T.C. M em o . 2 0 1 9 -1 6 1

UNITED STATES TAX COURT

GROW M A RK, INC. & SUBSIDIARIES, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 3 7 97 -1 4
. Fi l edDecem b er 1 1 , 2 01 9
.
Geo rg e W i l l iam

Ben s o n an dAn drew R. Ro b ers o n , fo r p et i t i o n er. J u s t in D. Sch ei d , Ro g el i o A. Vi l l ag el i u , an d Tes s d eLi efd e, fo r res p o n d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION PARIS, J u d g e: Res p on d en ti s s u eda n o ti ce o f d efi ci en cy t o p et i t i o n er d et erm i n i n g d efi ci en ci es o f $ 4 6 1 ,6 9 6 an d $ 2 , 9 5 8 ,3 1 9 fo r 2 0 0 9 an d2 0 1 0 , 1

1 Becau s e p et i t i o n er’ s t ax ab l e y ear b eg in s o n Sep t em b er 1 an d en ds o n Au g u s t3 1 , the t ax ab l e y ears i n i s s u e ran fro m Sep t em b er 1 , 2 0 0 8, t o Au g u s t3 1 , 2 0 1 0 . Fo r eas e o f d i s cu s s i o n th e Co u rtwi l l refer t o the t ax ab l e y ears i n i ss u e as (co n ti n u ed ...)- 2
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[* 2 ] res p ect i v el y . Pet i t i on er ch al l en g edres p o n d en t ’ s ad ju s t m en ts i n the n o t i ce o f d efi ci en cy . Pet i ti o n er al s o as s ert edi n i ts p et i t i o n th at i t i s en t i tl ed t o reduce i t s t ax ab l e i n co m e b y

$ 6 ,9 3 8 ,2 9 2 an d$ 7 ,3 2 9 ,4 9 1 fo r 2 00 9 an d 2 01 0 , res p ect i v el y , arg u i n g th ati ti n co rrect l y cal cu l at edi t s co s t o f g oo d s s o l d(COGS) fo r each y ear
u s i n g i t s n etex ci s e t ax l iab i l i t i es . 2 Aft er co n ces si o ns , 3 th e i s s u es fo r d eci si o n are: (1 ) wh et h er p et it i o n er m u s t
co m p u t e i t s s ect i o n 1 9 9 d om es t i c p ro du ct i o n act i v i t ies d edu ct io n (DPAD)
s ep arat el y

fo r p at ro n ag e an dn onp at ro n ag e act i v i t ies , (2 ) i f s ep arat e co m p ut at i o n s
are n o treq ui red , wh et h er p et it io n er m ay u s e i t s DPAD t o o ffs etan y o f i t s t ax ab l e i n co m e o r m

u s t al l o cat e i ts DPAD b et ween i t s p at ro n ag e an dn o np at ro n ag e
acco u n t s, (3 ) i f al l o cat io n i s req u i red , th e p ro p er m et h o do f al l o cat i on , an d(4 ) wh et h er t h e al co h o l fu el an db io d i es el m i x tu re cred i t s u nd er s ect i o n 6 4 2 6 (b ) an d

1 (...co n t in u ed ) 2 0 0 9 an d2 0 1 0 . Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co d e i n effect atal l rel ev an tt i m es , an dal l Ru le referen ces are t o th e Tax Co u rt ’ s Ru l es o f Pract i ce an dPro cedu re.

2 Th e co rrectcal cu l at i o n o f p et it i o n er’ s COGS--an di t s en t i t l em en t t o redu ce i t s t ax ab l e i n co m e acco rd in g l y --wi l l b e ad dres s ed i n a s ep arat e o p i n i o n.

3 OnNo v em

b er 2 5 , 2 01 5 , th e p art i es fi l eda s t i pu l at i o n o f s et t l edi s s u es ag reei n g t o cert ai n ad

j u s t m en t s t o p et i t i o n er’ s ex p en s es an di n co m e fo r 2 0 09 an d 2 0 1 0 . Th es e s et t l ed is s u es are b i n d i n g i n th e p art i es ’ Ru le 1 5 5 co m p u tat i o n s .- 3
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[* 3 ] (c) red u ce ex ci s e t ax es fo r p u rp o s es o f p et it i o n er’ s COGS cal cu l at i o n . Th e fo u rt h i s s u e wi l l b e d eci d edi n a s ep arat e o p i n i o n . FINDINGS OF FACT I. Back g ro u n d Pet i t i o ner i s an affi l i at edg ro up o f co rp orat i o n s co m p ri s i n g Gro wm ark , In c. (Gro wm ark ), an dm

u l t i p l e s ubs i d i ari es . Fo r Fed eral i n co m e t ax p u rp o s es p et i t i o n er fi l es a co n so l id at ed return . Wh enp et i t i o n er t i m el y fi l ed i ts p et i t i o n , i t s p ri n ci p al p l ace o f b u s i n es s was i n Il l in o i s . Gro wm arki s an ag ri cu l tu ral co o p erat i ve t h ats el l s fu el s , l ub ri can t s , p l an t
n u tri en t s, cro p p ro t ect i o n p ro du ct s , s eed , s tru ctu res , an dequ i p m en t . Gro wm ark al s o p ro v i d es g rai n m ark et i n g as s i st an ce an do th er s erv i ces . Gro wm arki s m em ber
o wn ed , an di ts m em

b ers i n cl u de farm er co o p erat i v es an di n d iv i dual farm ers . Gro w m arkd o es b u s i nes s wi th i t s m em b ers an d cert ai n n o n m em b ers (co l lect i v el y , p at ro n s ) o n a p at ro n ag e b as i s . Pat ro n s are el i g i b l e t o s h are i n p at ro n ag e d i v i d en d s p ai db y Gro w m ark
. Gro wm arkd o es b u s i n es s wi th al l o ther n o n m em b ers (n o npat ro n s ) o n a n o np at ro nag e b as i s , an d n o np at ro n s are n o tel i g ib l e t o s h are i n p at ro n ag e d i v i d en d s . 4

