer is a farmers cooperative organized as an agricultural marketing

association under the laws of State. Taxpayer is a nonexempt subchapter T
PLR-143091-14 2

cooperative. As a consequence, Taxpayer files its federal income tax return on Form
1120-C, U.S. Income Tax Return for Cooperative Associations. Taxpayer files its return
on the basis of a calendar year. Taxpayer’s overall method of accounting for federal
income tax purposes is the accrual basis.

     Taxpayer is the ----------- c cooperative in the United States. It was formed in -----

-------------------by the consolidation of -------------------c marketing cooperatives.
Taxpayer markets its members’ b both in a form and in processed form. Taxpayer is
primarily engaged through its a division in the business of procuring, processing and
distributing b into the a channel at the highest competitive price. In addition, Taxpayer
processes b into value-added c products (including ------------------------------------------------
----------------------------------------------------------------------------------------------------------------, ---

----------------------------) with shelf lives longer than a. These c products are sold to food
processors and institutional, wholesale and retail customers. Taxpayer coordinates the
flow of its b supply into the channel it believes will provide the best overall economic
return for members. In addition to a number of manufacturing plants, Taxpayer has an
extensive network of affiliated processors of c products.

   Taxpayer’s principal objectives are to ensure a stable market for the b of its

members and to maximize the price that its members receive for their b. Taxpayer is a
nonexempt subchapter T cooperative. Thus, among other things, Taxpayer is entitled
to exclude or deduct distributions to its members that qualify as per-unit retain
allocations and patronage dividends provided the requirements of subchapter T of the
Code are met.

     Taxpayer incurred a loss for its fiscal year ended December 31, 2013. Taxpayer

anticipates that its consolidated taxable loss for that year will be approximately ------- ----
----------. Of this loss, approximately ----------------- is attributable to patronage business,
and approximately ----------------is attributable to nonmember/nonpatronage business.

    For patronage dividend computation purposes, Taxpayer historically accounted

for its operations using a single allocation unit. Several years ago Taxpayer established
a special allocation unit for its -----------------------------------related to b marketed through
Joint Venture. Taxpayer has two allocation units, a general allocation unit and a special
allocation unit.

  Most b marketing activities are accounted for in the general allocation unit, with

the special allocation unit reserved for b marketed through Joint Venture. The
patronage net earnings of each allocation unit are allocated among members based
upon the quantity of b (measured in -----------------------) marketed through the unit.
When the special allocation unit was established, Taxpayer adopted the policy of not
PLR-143091-14 3

netting losses between the general allocation unit and the special allocation unit, and
that policy continues in effect today.1

   The 2013 loss relates to Taxpayer’s general allocation unit. The special

allocation unit had net earnings in 2013.

    Taxpayer anticipates that it will make an election pursuant to section 172(b)(3) of

the Code to relinquish the entire carryback period with respect to the 2013 loss. Thus,
for tax purposes, the 2013 loss will be available to carryover to 2014 and later years.

   As a cooperative, Taxpayer distributes its net earnings from business done with

or for member patrons to those patrons in the form of patronage dividends. Section 6.1
of Taxpayer’s Bylaws provides, in pertinent part:

    “6.1. Obligation to Allocate Net Earnings. The Association will at all times be
    operated on a cooperative basis for the benefit of its members. The Association
    is obligated to allocate annually as provided in this Article on a patronage basis
    to member patrons and nonmember patrons with whom an agreement has been
    entered into, all net earnings realized from business done with or for such
    patrons. Net earnings will be determined by deducting from the Association’s
    gross receipts on such business the related costs, including the cost of all
    products and services, the expense of handling all products and services, the
    general operating and administration expenses of the Association, including any
    reserves for expenses and an appropriate share of dividends paid to the holders
    of the Association’s preferred equity capital.…”

   In the event that Taxpayer incurs a loss in a year, Section 6.5 of Taxpayer’s

Bylaws provides the Board of Directors broad authority to adopt a plan for handling
losses incurred for any fiscal year so long as that plan is “equitable and practical.” That
section provides:

    “6.5. Losses. In the event the Association sustains a loss for any fiscal year, the
    Association may, at the discretion of the Board, account for such loss in any
    manner which it determines to be equitable and practical, including (a) offsetting
    such loss against unallocated reserves or surplus; (b) carrying such loss forward
    to be offset against future additions to unallocated reserves or surplus;
    (c) apportioning such loss among the patrons participating in such loss year on
    an equitable basis and recouping the amount due from each patron by offsetting
    it, in whole or in part, against the capital account balances of those patrons or
    against patronage due such patrons in future years; or (d) doing some
    combination of the foregoing. Notwithstanding anything in these Bylaws to the

1. Cooperatives are permitted by section 1388(j) of the Code either to net patronage losses between
   allocation units or not. Taxpayer has chosen not to do so in this case.
   PLR-143091-14 4

   contrary, in the event of a deficit in unallocated surplus, the Board may set aside
   patronage sourced earnings in order to eliminate such deficit.”

    Taxpayer had a deficit in unallocated surplus for financial statement purpose of
   

   approximately ------------------at December 31, 2013, largely as a result of the ------------- -
   ------------------------------that gave rise to the 2013 tax loss.

   Taxpayer’s Board of Directors is contemplating adopting the following plan for
   handling the 2013 loss (the “Loss Recovery Plan”):

2. The net operating loss as reported on Taxpayer’s 2013 consolidated federal
   income tax return (the “2013 loss”) will be divided into its component parts: (a) the
   general allocation unit patronage loss, and (b) the nonmember/nonpatronage loss.

3. The nonmember/nonpatronage net operating loss will be carried forward and
   offset against future nonmember/nonpatronage income until recovered.

4. The general allocation unit patronage loss will be recovered by retaining (and not
   allocating) a portion of future general allocation unit patronage earnings over a period of
   --------- years. The amount to be retained out of general allocation unit patronage
   earnings each year (prior to the payment of patronage dividends out of any remaining
   patronage earnings) will be determined as follows:

   The amount to be retained out of general allocation unit patronage earnings each
   year will be (i) the “recovery amount” (as defined below), plus (ii) net patronage
   gains from the sale or other disposition of assets (including interests in
   corporations, partnerships, limited liability companies, or other business entities),
   plus (iii) such other patronage earnings not arising in the ordinary course of
   business as shall be determined by the Board of Directors to be earnings which
   appropriately should be retained as part of the Loss Recovery Plan.

   In the event that general allocation unit patronage earnings for a year shall be
   redetermined after Taxpayer’s federal income tax return for the year has been
   filed, any resulting increase in patronage earnings shall be retained as part of the
   Loss Recovery Plan.

   Initially, the “recovery amount” shall be an amount equal to -----------------------------
   of the 2013 general allocation unit patronage loss.

   In any year where more or less than the “recovery amount” for the year is
   retained out of patronage earnings, the “recovery amount” for subsequent years
   shall be adjusted by dividing the remaining unrecovered 2013 general allocation
   unit patronage loss by the remaining number of years in the ----------year
   recovery period.
   PLR-143091-14 5

   After retaining amounts as provided above pursuant to this Loss Recovery Plan,
   any remaining general allocation unit patronage earnings each year will be
   available for distribution as patronage dividends to members marketing b through
   the general allocation unit.

   On Taxpayer’s federal income tax returns, the 2013 general allocation unit
   patronage loss carryover will be used as provided in section 172 against net
   patronage income (after deducting or excluding per-unit retain allocations and
   patronage dividends) reported on the tax returns (or as subsequently adjusted).
   The 2013 nonmember/nonpatronage loss will be used as provided in section 172
   against nonmember/nonpatronage income reported on the tax returns (or as
   subsequently adjusted).

