Tel: 202-626-8700
Fax: 202-626-8722
50 F Street, NW Suite 900
Washington, DC 20001
www.ncfc.org
June 27, 2016
Mr. Thomas West
Tax Legislative Counsel
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Mr. Douglas Poms
Deputy International Tax Counsel
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Dear Sirs:
Pursuant to recent discussions, the National Council of Farmer Cooperatives (NCFC)1 would like
submit two draft forms of administrative guidance that would clarify and simplify the rules applicable
to the use of Interest-Charge Domestic International Sales Corporations (IC-DISCs) by farmer
cooperatives. You may recall we previously met and discussed these issues with you.
A growing overseas market for U.S. agricultural products has created significant interest by farmer
cooperatives and their members in creating and utilizing IC-DISCs to enhance their export sales.
However, the intricacies of the combination of subchapter T of the Internal Revenue Code (dealing
with cooperatives) and the rules governing IC-DISCs create some uncertainty regarding the income tax
effects of certain contemplated structures. The guidance we propose would resolve these issues so
members of farmer cooperatives—like other farmers and other exporters—can enjoy the benefits
Congress contemplated in enacting and retaining IC-DISCs.
Over the years, Congress has enacted, and then repealed because of trade violation challenges, various
tax provisions designed to promote the export of U.S. goods.2 Nevertheless, Congress retained the ICDISC rules and resisted “technical corrections” that would have increased the rate of tax applicable to
IC-DISC dividends.3 Thus, it is clear Congress intended the IC-DISC regime to apply to small
businesses, such as members of farmer cooperatives, who are attempting to engage in export markets.
The draft guidance we propose would clarify the availability of IC-DISCs to farmers that are members
of cooperatives and would provide the same treatment applicable to other farm and small business
exporters.
Since 1929, NCFC has been the voice of America’s farmer cooperatives. Our members are regional and national farmer
cooperatives, which are in turn comprised of more than 2,500 local farmer cooperatives across the country. The majority of
America’s 2 million farmers and ranchers belong to one or more farmer cooperatives.
2
These provisions include the general Domestic International Sales Corporation, the Foreign Sales Corporation, and
Extraterritorial Income rules.
3
Compare sections 8 of H.R. 4195 and S. 2374, the “Tax Technical Corrections Act of 2007,” (as introduced) to H.R. 4839,
of the “Tax Technical Corrections Act of 2007,” (as enacted into law).
1
1
Cooperative/IC-DISC structures generally would take one of two contemplated forms. Under one
proposed structure, a farmer who is a member of a cooperative would form his or her own IC-DISC
through which the farmer would transfer the farmer’s produce (say, grain) to a cooperative. The
farmer would pay any commissions to the IC-DISC and receive any related dividends. The
cooperative would store the grain from the IC-DISC with other grain acquired from other member
farmers, and sell a portion of this combined grain to foreign buyers. Revenue Ruling 77-484 (1977-2
C.B. 289) indicates that the grain transferred by a farmer through an IC-DISC through this structure
does not give rise to qualified export receipts if the farmer’s grain is commingled with other grain
acquired by the cooperative, and cannot be traced to the export sale.
Treasury and the IRS should revisit Revenue Ruling 77-484. The ruling was issued before Congress
significantly amended the export sales rules in 1984, 2000, and 2004. It would seem to have very little
continuing viability other than to deny benefits otherwise intended by Congress. The IC-DISC rules
are intended to provide benefits for export sales. Under the facts of the ruling, most of the grain
acquired by the cooperative was exported, yet none of the grain sales qualified for DISC treatment
because the exported grain had been commingled with grain that was not exported. Farmer
cooperatives commingle grain or similar agricultural products because such products are commodities
and are fungible. No one ever would—or could—track individual kernels of grain to determine which
farmers’ kernels were exported and which kernels were not. A farmers’ ability to claim IC-DISC
benefits should not depend upon such an exact and otherwise meaningless accounting.
IC-DISC rules should treat commodities similar to the way buyers view the commodities and
cooperatives account for the commodities — as fungible goods. To require cooperatives to segregate
physically and trace grain or other commodities designated for export would impose unnecessary
business practices and costs on U.S. farmers. The attached draft revenue procedure would allow
cooperatives in the situation described in Revenue Ruling 77-484 to reasonably allocate the fungible
produce it received from its patrons between exported and domestic sales. The draft revenue
procedure also provides a safe harbor for a reasonable allocation method. We believe the draft revenue
procedure applies a common sense approach to a customary business practice without frustrating any
tax policy concerns.
Under a second proposed cooperative/IC-DISC structure, the farmer members of a cooperative jointly
would form an IC-DISC (generally, held through a partnership or trust). The cooperative would be the
related supplier for the IC-DISC. Upon export, the cooperative would pay the IC-DISC its
commission, and the IC-DISC would then distribute a dividend to the farmer members through the
partnership or trust.
This structure avoids the commingling issue present in Revenue Ruling 77-484 because the exported
produce is sold only through the IC-DISC. However, it is unclear whether and how the subchapter T
rules apply in the computation of “combined taxable income” upon which the commission is
determined under this structure. For instance, cooperatives are allowed deductions for certain
distributions to its members. It would seem based on a reasonable reading of the statute that combined
taxable income would be determined without taking these patronage dividends, per-unit retain
allocations, and nonpatronage distributions into account. Treasury and IRS took a similar approach in
Treasury regulation section 1.199-6(c) regarding the calculation of qualified production activities
income for farmer cooperatives. Similar rules should apply to the calculation of combined taxable
income for IC-DISC purposes.
2
In addition, the second arrangement creates two streams of taxable income for farmers — one from the
cooperative and another from the entity holding the IC-DISC. The tax accounting treatment for these
two revenue streams at the farmer level should be clarified.
The attached proposed revenue ruling addresses these two issues. The proposed guidance would: (i)
confirm how the cooperative should calculate combined taxable income and (ii) clarify how
cooperative farmer-members should calculate and report their own taxable incomes under the second
arrangement.
We believe our proposed guidance with respect to the uniquely cooperative issues identified above will
go along way toward facilitating the use of IC-DISCs by farmer cooperatives, and benefit the millions
of farmers who are members of cooperatives. It would treat farmer members the same as other small
businesses owners who use IC-DISCs for their export sales. We would request that Treasury and the
IRS publish both proposed forms of guidance to provide certainty with respect to the two IC-DISC
structures that farmers may use.
We also believe that published guidance is in the government’s best interests. Guidance would
alleviate the administrative burdens of the IRS. With clear rules, taxpayers would not have the need to
request private letter rulings from the IRS National Office and field agents would have an easier time
examining related tax returns. In addition, the proposed guidance would clarify the proper treatment
for farmers. Without such guidance, farmers receiving Forms 1099-DIV and 1099-PATR and filing
Schedules B and F of Form 1040 may have different filing positions depending on the structure of their
IC-DISC arrangements and their reading of the instructions for the tax forms.
Thank you for continued interest in this matter. We would be happy to meet with you to discuss these
matters further. In the meantime, please contact Marlis Carson ([email protected]; 202-879-0825)
with any questions, comments, etc.
Sincerely,
Charles F. Conner
President and CEO
Attachments
cc:
The Honorable Mark Mazur
Assistant Secretary (Tax Policy)
Department of the Treasury
3
Ms. Emily S. McMahon
Deputy Assistant Secretary
Department of the Treasury
Ms. Hannah Hawkins
Attorney Advisor
Department of the Treasury
4