4 Sec. 1 .1 3 8 8 -1 (e), In co m e Tax Reg s ., p ro v i d es that“p at ro n ” i n cl u d es “ an y p ers o n wi th wh o m

o r fo r wh o m

th e co o p erat iv e as s o ci at i o n d o es b u s in es s o n a (co n ti n u ed ...)- 4
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[* 4 ] Fo r Fed eral i n co m e t ax pu rp o s es Gro wm arki s a co rp o rat i o n o p erat in g o n a
co o perat i v e b as i s t o wh ich p artI o f s ub ch ap t er T ap p l i es (s ub ch ap ter T
co o perat i v e). Gro wm arki s a n o n ex em p ts ub ch ap t er T co o p erat iv e an da s p eci fi ed ag ri cu l tu ral o r h ort icu l tu ral co o p erat i v e wi th i n the m ean i n g o f s ect i o n 1 9 9 (d )(3 )(F). II. Tax Retu rn s In 2 0 0 9 an d2 0 1 0 Gro wm arko p erat edi t s b u s in es s th ro u g h s ev eral d i v i s i on s , each o f wh i ch co ndu ct edb u s i n es s o n a p at ro n ag e b as is wi th p at ro n s an d
o n a n o np at ro n ag e b as i s wi th n o np at ro n s . Gro wm arkal so h adan i n v es tm en t
o p erat i o n s d i v is i o n th at i ttreat edas n o np at ro n ag e. Gro w m arkco ndu ct edo th er act i vi t i es o n a n o np at ro nag e b as i s t h ro u gh wh o l l y o wn eds ub s i d i ari es . Th e d i v i s i on s o f Gro w m arkrel ev an tt o p et i t i o n er’ s 2 0 0 9 an d2 0 1 0 DPAD
co m p u t at i o n s were (1 ) Gro wm ark ’ s g rai n d i v i s i o n , th ro u g h wh i ch i tm ark et ed g rai n fo r i t s m em

b er co o p erat i v es an dn o np at ro n s , an d(2 ) t h e l ub ri can t b u s i n es s
co n du ct ed b y

th e en erg y

d ep art m en to f Gro wm ark ’ s wh o l es al e s up pl i es d i v i s i o n , wh i ch was i n v ol v ed in th e p ro cu rem en t , m ark et i n g , an dd i s tri b u ti o n o f refi n edan d
ren ewab l e fu el s , l ub ri can ts an dg reas es , an do th er en erg y p ro du ct s .

4 (...co n t in u ed ) co o perat i v e b as i s , wh eth er a m em b er o r a n o n m em

b er o f t h e co o p erat iv e as s o ci at io n ”.- 5
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[* 5 ] A. 2 00 9 Retu rn Gro wm ark , act i n g as ag en tfo r p et i t i o n er’ s co n s ol id at edretu rn g ro up , t i m el y fi led (wi th an ex t en s i o n ) Fo rm 1 1 2 0 -C, U.S. In co m e Tax Retu rn fo r Co o p erat i v e As s oci at i o n s , fo r 2 0 0 9 . Pet i ti o n er co m p u t edth e DPAD fo r i t s ex p an d ed affi l i at ed g ro up (EAG), 5 wh i ch fo r 2 0 0 9 i n cl u d ed (1 ) Gro wm ark , (2 ) Seed way , LLC (Seed way ), a s eedco m

p an y wh o l l y o wn edb y

Gro w m ark treat edas a d i s reg ard ed

5 Sec. 1 9 9 (d )(4 ) p ro v i d es a s peci al ru l e fo r an EAG’ s DPAD co m pu t at i o n an d th e al l ocat i o n o f t h e EAG’ s DPAD am o ng i t s m em b ers : (4 ) Sp eci al ru l e fo r affi l i at edg ro up s .-- (A) In g en eral .--Al l m em b ers o f anex p an d edaffi l i at ed g ro up s h al l b e treat edas a s i n g l e co rp o rat io n fo r p u rp os es o f th i s s ect io n . (B) Ex pan d edaffi l i at edg ro up . --Fo r p u rp os es o f t h i s s ect i o n , th e t erm

“ ex pan d edaffi l i at edg ro up ” m ean s an affi l i at edg ro up as d efi n edi n s ect i on 1 5 0 4(a), d et erm i n ed
--

