Ag Processing, Inc. v. Comm'r

• Decision Date: 16 October 2019
• Docket Number: 153 T.C. No. 3,Docket No. 23479-14.
• Parties: AG PROCESSING, INC. A COOPERATIVE AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

AG PROCESSING, INC. A COOPERATIVE AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

153 T.C. No. 3

Docket No. 23479-14.

UNITED STATES TAX COURT

October 16, 2019

P is a nonexempt cooperative subject to the rules under I.R.C. secs. 1381 through 1388 (subch. T). During its taxable years 2006 through 2009 P made payments to its members for products that it processed and marketed for the members. The amounts of the payments were fixed without reference to P's net earnings pursuant to an agreement between P and each member. P received similar payments from a cooperative of which it was a member.

In a private letter ruling issued to P in 2009, the IRS characterized such payments as per-unit retain allocations paid in money (PURPIMs) for purposes of I.R.C. secs. 1382(b)(3) and 1388(f) and for purposes of P's domestic production activities deduction (DPAD) under I.R.C. sec. 199. P reported the payments as PURPIMs in computing its taxable income and treated the payments as PURPIMs in computing its DPAD for its current taxable year, 2009, and its open taxable year under extension, 2008. P also filed amended returns for prior taxable years 2006 and 2007 reporting payments made with respect to those years as PURPIMs and treating them as such in computing its taxable income and DPAD.

R determined that the payments P made to its members did not qualify as PURPIMs for taxable years 2006, 2007, and 2008. In addition R determined that P, as a nonexempt cooperative, was required to compute two separate DPAD amounts--one for its patronage activities and one for its nonpatronage activities.

Held: The payments P made to its members and the similar payments P received from a cooperative of which it was a member are PURPIMs for purposes of I.R.C. secs. 1382(b)(3) and 1388(f), and P must treat them as such in computing its DPAD under I.R.C. sec. 199.

Held, further, I.R.C. sec. 199(d)(3) does not require P to compute separate DPAD amounts for its patronage and nonpatronage activities.

Held, further, once DPAD is computed under I.R.C. sec. 199, it must be allocated under the rules of subch. T between P's patronage and nonpatronage accounts.

Held, further, under the general rules of I.R.C. sec. 172(d)(7) P's DPAD cannot be used to create or increase a net operating loss.

George William Benson and Andrew R. Roberson, for petitioner.

Courtney L. Frola and William R. Davis, Jr., for respondent.

PARIS, Judge: Respondent determined deficiencies of $277,477, $10,855,409, and $763,742 for petitioner's taxable years¹ ended August 31, 2007,2008, and 2009, respectively. In its petition petitioner challenged respondent's adjustments. Petitioner also affirmatively alleged that it had (1) erroneously included in income on its 2008 and 2009 Federal income tax returns $30,992,706.31 and $26,594,457.99, respectively, of biodiesel mixture excise tax credits refunded under section 6427(e),² (2) erroneously included in income on its 2008 and 2009 Federal income tax returns $175,727.99 and $374,157, respectively, of alternative fuel mixture excise tax credits refunded under section 6427(e), and (3) erroneously failed to add back certain payments into its computation of taxable income and qualified production activities income (QPAI) for purposes of determining its domestic production activities deduction (DPAD) under section 199 for 2008.

After concessions,³ the issues for consideration are whether: (1) certain payments petitioner made to its members and certain payments petitioner received from a cooperative of which it is a member constitute per-unit retain allocations paid in money (PURPIMs) within the meaning of subchapter T under chapter 1 of subtitle A of the Internal Revenue Code (sections 1381 through 1388), (2) petitioner must compute its DPAD separately for patronage and nonpatronage activities, (3) if separate computations are not required, petitioner may use its DPAD to offset any of its taxable income or must allocate its DPAD between its patronage and nonpatronage accounts, and (4) petitioner's excess DPAD (if any) may create or increase a net operating loss under section 1.199-7(c), Income Tax Regs.⁴

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The first stipulation of facts and the attached exhibits are incorporated herein by this reference.

Petitioner consists of parent company Ag Processing, Inc. a cooperative (AGP) and several subsidiaries. For Federal income tax purposes AGP is a corporation operating on a cooperative basis to which part I of subchapter T applies (subchapter T cooperative). AGP is a nonexempt subchapter T cooperative. AGP is also a specified agricultural or horticultural cooperative as defined in section 199(d)(3)(F). Petitioner's principal place of business was in Nebraska when it timely filed its petition.