   Taxpayer had a deficit in unallocated surplus for financial reporting purposes of
   approximately -------million at December 31, 2013. Taxpayer anticipates that amounts
   retained under the Loss Recovery Plan will be reflected as reductions to the deficit in
   unallocated surplus for financial reporting purposes. Using an example provided by
   Taxpayer, at the end of 2017, the deficit in unallocated surplus would have been
   reduced by (i) the amount of any recoveries in 2014, 2015, 2016 and 2017 related to the
   nonmember/nonpatronage portion of the loss and (ii) by the ----------million recovered
   out of patronage income during those years pursuant to the Loss Recovery Plan.

Rulings Requested

1. After electing to relinquish its entire carryback period with respect to the 2013
   loss, Taxpayer may carry its 2013 patronage loss forward in accordance with the
   provisions of section 172 of the Code to be offset against otherwise taxable patronage
   income earned in 2014 and subsequent years.

2. For 2014 and subsequent years, after retaining the amounts specified in the Loss
   Recovery Plan, any remaining patronage earnings of the general allocation unit will be
   available for distribution to members as patronage dividends excludable or deductible
   under section 1382(b) of the Code.

3. Any carryover of the 2013 general allocation unit patronage loss will not result in
   a recomputation of Taxpayer’s patronage dividend exclusion or deduction in carryover
   years for the purposes of determining the amount of the loss remaining to be carried to
   subsequent years under section 172(b)(2) of the Code.

4. After electing to relinquish its entire carryback period with respect to the 2013
   loss, Taxpayer may carry its 2013 nonmember/nonpatronage loss forward in
   accordance with the provisions of section 172 of the Code to be offset against taxable
   nonmember/nonpatronage income earned in 2014 and subsequent years.
   PLR-143091-14 6

5. The Loss Recovery Plan for handling Taxpayer’s 2013 net operating loss is
   consistent with “operating on a cooperative basis” as that term is used in section
   1381(a)(2) of the Code.

   Section 172(a) of the Code allows a deduction for the taxable year equal to the
   aggregate of (1) the net operating loss (“NOL”) carryovers to such years, plus (2) the
   NOL carrybacks to such year. With certain modifications, section 172(c) defines a NOL
   as the excess of the deductions allowed by Chapter 1 of the Code over the gross
   income. Section 172(b)(1)(A) generally provides that a NOL for any taxable year is
   carried back to each of the 2 taxable years preceding the taxable year of the loss and
   carried forward to each of the 20 taxable years following the year of the loss.

   Section 172(b)(2) of the Code provides that the entire amount of the NOL for any
   taxable year must be carried to the earliest taxable year for which such loss may be
   carried under section 172(b)(1). The portion of such loss that may be carried to each of
   the other taxable years is the excess, if any, of the amount of such loss over the sum of
   the taxable income (computed in accordance with the modifications set forth in section
   172) for each of the prior taxable years to which such loss may be carried.

   Section 172(b)(3) of the Code provides that any taxpayer entitled to a carryback
   period for a NOL may elect to relinquish the carryback period. Such an election must be
   made by the due date (including extensions of time) for filing the taxpayer's return for
   the taxable year of the NOL for which the election is to be in effect. Such election, once
   made for any taxable year, is irrevocable for that taxable year.`

   Section 1382(b)(1) of the Code provides that in determining the taxable income
   of an organization to which this part applies, there shall not be taken into account
   amounts paid during the payment period for the taxable year (1) as patronage dividends
   (as defined in section 1388(a)), to the extent paid in money, qualified written notices of
   allocation (as defined in section 1388(c)), or other property (except nonqualified written
   notices of allocation (as defined in section 1388(d)) with respect to patronage occurring
   during such taxable year.

   Section 1388(a) of the Code defines the term “patronage dividend” as an amount
   paid to a patron by an organization to which part I of this subchapter applies (1) on the
   basis of quantity or value of business done with or for such patron, (2) under an
   obligation of such organization to pay such amount, which obligation existed before the
   organization received the amount so paid, and (3) which is determined by reference to
   the net earnings of the organization from business done with or for its patrons.