(i ) b y s ub s t i tu ti n g “ m ore t h an 5 0 p ercen t ” fo r “ at l eas t8 0 p ercen t ” each p l ace i tap p ears , an d (i i ) wi th o u treg ardt o p arag rap h s (2 ) an d(4 ) o f s ect i o n 1 5 0 4(b ). (C) Al l o cat i o n o f d edu ct i o n .--Ex cep t as p ro v i d edi n reg u lat i o n s , the d edu ct i o n u n d er s ub s ect i o n (a) s h al l b e al l o cat edam o n g th e m em b ers o f th e ex p an d ed affi l iat edg ro up i n p ro p o rt i o n t o each m em ber’ s res p ect iv e am ou n t (i f an y ) o f qual i fi edp ro duct i o n act i v i t i es i n co m e.- 6
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[* 6 ] en t i ty

fo r Fed eral i n co m e t ax p u rp os es th atp ro du ced an dm ark et eds eedan d th ato p erat edo n a n o np at ro n ag e b as i s , (3 ) Ag Van t ag e FS, In c. (Ag Van t ag e), a
co m p an y th atm ark et edan ds o l dfarm s upp l ies an dg rai n an d thato p erat edo n a
n o np at ro n ag e b as i s , an d(4 ) FS Fi n an ci al Serv i ces Co rp . (FS Fi n an ci al ), a wh o l l y
o wn eds ub s i d i ary

o f Gro wm arkth atp ro v i d edi n s u ran ce b ro k erag e s erv i ces an d
o p erat edo n a n o np at ro n ag e b as i s . In co m p l et i n g i t s Fo rm

1 1 2 0 -C fo r 2 00 9 p et i t io n er al l ocat edGro wm ark ’ s d o m es t ic p ro du ct i o n g ro s s recei p t s (DPGR), s ee s ec. 1 9 9(c)(4 ) (d efi n i n g

“ d o m es t i c p ro du ct i o n g ro s s recei p t s ”), an dth e wag es i trep o rt ed o n Fo rm W -2 , W ag e an dTax St at em en t(W -2 wag es ), b et w een th e p at ro n ag e an dn onp at ro n ag e
co l u m ns o n i t s Sch edu l e G, Al lo cat i o n o f Pat ro n ag e an d No np at ro n ag e In co m e
an d Dedu ct i on s . Gro wm ark d i dn o ts p l i ti t s b u s i n es s o p erat i o n s o n th e b as i s o f p at ro n ag e an dn onp at ro n ag e act i v i t i es , n or d i di td ed icat e s p eci fi c as s et s o r p ers o n s t o p at ro n ag e an d n o np at ro n ag e act i v i t ies . On Sch edu le G p et i t i o n er al l o cat edi t em s b et ween the p at ro n ag e an dn o np at ro n ag e co l u m n s o n th e b as i s o f th e v o lu m e o f b us i nes s d o n e wi th m em b ers . Seed way

an dAg Van tag e o p erat edo n
a n o np at ro n ag e b as is fo r 2 0 0 9 , an dp et i t i on er rep o rt edth ei r DPGR an dW -2 wag es i n the n o np at ro n ag e co l u m n on Sch edu l e G.- 7
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[* 7 ] Fo r 2 0 0 9 Gro wm arkwas a m em b er o f t h ree d i fferen tl i m i tedl i ab i l i ty
co m p an i es (LLCs ) fro m

wh i ch i trecei v edd is tri b u t i v e s h ares o f qu al i fi ed p ro duct i o n act i v i ti es i n co m e (QPAI) an dW -2 wag es . See s ec. 1 9 9 (c)(1 ) (d efi n i n g

“ qu al i fi edp ro du ct i o n act i vi t i es i n co m e”). Fo r 2 00 9 Gro w m arkh el dan i n t eres ti n each o f t h e fo l l o wi ng LLCs : (1 ) Pro -Pet , LLC (Pro -Pet ), fro m wh i ch Gro wm ark p u rch as edp etfo o dthati t res o ldt o p at ro ns o n a p at ro n ag e b as is an dt o n onp at ro n s
o n a n o np at ro n ag e b as i s , (2 ) Al l i edSeed , LLC (Al l iedSeed ), fro m wh i ch Gro w m arkp u rch as eds eedth ati tres o l d t o p at ro n s o n a p at ro n ag e b as i s an dt o
n o np at ro n s o n a n onp at ro n ag e b as i s , an d(3 ) M id -Am eri ca Bi o fu el s, LLC (M i d
Am eri ca Bi o fu el s ), wh i ch p ro du cedb io fu el s fo r s al e t o cu s t o m ers . Fo r 2 0 09
n ei th er Gro wm arkn o r an y o th er m em

b er o f p et i t i o n er’ s EAG p u rch as edb i o fu el fro m M i d -Am eri ca Bi o fu el s fo r res al e t o p at ro ns o n a p at ro n ag e b as i s . On Sch edu l e G p et i t i o n er al l o cat edGro wm ark ’ s d i st ri b u t i v e s hares o f QPAI an dW -2 wag es fro m

Pro -Pet an d Al l i edSeedb et w een th e p at ro n ag e an dn onp at ro n ag e
co l u m ns o n th e b as is o f t h e v o l u m e o f b us i n es s co n du ct edwi th m em b ers i n each p ro ductl i n e. Al l o f Gro wm ark ’ s d i s tri b u ti v e s h ares o f QPAI an d W -2 wag es fro m M i d -Am eri ca Bi o fu el s were as s i g n edt o the n o npat ro n ag e co l u m n . Fo r 2 0 0 9 FS Fi n an ci al , Ag Van t ag e, an dNew Cen tu ry FS, In c. (New Cen tu ry ), a wh o l ly

o wn eds ub s i d i ary

o f Gro wm ark , h el di n teres t s i n v ari o u s LLCs- 8
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[* 8 ] fro m wh i ch th ey

