The taxpayer is the common parent of an affiliated group of corporations that files a consolidated federal income tax return on an accrual basis. The group’s primary business is to manufacture and sell products and services.

The parent corporation (taxpayer) has at least six subsidiaries.  One is a cooperative that conducts most of the group's manufacturing and procurement activities.  The parent and the other five subsidiaries are all patrons of the cooperative and each patron of the cooperative is a member of the consolidated group.

The taxpayer asserted that the cooperative is entitled to a deduction under section 1382 in the tax year before the patronage dividend was paid and that under section 1385, the patrons do not include this amount in income until the year of payment. Taxpayer claimed that the intercompany matching rule under Reg. section 1.1502-13(c)(2) does not apply.

IRS Chief Counsel Memorandum 200829028 (released July 18, 2008, and dated April 4, 2008) rejected the taxpayer’s position.  It states that "The outcome described above is clearly applicable to a cooperative and its patrons where the entities are not members of the same consolidated group."

However, it goes on to say that because the cooperative and its patrons are members of the same group, the payment of patronage refunds is an intercompany transaction under the broad definition of the term in Treas. Reg. 1.1502-13(b)(1)(i).  In this instance, the timing rules of the intercompany transaction regulations override Subchapter T to ensure single entity treatment of the combined cooperative and patrons.  The cooperative must defer taking its patronage refund deduction until the year in which the patrons take into account their corresponding items of income.

NSAC wishes to thank KPMG for calling this development to our attention. The full text of this CCM is available at http://www.irs.gov/pub/irs-wd/0829028.pdf.