   In Rev. Rul. 65-106, 1965-1 C.B. 126, the Service addressed the inter-play
   between the net operating loss deduction and the patronage dividend deduction, asking
   “whether the net earnings of a taxable year available for payment of patronage
   PLR-143091-14 7

dividends must be reduced by the allowance of a net operating loss deduction.” The
ruling concluded that they did not:

  “The net operating loss deduction allowed under section 172(a) of the Internal
  Revenue Code of 1954 does not reduce a cooperative’s earnings in the year of
  such deduction.… Therefore, the earnings of the cooperative available for
  payment of patronage dividends, the payment of which is treated as a deduction
  under section 1382(b) of the Code, are not affected by the net operating loss
  deduction. Similarly, since 172(b)(2) of the Code does not limit the patronage
  dividends deduction in any way, the amount of patronage dividends treated as a
  deduction is not required to be recomputed for any year to which a net operating
  loss may be carried in determining, under that section, the portion of such loss
  that remains to be carried to other taxable years.”

  This conclusion was subject to the following qualification:

  “While the loss of one year does not affect the earnings of another, the contract
  between the cooperative and its members, or the bylaws of the cooperative, etc.,
  may contain a provision concerning losses that could affect the amount of
  patronage dividends such a cooperative is obligated to pay in taxable years
  following the year a net operating loss is incurred. See Section 1388(a)(2) of the
  Code.”

   Rev. Rul. 65-106 permits a cooperative and its members to determine the impact

on a net operating loss on the patronage dividends to be paid in subsequent years. It
provides that a loss will have no impact on future earnings of the cooperative available
to be distributed as patronage dividends, except to the extent otherwise provided.
Thus, it establishes a rule governing the relationship of the section 172(a) net operating
loss deduction and the section 1382(b)(1) patronage dividend deduction.

   The courts have recognized that it is left to a cooperative to determine how to

recover patronage losses. In Associated Milk Producers, Inc. v. Commissioner, 68 T.C.
729 (1977), the Tax Court observed: “We fail to see any legitimate interest of
respondent in the mechanics of petitioner’s allocation of losses among its past, current,
or future member-patrons.” In Ford-Iroquois FS, Inc. v. Commissioner, 74 T.C. 1213
(1980), the Tax Court reiterated that conclusion: “The allocation of losses among a
cooperative’s past, continuing, and future members is properly the concern of the
membership and its board of directors.”

   In Farm Service Cooperative v. United States, 619 F.2d 718 (8th Cir. 1980), the

Eighth Circuit Court of Appeals cited with approval the Tax Court’s conclusions with
respect to patronage losses in Associated Milk Producers, and then observed:
PLR-143091-14 8

  “Cf. Rev. Rul. 65-106, 1965-1 C.B. 126 (cooperative can choose which year’s
  patronage income to offset with a patronage loss).” (emphasis added).

  This reference to Rev. Rul. 65-106 and short description of the ruling followed the

discussion of that ruling contained in the Government’s brief:

   “Rev. Rul. 65-106, supra, merely holds that a cooperative has a choice as to

which year’s patron income to offset with a patron loss, and need not necessarily offset
a current patron loss against the following year’s patron income.” (emphasis added).

   According to Taxpayer, this ruling request presents two separate but inter-related

questions. First, what impact will the 2013 loss have upon Taxpayer’s patronage
dividends after the adoption of the Loss Recovery Plan? Second, how can Taxpayer
use the NOL carryover resulting from the 2013 loss?

     The Loss Recovery Plan’s focus is upon establishing how the 2013 loss will be

recovered by holding back a portion of general allocation unit patronage earnings over a
----------year period, thus reducing the patronage dividends paid. This will result in
unallocated general allocation patronage earnings in future years, which absent the
2013 NOL carryover would be subject to tax.