recei v edd i s tri b u t i ve s h ares o f QPAI an d W -2 wag es . On Sch edu l e G p et i t i o n er rep o rt edal l o f th o s e d i s tri b u ti v e s h ares i n th e n o np at ro n ag e
co l u m n. Ad d it i on al l y , Gro wm ark ’ s g rai n d i v is i on h adW -2 wag es at tri b u t ab l e t o FS Fi nan ci al ’ s o wn ers h i p i n t eres ts i n the LLCs . Pet i ti o n er rep o rt edth o s e W -2 wag es i n th e n o np at ro n ag e co l u m n o n Sch edu l e G. Fo r 2 0 0 9 Gro wm arkm ad e p aym en t s t o p atro n s th atqu al ifi edas p er-u n i t ret ai n al l o cat i o n s p ai di n m o n ey (PURPIM s ) fo r p u rp os es o f s ect i on s 1 3 82 (b ) an d 1 3 8 8 . Pet i t i o n er rep o rt edthe p aym en t s Gro wm arkm ad e t o i t s p atro n s i n th e p at ro n ag e co l u m

n o n Sch edu l e G. Ad d it i on al l y , Ag Van tag e recei v ed p aym en t s fro m o th er co o p erat i ves th at qu al i fi edas PURPIM s an d rep o rt edth o s e p aym en t s i n the n o np at ro n ag e co l u m n on Sch edu l e G. Inco m p u t i n g i t s QPAI an dt ax ab l e i n co m e fo r p u rp o ses o f i t s DPAD co m p u t at i o n, p et i t i o n er ad dedb ackth e PURPIM s Gro wm ark pai dan ds ubt ract edo u t th e PURPIM s Ag Van tag e recei v ed
. 6 In co m p u t i n g i t s 2 0 0 9 DPAD p et i t i o n er d i dn ots ep arat e an y am o u n ts as p at ro n ag e an dn onp at ro n ag e. In s t ead , i tp erfo rm eda s in g l e co m p ut at i o n ag g reg at i n g al l am o u n t s fro m th e m em bers o f i t s EAG. Pet i ti o n er then al l o cat ed

6 See i n fra p p . 1 3 -1 4 fo r a d i s cu s si o n o f t h e m ech an i cs o f a s p eci fi ed ag ri cu l tu ral o r h ort icu l tu ral co o p erat i v e’ s DPAD co m p u t at i o n .- 9
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[* 9 ] th e t o tal DPAD am o u n t o n Sch edu l e G b et ween th e p at ro n ag e an d
n o np at ro n ag e co l um

n s o n the b as i s o f QPAI. 7 B. 2 01 0 Retu rn Gro wm ark , act i n g as ag en tfo r p et i t i o n er’ s co n s ol id at edretu rn g ro up , t i m el y fi led (wi th an ex t en s i o n ) Fo rm 1 1 2 0 -C fo r 2 0 10 . Pet i t i o n er co m p ut edth e DPAD fo r i t s EAG, wh i ch fo r 2 0 1 0 i n cl u d ed(1 ) Gro wm ark , (2 ) Seed way , wh i ch o p erat ed
o n a n o np at ro n ag e b as i s , (3 ) th e Ag Van t ag e g rai n d i v i s i o n o f Gro wm ark , 8 wh i ch
o p erat edo n a p at ro n ag e b as i s , an d(4 ) FS Fi n an ci al , wh i ch o p erat edo n a
n o np at ro n ag e b as i s . In co m p l et i n g i t s Fo rm

1 1 2 0 -C fo r 2 01 0 p et i t io n er al l ocat edGro wm ark ’ s DPGR an dW -2 wag es b et ween th e p at ro n ag e an dn o np at ro n ag e co l u m n s o n i t s Sch edu l e G o n the b as i s o f t h e v o l u m e o f b u s in es s d on e wi th m em b ers . Fo r 2 0 1 0 al l o f t h e g rai n m ark et edb y th e Ag V an t ag e g rai n d i v i si o n was m ark et edfo r p at ro n s o n a p at ro n ag e b as i s , an dp et i t i o n er rep o rt ed th e Ag Van t ag e g rai n d i v i s i on ’ s DPGR an dW -2 w ag es i n th e p at ro n ag e co l u m n o n Sch edu l e G.

7 So l el y fo r p u rp o s es o f t h i s al l o cat io n p et it i on er s ep arat el y co m p u t eda “p at ro nag e QPAI” an da “ n o np at ro n ag e QPAI”. To co m p u t e each QPAI p et i t i on er s ep arat edth e el em en ts o f t h e DPAD co m p u tat i o n i n t o p at ro n ag e an dn o np at ro n ag e cat eg o ri es i n acco rd an ce wi th t h e s ep arat io n i tu s edfo r Sch edu l e G p u rp o s es .

8 Atth e b eg i n n i n g o f p et it i o n er’ s t ax ab le y ear 2 01 0 Ag Van t ag e m erg edi nt o Gro w m ark
.- 1 0 -

