IRS Document Discusses Section 199 Calculations and Per-Unit Retains Paid in Money (PURPIMs)


	HOT TOPICS IRS Document Discusses Section 199 Calculations and Per-Unit Retains Paid in Money (PURPIMs) IRS has released an Internal Legal Memorandum (letter ruling 200806011) that provides some interesting insights into how the IRS National Office views the payments by marketing cooperatives to patrons, at least in a section 199 context. Some prior internal IRS documents on this issue have not been released, so any analysis of this relatively brief letter ruling here is limited as it isn't always clear just what point the author is responding to. The IRS Technical Advisers Group e-mailed the Chief Counsel's Officers to review the issue of whether marketing cooperatives using pooling are allowed a larger sec. 199 deduction than marketing cooperatives that do not use pooling. The argument for the difference is that when non-pooling marketing cooperatives make a cash payment to patrons for product delivered, the amount of the payment is added to cost of goods sold and therefore not eligible to be added-back to qualified production activities income (QPAI) for sec. 199 purposes. Cash payments to patrons by pooling cooperatives are considered Per-Unit Retains Paid in Money (PURPIMs), are not included in cost of goods sold, and are added back to QPAI resulting in a larger amount of QPAI and a larger section 199 deduction. In concluding that pooling and non-pooling cooperatives are entitled to the same section 199 deduction, the IRS National Office made several interesting observations: PURPIMs are deductible by a marketing cooperative whether or not the product marketed for the patron has been sold during the taxable year (Sections 1382(b)(3) and 1382(e)(2)). Cash payments for product to patrons of non-pooling marketing cooperatives, not based on net earnings, also meet the definition on PURPIMs and are "deductible by the non-pooling cooperative in the same manner as the pooling cooperative resulting in identical sec. 199 calculations and sec. 199 deductions" (Sections 1388(f) and 1382(b)(3)). If the cash payment for product from non-pooling cooperatives is excluded from the co-op's sec. 199 calculation, it would be domestic production gross receipts to the patrons. The Code and regulations emphasize that the entire sec. 199 calculation should be done at the cooperative level. The conclusion that the "purchases" from patrons are PURPIMs is consistent with that objective. KPMG has posted a more complete and lucid explanation of this letter ruling, with a link to the text, on its web site and given NSAC permission to refer you to that posting: http://www.us.kpmg.com/microsite/taxnewsflash/coops/