In a new ruling, the Service considered the period of historical patronage business that should be used to calculate the gain on a liquidation sale.
Coop was a cooperative within the meaning of Subchapter T. It struggled in its market and sold its business to Buyer Corp, including all assets, property, networks services, etc. Upon member approval, Coop liquidated its assets for patronage distributions in accordance with its bylaws. However, for asset gains, the bylaws were silent on what time period to use for measuring patronage. The bylaws provided that “residual assets shall be shared by shareholders (including both active and inactive members) based on historic participation.”
Coop determined that a percentage of the gains from the sale was eligible for distribution as a patronage dividend. Coop calculated the percentage based on the average of the patronage/nonpatronage business ratios over a specific number of years that the cooperative believed was representative of its entire existence. The percentage did not include the cooperative’s first years because such data was no longer available.
Coop requested a ruling from the Service that (i) the sale to Buyer Corp was done for “with or for” the benefit of its patrons and (ii) that Coop is entitled to exclude or deduct a portion of the distributions that is equal to the patronage portion of the net gain.
The IRS found that the patronage portion of the net gain from the sale of its business assets to Buyer Corp was directly related to the amount of business done with or for patrons and, thus, was patronage-soured income eligible for the patronage–dividend deduction under Subchapter T. The IRS noted that Coop’s use of data from only a certain number of years, rather than its entire existence, did not affect its ability to deduct the patronage portion paid to its members.