[* 1 0 ] Seed way

o p erat edo n a n o np at ro n ag e b as i s fo r 2 01 0 , an dp et i t i o ner rep o rt ed i t s DPGR an dW -2 wag es i n t h e n o np atro n ag e co lu m n o n Sch edul e G. Fo r 2 0 1 0 Gro wm arkrecei v edd i s tri b u t i v e s hares o f QPAI an dW -2 wag es fro m Pro -Pet , Al l i ed Seed , an dM i d -Am eri ca Bi o fu el s. Pet i t i o n er al l o cat ed Gro w m ark ’ s d i s tri b u t i v e s h ares o f QPAI an d W -2 wag es fro m Pro -Pet b et ween th e p at ro n ag e an dn onp at ro n ag e co l u m n s o n Sch edu l e G o n the b as i s o f th e v ol u m e o f b u s i n es s co n du ct edwi th m em b ers th ro u g h the p ro du ctl i n e. Al l o f Gro wm ark ’ s d i s tri b u t i v e s h ares o f QPAI an dW -2 wag es fro m Al l iedSeed 9 an dM i d -Am eri ca Bi o fu el s were as s ig n ed to th e n o np at ro n ag e co l u m n o n Sch edu l e G. Ad d i t i o n al l y Gro w m ark ’ s g rai n d i v i s io n h adW -2 wag es at tri b u tab l e t o FS Fi n an ci al ’ s
o wn ers hi p i n t eres ts i n th e LLCs . Pet i t i o n er rep o rt ed th o s e W -2 wag es i n th e
n o np at ro n ag e co l um

n o n Sch edu le G. Fo r 2 0 1 0 FS Fi n an ci al , th e Ag Van t ag e g rai n d i v i si o n o f Gro w m ark , an dth e New Cen tu ry

ret ai l d i v i s i on o f Gro wm arkh el di n t eres t s i n v ari ou s LLCs fro m wh i ch th ey

recei v edd is tri b u ti v e s h ares o f QPAI an d W -2 wag es . Fo r 2 0 1 0 p et i t i o n er d i dn o to p erat e o n a p at ro n ag e b as i s th ro ug h an y o f t he LLCs i n wh i ch FS Fi nan ci al , th e Ag V an t ag e g rai n d i vi s i o n , o r t h e New Cen tu ry ret ai l d i v i s i o n

9 Fo r 2 0 1 0 Gro wm arks o l ds eedp u rch as edfro m Al li edSeedo n a n o np at ro n ag e b as i s .- 1 1 -

[* 1 1 ] h el dan i n t eres t . OnSch edu l e G p et it i on er rep o rt edth e d i st ri b u t i v e s h ares recei v edb y

FS Fi n an ci al , th e Ag V an t ag e g rai n d iv i s i o n, an dth e New Cen tu ry ret ai l d i v i s i o n i n th e n onp at ro n ag e co lu m n . Du ri n g 2 0 1 0 Gro w m arkan dthe Ag Van t ag e g rai n d i v is i on o f Gro wm ark
m ad e p aym en t s t o p at ro n s th atqu al i fi edas PURPIM s , an dth ey recei vedp aym en t s fro m o th er co o p erat i ves th at qu al i fi edas PURPIM s . In2 0 1 0 an LLC i n wh i ch FS Fi n an ci al h el dan i n t eres trecei v edp aym en t s th atqu al i fi ed as PURPIM s . In
co m p u t i n g i t s QPAI an dt ax ab l e i n co m e fo r p urp o ses o f i ts DPAD co m p u t at i o n , p et i t i o n er ad d edb ackth e PURPIM s Gro wm arkan d the Ag Van t ag e g rai n d i v i s i o n p ai dan ds ub tract ed o u tth e PURPIM s th ey recei v ed . Pet i ti o n er al s o s ub tract edo u t i t s d i s tri b u ti v e s h are o f th e PURPIM s recei v edb y th e LLC i n wh ich FS Fi n an ci al h el dan i n t eres t . Pet i t i o ner i n cl u d edth e PURPIM s Gro w m arkan dth e Ag Van t ag e g rai n d i v i s i o n p ai d an drecei v edi n the p at ro n ag e co l u m n o n Sch edu l e G. Pet i t io n er i n cl ud edi t s d i s tri b ut i v e s h are o f th e PURPIM s recei v edb y th e LLC i n wh i ch FS Fi n an ci al h el dan i n t eres ti n th e n o np at ro n ag e co l u m n o n Sch edu l e G. In co m p u t i n g i t s 2 0 1 0 DPAD p et i t i o n er d i dn ots ep arat e an y am o u n ts as p at ro n ag e an dn onp at ro n ag e. In s t ead , i tp erfo rm eda s in g l e co m p ut at i o n ag g reg at i n g al l am o u n t s fro m th e m em bers o f i t s EAG. Pet i ti o n er then al l o cat ed- 1 2 -

[* 1 2 ] th e DPAD b et ween th e p at ro n ag e an dn o np at ro n ag e co l u m n s o n Sch edu l e G
o n th e b as i s o f QPAI. 1 0 Du ri n g 2 0 1 0 p et i t i o n er recei v ed DPAD p as s edth ro u g h fro m o th er
co o perat i v es . OnSch edu l e G p et i ti o n er d i dn o tal l o cat e t h e p as s ed -t h ro u gh DPAD b et w een th e p at ro n ag e an d n o np atro n ag e co l u m ns as i td i dwi th th e DPAD i t gen erat ed . In s t ead , p et i t i o ner as s i g nedth e DPAD p as s edth ro ug h fro m each
co o perat i v e t o the p at ro nag e an dn o np at ro n ag e co l um n s o n th e b as i s o f t he n atu re
o f t h e rel at io ns h ip b et ween p et i t i o n er an dth e co o p erat i v e. 1 1 OPINION I. DPAD Sect io n 1 9 9 was ad d edt o th e In t ern al Rev en u e Co d e b y th e Am eri can J o b s Creat i o n Act o f 2 0 04 , Pub. L. No . 1 0 8-3 5 7 , s ec. 1 0 2 (a), 1 1 8 St at . at 1 42 4 , t o p ro v id e a t ax d edu ct io n fo r cert ai n d o m es t i c p ro du ct i o n act iv i t i es . 1 2 Th e

1 0 So l el y fo r p u rp o s es o f t h i s al l o cat i o n p et i t i o n er s ep arat el y co m p ut eda “p at ro nag e QPAI” an da “ n o np at ro n ag e QPAI”. To co m p u t e each QPAI p et i t i on er s ep arat edth e el em en ts o f t h e DPAD co m p u tat i o n i n t o p at ro n ag e an dn o np at ro n ag e cat eg o ri es i n acco rd an ce wi th t h e s ep arat io n i tu s edfo r Sch edu l e G p u rp o s es .

