IRS letter ruling - Patronage dividends paid by financing cooperative and interest expense 

May 8:  The IRS issued a private letter ruling* concluding that patronage dividends paid by a financing cooperative effectively reduce the costs that its patrons incur to borrow funds from the cooperative. Accordingly, while the taxpayer—a timberland REIT that borrows from farm cooperative banks—must include patronage dividend income in its gross income under section 1385(a)(1), such patronage dividends effectively reduce the taxpayer’s interest expense paid during the prior year. PLR 201418022 (release date May 2, 2014, and dated January 28, 2014)

Read text of PLR 201418022 [PDF 54 KB]

*Private letter rulings are taxpayer-specific rulings furnished by the IRS National Office in response to requests made by taxpayers and can only be relied upon by the taxpayer to whom issued. It is important to note that, pursuant to section 6110(k)(3), such items cannot be used or cited as precedent. Nonetheless, such rulings can provide useful information about how the IRS may view certain issues.


The taxpayer is a REIT that owns and manages timberlands for the production and sale of timber. The taxpayer:

  • Entered into a credit agreement with banks that are farm cooperatives (i.e., that provide financing to their patrons)
  • Expects to receive a “patronage dividend” from each farm credit bank

For federal tax purposes, the patronage dividends are included in gross income under section 1385. However, for financial reporting purposes, the taxpayer reduces its interest expense by the amount of patronage dividends received.

IRS letter ruling

The IRS issued a letter ruling, as requested by the taxpayer, that with application of the REIT provisions of the Code, patronage dividends that are included in the taxpayer’s gross income under section 1385 are excluded from the taxpayer’s gross income for purposes of sections 856(c)(2) and (c)(3).

The IRS explained that patronage dividends paid by a cooperative are a return of earnings to its cooperative patrons based on the amount of business that the patron transacts with the cooperative.

The patronage dividends paid by a financing cooperative effectively reduce the costs that its patrons incur to borrow funds from the cooperative. Thus, while the taxpayer must include patronage dividend income in its gross income under section 1385(a)(1), the patronage dividends that the taxpayer receives effectively reduce its interest expense paid during the prior year.

For more information, contact KPMG’s National Director of Cooperative Tax Services:

David Antoni, in Philadelphia

(267) 256-1627

Or Associate National Director of KPMG’s Cooperative Tax Services

Brett Huston, in Sacramento

(916) 554-1654

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