    Taxpayer plans to split its loss for 2013 between the portion of the loss that is

patronage and the portion of the loss that is nonmember/nonpatronage. It plans to
waive its right to carry either portion of the 2013 loss back to 2011 and 2012 pursuant to
section 172(b)(3) of the Code. Applying the rules of section 172, Taxpayer plans to
carry the 2013 patronage NOL over against any unallocated (and therefore taxable)
patronage earnings it may have in future years until the NOL is fully used (or expires at
the end of twenty years). Similarly, applying the rules of section 172, Taxpayer plans to
carry the 2013 nonmember/nonpatronage NOL over against any
nonmember/nonpatronage earnings it may have in future years until that portion of the
loss is fully used (or expires at the end of twenty years).

Ruling Request #1

    At one time the Service took the position that cooperatives could not incur losses

with respect to their patronage activities and thus were not entitled to carry patronage
loss back and forward under section 172 of the Code. In Associated Milk Producers,
Inc., the Tax Court rejected this position:

  “We consider respondent’s position herein not only contrary to the express
  provisions of section 172, but conceptually strained and lacking any fundamental
  policy support; in short, an unwarranted tinkering with the tax structure applicable
  to cooperatives. The deductions claimed are clearly authorized by section 172.
  There is nothing within that section or the regulations thereunder which indicates

PLR-143091-14 9

  that the net operating loss deduction is not applicable in the case of a
  cooperative subject to subchapter T. In fact, quite to the contrary, the utilization
  of the net operating loss deduction is clearly implicit in certain subsections of the
  Code and the Income Tax Regulations, and in various of respondent’s rulings
  dealing with cooperatives.”

   Later, the Service took the position that cooperative losses were governed by

section 277 of the Code, not section 172. That position was rejected by the Tax Court
in Buckeye Countrymark, Inc. v. Commissioner, 103 T.C. 547 (1994). In AOD CC-
1997-003 (May 5, 1997), the Service announced its acquiescence in Buckeye
Countrymark observing:

  “We will no longer take the position that nonexempt cooperatives subject to
  subchapter T of the Code are subject to the limitations of section 277 of the
  Code. Nonexempt cooperatives subject to subchapter T may avail themselves of
  loss carrybacks allowed by section 172 of the Code.” (emphasis added).

  Thus, the first requested ruling asks for confirmation that the patronage portion of

the 2013 loss may be carried over pursuant to section 172 of the Code.

Ruling Request #2

   Section 1388(a)(3) of the Code provides that a “patronage dividend” paid by a

cooperative must, among other things, be “determined by reference to the net earnings
of the organization from business done with or for its patrons.” (emphasis added). Rev.
Rul. 65-106 provides that:

  “The net operating loss deduction allowed under section 172(a) of the Internal
  Revenue Code of 1954 does not reduce a cooperative’s earnings in the year of
  such deduction.… Therefore, the earnings of the cooperative available for
  payment of patronage dividends, the payment of which is treated as a deduction
  under section 1382(b) of the Code, are not affected by the net operating loss
  deduction.…

  While the loss of one year does not affect the earnings of another, the contract
  between the cooperative and its members, or the bylaws of the cooperative, etc.,
  may contain a provision concerning losses that could affect the amount of
  patronage dividends such a cooperative is obligated to pay in taxable years
  following the year a net operating loss is incurred.”

   The second ruling request asks for confirmation that the 2013 patronage loss will

reduce “net earnings” available for distribution by Taxpayer as patronage refunds in
future years only to the extent provided in the Loss Recovery Plan. That plan
contemplates retaining a specified amount from general allocation unit earnings each
PLR-143091-14 10

year over a ----------year period until the 2013 loss is recovered. Taxpayer asks for
confirmation that any general allocation unit patronage net earnings in excess of those
retained pursuant to the Loss Allocation Plan will be “net earnings” available for
distribution as patronage dividends excludable or deductible under section 1382(b)(1) of
the Code.