1 1 Fo r ex am

pl e, Gro wm arkrecei v edDPAD fro m a co o p erat i v e fro m

wh i ch i t o b t ai n edfu el fo r res al e t o p at ro n s o n a p at ro n ag e b as is . Pet i t i o n er as s ig nedth at p as s ed -t h ro u g h DPAD t o t h e p at ro n ag e co lu m n o n Sch edu l e G.
1 2 Th e Tax Cu t s an dJ o b s Acto f 2 0 17 , Pub. L. No . 1 1 5 -9 7 , s ec. 1 3 3 05 (a) an d (co n ti n u ed ...)- 1 3 -

[* 1 3 ] d edu ct i o n i s fo r an am o u n t equ al t o a p ercen t ag e 1 3 o f t h e l es s er o f t h e t ax p ay er’ s QPAI o r t ax ab l e i nco m e. Sec. 1 99 (a). Th e t ax p ay er’ s DPAD can n o t
ex ceed 5 0% o f t h e W -2 wag es o f t h e t ax p ay er fo r t he t ax ab l e y ear. Sec. 1 9 9 (b )(1 ). A. Co m

pu t at i o n Sect io n 1 9 9 (d )(3 ) i n cl ud es ru l es ap p l i cab l e t o s p eci fi edag ri cu l tu ral an d h o rt i cu l tu ral co o p erat i v es , wh i ch are ex em p t an dn o nex em

p ts ub ch ap t er T
co o perat i v es en g ag edi n th e m anu fact u ri ng , p ro du ct i o n , g ro wth , o r ex tract i o n o f
an y ag ri cu l tu ral o r h o rt i cu l tu ral p ro du cto r i n th e m ark et i n g o f ag ri cu l tu ral o r h o rt i cu l tu ral p ro duct s . Sec. 1 9 9 (d )(3 )(F). Su ch co op erat i v es d et erm i n e t ax ab l e i n co m e wi th o u treg ardt o an y d edu ct i on u n d er s ect i on 1 3 8 2 (b ) (rel at in g t o p at ro n ag e d i v i d en d s an dp er-u ni tret ai n al l o cat i o n s (PURAs )) o r s ect i o n 1 3 8 2 (c) (rel at i n g t o n onp at ro n ag e d is tri b u ti o n s ). Sec. 1 9 9 (d )(3 )(C). Un d er s ect i o n 1 99 (d )(3 )(C) a n o n ex em p ts p eci fi edag ri cu l tu ral o r h o rt i cu l tu ral co o p erat i v e m u s tco m p u t e i t s t ax ab l e i n co m e fo r p u rp o s es o f i t s DPAD co m

p u tat i o n wi th o u treg ardt o th e d edu ct i o n s u n d er s ect i o n 1 3 82 (b ) fo r

1 2 (...co n t i nu ed ) (c), 1 3 1 St at . at2 1 2 6 , el im i nat eds ec. 1 9 9 fo r t ax ab le y ears b eg i n ni n g aft er Decem b er 3 1 , 2 0 17
. 1 3 Th e DPAD was “p h as edi n ” b eg i n ni n g i n 2 0 0 5 . Fo r p et i t i o ner’ s t ax ab l e y ears 2 0 0 9 an d2 0 1 0 th e al l o wab l e d edu ct i o n was fo r an am o u n t equ al t o 6 % o f th e l es ser o f i t s QPAI o r t ax ab le i nco m e.- 1 4 -

[* 1 4 ] p at ro n ag e d i s tri b u t i o n s an dPURAs , wh et h er p ai di n m o n ey as PURPIM s o r i n cert ifi cat es . 1 4 Th e p at ro n , th en , d i s reg ard s fro m i t s co m p u tat i o n o f t ax ab l e i n co m e fo r p u rp o ses o f i t s o wnDPAD co m p u t at i o n p at ro n ag e d i s tri b u ti o n s an d PURAs i trecei v edfro m

a co o perat i v e. Sec. 1 .1 9 9-6 (l ), In co m e Tax Reg s. Th e p art i es d i s ag ree ab o u tth e p ro p er m et h o dfo r co m p ut i ng p et i ti o n er’ s DPAD g i v en Gro w m ark ’ s s t atus as a n o n ex em p ts ubch ap t er T co o p erat i v e. Th i s Co u rtrecen t ly

ad dres s edth e p ro p er m et h odo f co m p u t at i o n fo r a n o nex em

p t
s ub ch ap t er T co o perat iv e’ s DPAD i n Ag Pro ces s i n g , In c. a Co o p . & Sub s . v . Co m m i s s i o n er (Ag Pro ces s i n g ), 1 5 3 T.C. _