I. Petitioner's Structure

During 2006 through 2009 petitioner owned certain active and inactive corporations, limited liability companies, and foreign companies. Petitioner filed consolidated returns for 2006 through 2009. Petitioner constituted an expanded affiliated group (EAG) under section 199(d)(4) and computed its DPAD as though it were a single corporation.⁵ As relevant to petitioner's DPAD computation for2006 through 2009 AGP wholly owned the following entities: (1) AGP Grain Marketing, LLC (AGP Grain Marketing), a disregarded entity for Federal income tax purposes treated as a division of AGP; (2) AGP Grain, Ltd., which engaged in marketing grain and operated on a nonpatronage basis; (3) AGP Corn Processing, Inc., which produced ethanol and operated on a nonpatronage basis; (4) Ag Environmental Products, L.L.C., which marketed the biodiesel fuel produced by AGP and operated on a nonpatronage basis; and (5) Ag Processing Incorporated, which served as a holding company for investments in two foreign companies and operated on a nonpatronage basis.

II. Petitioner's Business

AGP is an agricultural cooperative engaged in procuring, processing, marketing, and transporting oilseeds, grains, and related products. AGP's businesses include soybean processing, vegetable oil refining, renewable fuels, grain and agricultural products, and international businesses. AGP operates soybean processing plants, soybean oil refineries, and biodiesel production facilities. AGP is member owned, and its operations benefit its members, among others.

For 2006 through 2009 AGP's members included over 170 local farmer-owned cooperatives and several regional cooperatives. AGP conducted business with its members on a patronage basis, and members were eligible to share in patronage dividends paid by AGP. AGP conducted business with nonmembers on a nonpatronage basis, and nonmembers were not entitled to share in patronage dividends paid by AGP.⁶

AGP's principal business involved processing and marketing soybeans purchased from members and nonmembers. During 2006 through 2009 AGP acquired over 200 million bushels of soybeans per year.⁷ AGP marketed soybeans from members on a patronage basis and from nonmembers on a nonpatronage basis. AGP acquired 77.78%, 76.56%, 76.63%, and 74.38% of its soybean bushels from members on a patronage basis in 2006, 2007, 2008, and 2009, respectively.

Each soybean purchase was made at a fixed price without reference to AGP's net earnings pursuant to a contract (soybean contract) between AGP and each member or nonmember. To set the price for each soybean contract, AGP started with the Chicago Board of Trade's then-current market price per busheland adjusted the amount to arrive at a "basis" price. The final price in each soybean contract included adjustments for locality and for factors affecting the quality of the soybeans (i.e., moisture, odors, foreign material, and protein content). Each soybean contract covered one or more soybean deliveries from the seller to AGP. AGP paid the full amount due under each soybean contract (soybean payment) in cash at the time specified in the contract, which was typically within two to three days after delivery. The soybean contracts did not specify the tax treatment of the soybean payments or otherwise characterize them. The soybean contracts did not reference the use of a per-unit retain allocation system. A soybean contract with a member and a soybean contract with a nonmember had the same terms. Upon delivery the soybeans were commingled for processing such that the soybeans from members were not distinguished or separated from the soybeans from nonmembers.

AGP made soybean payments to its members totaling $989,725,211, $1,187,491,538, $1,952,086,277, and $1,577,625,253 for 2006, 2007, 2008, and 2009, respectively. AGP also paid patronage dividends to its members totaling $31,000,000, $46,200,000, $88,214,683, and $13,500,000 for 2006, 2007, 2008, and 2009, respectively.

AGP marketed grain that it purchased from members and nonmembers through AGP Grain Marketing. AGP Grain Marketing acquired over 90 million bushels of grain per year during 2006, 2007, 2008, and 2009. AGP Grain Marketing marketed grain from members on a patronage basis and from nonmembers on a nonpatronage basis. AGP Grain Marketing acquired 42.53%, 34.43%, 30.49%, and 37.49% of its grain bushels from members on a patronage basis in 2006, 2007, 2008, and 2009, respectively. Each grain purchase was made at a fixed price without reference to AGP's or AGP Grain Marketing's net earnings pursuant to a contract (grain contract) between AGP Grain Marketing and each member or nonmember. AGP Grain Marketing paid the amount due under each grain contract (grain payments) in cash at the time specified in the contract. The grain contracts did not specify the tax treatment of the grain payments or otherwise characterize them. The grain contracts did not reference the use of a per-unit retain allocation system. A grain contract with a member and a grain contract with a nonmember had the same terms. Upon delivery the grain was commingled for processing such that the...