Ruling Request #3

   After concluding that losses do not affect “net earnings” in subsequent years

available for distribution as patronage dividend except to the extent provided by a
cooperative, Rev. Rul. 65-106 addressed a second question, which was described in
GCM 32919 (October 5, 1964) as follows:

  “Whether the patronage dividends deduction is to be recomputed in determining
  under section 172(b)(2) the portion of a net operating loss carried to one taxable
  year which remains to be carried to other taxable years.”

  Rev. Rul. 65-106 answered this question in the negative, confirming that the

conclusion of the ruling was applicable not only for purposes of subchapter T of the
Code, but also for section 172 purposes:

  “Similarly, since 172(b)(2) of the Code does not limit the patronage dividends
  deduction in any way, the amount of patronage dividends treated as a deduction
  is not required to be recomputed for any year to which a net operating loss may
  be carried in determining, under that section, the portion of such loss that
  remains to be carried to other taxable years.”

 The third ruling requests confirmation for this conclusion for Taxpayer and

Taxpayer’s Loss Recovery Plan.

Ruling Request #4

  At one time it was the position of the Service that a nonexempt subchapter T

cooperative was required to net nonmember/nonpatronage losses against patronage
income. Rev. Rul. 70-420, 1970-2 C.B. 64. This ruling was revoked by Rev. Rul. 74-
377, 1974-2 C.B. 274, which concluded that a cooperative is not required to net
nonmember/nonpatronage losses against patronage income. That ruling states:

  “This net operating loss may be carried back and carried forward in accordance
  with section 172 to offset past or future income from business done with
  nonmembers to whom the cooperative has no obligation to return patronage
  dividends.”

PLR-143091-14 11

   Rev. Rul. 74-377 has been consistently interpreted by Courts and, Taxpayer

believes that while netting is not required, it is permitted in the discretion of a
cooperative, so that, for instance, if a cooperative retains patronage earnings to recoup
a nonmember/nonpatronage loss, the nonmember/nonpatronage loss can be offset
against such retained patronage earnings. See, e.g., Farm Service Cooperative v.
Commissioner, supra at footnote 16, and Certified Grocers of California, Ltd. v.
Commissioner, 88 T.C. 238 (1987), footnote 21.

   Under the Loss Recovery Plan, Taxpayer has chosen not to net

nonmember/nonpatronage losses against patronage income, but rather to carry the
losses forward to be used against future nonmember/nonpatronage income. This
approach is consistent with Rev. Rul. 74-377.

Ruling Request #5

   Over the years, in connection with some of the disputes regarding the treatment

of cooperative losses the Service has suggested that there might be some approaches
for handling losses that are inconsistent with an organization’s status as a nonexempt
subchapter T cooperative. The fifth ruling requests confirmation that Taxpayer’s Loss
Recovery Plan is consistent with “operating on a cooperative basis.”

    The Loss Recovery Plan delays the time that the NOL will produce a tax benefit

for Taxpayer and its members, and thus is not the optimal approach judged strictly from
the perspective of minimizing the tax burden of Taxpayer and its members. If Taxpayer
adopted a plan to recover the loss by withholding all future general allocation unit
patronage income until the loss was recovered, and did not pay patronage dividends out
of the general allocation unit until that occurred, it would use the loss sooner, minimizing
the taxable income of Taxpayer and its members. Alternatively, if Taxpayer passed the
loss through to members, by allocating the loss among members on a patronage basis
and offsetting each member’s allocated portion of the loss against the member’s
qualified written notices of allocation, the members would be able to benefit from the
loss in the year of the pass-through, accelerating realization of a tax benefit from the
loss.

     However, while Taxpayer considered each of these alternatives, Taxpayer

represents that it has rejected them because they present fairness and business issues.
The 2013 loss is largely the result of payments made during 2013 in --------------- of
several ------------------------------. These ------------ arose as a result of Taxpayer’s b and b
product marketing activities. The conduct that gave rise to the ---------------------------------
------------- in the ------------ occurred over a period of years. The ------------- itself has
dragged on for many years.