__ , _

_ _ (s l i p o p . at3 8 -4 6 ) (Oct . 1 6 , 2 0 1 9 ). Th i s Co u rtrev i ewed th e t ex t , p u rp os e, an dh is t o ry o f s ect i o n 1 9 9 an d
co n cl u d ed th at s ect i o n 1 9 9 d o es n otreq ui re a n o n ex em p ts ub ch ap t er T co op erat i v e t o co m p u t e s ep arat e DPAD am o u n t s fo r i ts p atro n ag e an dn o np at ro n ag e act i v i t i es . Ag Pro ces s i n g , 1 5 3 T.C. at_ _ _ (s l i p o p . at4 4 ). Th ere i s n o s ub s t an t i v e d i fferen ce b et ween th e n on ex em

p t s ub ch ap t er T co o perat i v e i n Ag Pro ces s i n g an dGro wm ark th atwo u l dl eadth e Co u rtt o co n cl u d e o therwi s e i n thi s cas e. Th erefo re, p et i t i o n er

1 4 Th i s i s co m

m o n l y kn o wn as “ ad d in g b ack ” p atro n ag e d i vi d en ds an d PURAs . Ex em

pt s ub ch . T co o p erat i v es m u stal s o co m

p ut e t ax ab l e i n co m e wi th o u treg ardt o t h e d educt i o n s al l o wab l e u n d er s ec. 1 3 8 2 (c) rel at i ng t o n o np at ro n ag e d i s tri b u t i o n s.- 1 5 -

[* 1 5 ] i s n o treq u i red t o co m p u t e s ep arat e DPAD am o u n t s fo r i ts p at ro n ag e an d
n o np at ro n ag e act iv i t i es . B. Al l o cat i o n Pet i t i o ner arg u es th ati ti s en ti t ledt o u s e t he fu l l am ou n to f DPAD ag ai n s t al l i n co m e s o u rces . Al t ern at i v el y , p et i t i on er arg u es th at i f i ti s req ui redt o al l o cat e i t s DPAD b et ween i ts n onp at ro n ag e an d p at ro n ag e acco u n ts o n Sch edu l e G, i tm ay d o s o u s i n g a reas o n ab le m et ho do f al l o cat i o n.

1
. Req u i rem en t Un d er th e g en eral ru l es o f s ub ch ap t er T a co o p erat i v e m u s t s ep arat e i t s p at ro n ag e i n co m e an dex p en ses / d educt i o n s fro m i t s n onp at ro n ag e i n co m e an d
ex p en s es / d edu ct i o n s t o co m p u t e t h e am o u n tav ai l ab l e fo r p at ro n ag e d i v i d en d s an d t o l im i tth e u se o f i t s p at ro nag e l o s s es . Farm Serv . Co o p. v . Co m m is si o n er, 6 1 9 F.2 d7 1 8 , 7 2 5 (8 th Ci r. 1 9 8 0 ), rev ’ g 7 0 T.C. 1 4 5 (1 97 8 ); s ee Ag Pro ces s i n g , 1 5 3 T.C. at_ _ _ (s l i p o p . at4 3 -4 4 ); Bu ck ey e Co u n trym ark , In c. v . Co m m i s s i o n er, 1 0 3 T.C. 5 4 7 (1 9 9 4 ); Cert i fi edGro cers o f Cal
. , Lt d
. v . Co m m i s s i o n er, 8 8 T.C. 2 3 8 (1 9 8 7). In Ag Pro ces s i n g , 1 53 T.C. at_ _ _ (s l i p o p . at4 7 -4 8 ), thi s Co urth el dth at
o n ce co m p u t ed , DPAD m

u s t b e al l o cat ed b et ween th e n o nex em p t s ub ch ap t er T
co o perat i v e’ s p at ro n ag e an dn o np at ro n ag e acco u n t s o n Sch edu l e G.- 1 6 -

[* 1 6 ] 2
. M et h o d Th e p art i es d i s ag ree ab o u tth e p ro p er m et h o do f al l o cat i n g p et i t i o n er’ s DPAD b et w een th e p at ro n ag e an d n o np atro n ag e co l u m ns o n Sch edu l e G. Oni t s Sch edu l e G fo r 2 0 0 9 an d2 0 1 0 p et i t i o n er al l o cat edth e DPAD i t g en erat edb et ween i t s p at ro n ag e an dn o np at ro nag e acco un t s o n t h e b as i s o f QPAI. W i th res p ectt o th e p as s ed -t hro u g h DPAD p et i t i o n er recei v edfro m o th er co o p erat i v es o f wh i ch i t
was a p at ro n , p et i ti on er as s ig n edeach p as s ed -t h ro ug h am o u n td i rect l y t o th e p at ro n ag e o r n o np at ro nag e co l u m n o n Sch edu le G o n th e b as i s o f p et i t i o ner’ s b u s i n es s rel at i on s h ip wi th t h e co o p erat i v e. Pet i t i o ner arg u es th atal lo cat io n o n the b as i s o f QPAI i s a “ reas on ab le
m et h o d o f al l o cat io n ” u n d er s ect i o n 1 9 9 , referen ci n g th e EAG ru l e an dth e reg u l at i o n s u n der s ect i o n 1 9 9 th atu s e QPAI as a b as is fo r al l o cat i n g DPAD. See, e.g ., s ec. 1 9 9 (d )(4 )(C); s ec. 1 .1 9 9 -7 (c), In co m e Tax Reg s . Res p o n den targ u es th at
u s i n g QPAI as the b as i s fo r al lo cat i o n i s i m pro p er an drei t erat es h i s p o s it i on th at DPAD s h o u l db e co m

p u t eds ep arat el y

fo r p at ro n ag e an d n o np at ro n ag e act i v i t i es . Sect io n 1 9 9 (d )(4 ) d i ct at es th e i n it i al al l o cat i o n thatp et i t i o n er m u s t m ak e b y al l o cat i n g DPAD t o each m em b er o f i t s EAG o n the b as is o f QPAI. Ho wev er,
u n d er t h i s Co u rt ’ s h o l d i ng i n Ag Pro ces s i n g , a n o n ex em p ts ub ch ap t er T
co o perat i v e m

u s tal l ocat e i t s DPAD b et ween p at ro nag e an dn o npat ro n ag e- 1 7 -