 In developing the Loss Recovery Plan, Taxpayer has sought to balance a

number of considerations, some of the most important of which are:
PLR-143091-14 12

  Taxpayer believes that it is important to recover the amount of the loss by
  retaining future patronage earnings so that it can restore its balance sheet. That
  will allow Taxpayer to continue to fulfill its mission on behalf of its members. For
  this reason, simply passing the loss through to members is judged not desirable.
  Moreover, passing losses through to members of a cooperative is normally
  damaging to member relations. Cooperatives rarely choose that option.

  Taxpayer and its Board of Directors are seeking to craft a loss recovery plan that
  is fair to members, past, present and future. Allocating the loss to past patrons
  and trying to recover that loss from them is not practical. It is not clear that past
  patrons benefited from the conduct that gave rise to the ------------- (let alone
  which patrons might have benefited and how much). Because of this, Taxpayer
  and its Board of Directors are contemplating recovering the loss out of future
  patronage earnings. Taxpayer does not believe that it is appropriate to hold back
  all general allocation unit patronage earnings and to pay no patronage dividends
  until the recovery is complete. That would burden members that patronize
  Taxpayer during the next few years with a disproportionate share of the loss
  recovery. Taxpayer believes that the fairest way to recover the loss is over a
  period of years, holding back a specified portion of general allocation unit
  patronage income each year and continuing to distribute the remainder as
  patronage dividends.

   Taxpayer and its Board of Directors have sought to develop a plan that causes

the least disruption to the business of its members or to Taxpayer’s business. Holding
back all general allocation unit patronage earnings until the loss is recovered would be
potentially disruptive to the businesses of members who count on continued patronage
dividends from Taxpayer. Such an approach might also place Taxpayer at a
competitive disadvantage in the marketplace. This is another reason that Taxpayer and
its Board of Directors are contemplating spreading the recovery over a period of years,
holding back a specified portion of the general allocation unit patronage income each
year, but distributing the remainder as patronage dividends.

  Taxpayer believes that the Loss Recovery Plan is consistent with its status as a

subchapter T cooperative.

  Based on the foregoing we rule that:

1. After electing to relinquish its entire carryback period with respect to the 2013
   loss, Taxpayer may carry its 2013 patronage loss forward in accordance with the
   provisions of section 172 of the Code to be offset against otherwise taxable patronage
   income earned in 2014 and subsequent years.

2. For 2014 and subsequent years, after retaining the amounts specified in the Loss
   Recovery Plan, any remaining patronage earnings of the general allocation unit will be
   PLR-143091-14 13

available for distribution to members as patronage dividends excludable or deductible
under section 1382(b) of the Code.

3. Any carryover of the 2013 general allocation unit patronage loss will not result in
   a recomputation of Taxpayer’s patronage dividend exclusion or deduction in carryover
   years for the purposes of determining the amount of the loss remaining to be carried to
   subsequent years under section 172(b)(2) of the Code.

4. After electing to relinquish its entire carryback period with respect to the 2013
   loss, Taxpayer may carry its 2013 nonmember/nonpatronage loss forward in
   accordance with the provisions of section 172 of the Code to be offset against taxable
   nonmember/nonpatronage income earned in 2014 and subsequent years.

5. The Loss Recovery Plan for handling Taxpayer’s 2013 net operating loss is
   consistent with “operating on a cooperative basis” as that term is used in section
   1381(a)(2) of the Code.

   No opinion is expressed or implied regarding the application of any other
   

   provision in the Code or regulations. This ruling is directed only to the taxpayer that
   requested it. Under section 6110(k)(3) of the Code it may not be used or cited as
   precedent. In accordance with a power of attorney filed with the request, a copy of the
   ruling is being sent to your authorized representative.

                                        Sincerely yours,
   
                                        Paul Handleman
                                        Chief, Branch 5
                                        Office of the Associate Chief Counsel
                                        (Passthroughs & Special Industries)
   

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