[* 1 7 ] acco u n t s b ecau s e o f s ubch ap t er T, n ots ect i on 1 9 9
. 1 5 Th i s Co u rtn o t edth at ty p i cal l y th e as s i g n m en to f a p art i cu l ar i t em i s d ep en den tup o n i t s rel at i o n sh i p t o th e co o p erat iv e’ s b us i nes s p u rp o s e. Ag Pro ces s in g , 1 5 3 T.C. at_ _ _ (s l i p o p . at 4 6 -4 7) (ci t i n g Il l . Grai n Co rp . v . Co m m i s s io n er, 8 7 T.C. 4 3 5 , 4 5 9 (1 9 8 6)). Pet i t io n er g en eral ly

al l o cat edi t em s o f i n co m e an dex p en se/ d edu ct i o n b et ween th e p at ro n ag e an dn onp at ro n ag e co l u m n s o n Sch edu l e G. Ital l o cat edth e DPAD th at
was p as s edth ro ug h fro m o th er co o p erat iv es o n the b as i s o f i t s b u s i n es s rel at i o n s h i p t o th at co o p erat i ve. In Ag Pro ces s i n g , 1 5 3 T.C. at_ _ _ (s l i p o p . at4 7 ), th i s Co u rtfu rt h er s t at ed : “ Wh ere an i t em o f i n co m e o r ex pen s e/ d edu ct i o n i s at tri b u t ab l e t o b ot h p at ro n ag e an dn o np at ro n ag e act i v i ty , h o wev er, i t i s ap p ro p ri at e t o al l o cat e t h ati t em

b et w een p at ro n ag e an d n onp at ro n ag e acco un t s ”. Pet i t i o n er g en eral l y fo l l o wedth atru l e fo r Sch edu l e G p u rp o s es 1 6 an ds h o u l dal l o cat e i t s

1 5 A n o nex em

p t s ub ch . T co o p erat i ve wo u l d cal cu l at e a s in g l e DPAD u n d er s ec. 1 9 9 an d th en al l o cat e t h atam o u n tb et ween i ts p at ro n ag e an dn onp at ro n ag e co l u m ns o n Sch edu l e G. Inth e cas e o f an EAG, each m em b er o f t h e EAG wo u l d recei v e an al l o cat i o n o f DPAD o n the b as is o f i t s QPAI. Sec. 1 9 9 (d )(4 )(C). Th en an y n o n ex em p ts ub ch . T co o p erat i ve m em b er o f t he EAG wo u l d al l o cat e i t s DPAD b et w een i t s p at ro n ag e an dn o np at ro n ag e acco u n t s o n i t s Sch edu l e G. Th e Co u rtkn o ws o f n o reas o n thatan EAG th atal s o fi les a co ns o l id at edretu rn , s u ch as p et i ti o n er, can n o tal so u s e t h i s m et h o d.

1 6 Pet i t i o ner al l o cat edGro wm ark ’ s DPGR an d W -2 wag es , fo r ex am p l e, o n th e b as i s o f t h e v o l um e o f b u s in es s d o n e wi th m em b ers . Res p o n d en td o es n o t d i s p u t e--an dth e Co u rtn eedn o tad dres s --wh et h er p et i t i o n er’ s Sch edu le G (co n ti n u ed ...)- 1 8 -

[* 1 8 ] ag greg at e DPAD u s i n g th e s am e m et h o di t u s edfo r i t s o th er Sch edu l e G al l o cat i o n s . II. Co n cl u si o n Th e Co u rtco n cl u d es th ati n acco rd an ce wi th thi s Co urt ’ s h o l d i ng i n Ag Pro ces s i n g , p et i t i o n er i s n o treq u i redt o co m p u t e s ep arat e DPAD am o u nt s fo r i t s p at ro n ag e an dn onp at ro n ag e act i v i t i es . Al s o i n acco rd an ce wi th t h i s Co u rt ’ s h o l d i n g i n Ag Pro ces s i n g , p et i ti o n er m u stal l ocat e i ts ag g reg at el y co m p u ted DPAD b et w een i t s p at ro n ag e an dn o np at ro n ag e acco u n t s . Becau s e t h e Sch edu l e G al l o cat i o n i s d o ne p urs u an t t o s ub ch ap t er T, n ots ect i on 1 9 9 , p et i ti o n er s h o u l d al l o cat e t h e ag g reg at e DPAD o n i ts Sch edu l e G u s i n g the s am e m et h o di tu s edfo r i t s o th er Sch edu le G al l o cat i on s . Th e rem ai n d er o f t h i s cas e co n cern in g p et i t i o n er’ s COGS cal cu l at io n wi ll b e t h e s ub jecto f a s ep arat e o p i n i on .

1 6 (...co n t i nu ed ) al l o cat i o n s were p ro p er.