# Section 199A Rules for Cooperatives and Their Patrons > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-11501 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** June 19, 2019 - **Citation:** 84 FR 28668 ## Text DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-118425-18] RIN 1545-B090 Section 199A Rules for Cooperatives and Their Patrons AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking; withdrawal of notice of proposed rulemaking. SUMMARY: These proposed regulations provide guidance to cooperatives to which sections 1381 through 1388 of the Internal Revenue Code (Code) apply (Cooperatives) and their patrons regarding the deduction for qualified business income (QBI) under section 199A(a) of the Code as well as guidance to specified agricultural or horticultural cooperatives (Specified Cooperatives) and their patrons regarding the deduction for domestic production activities under section 199A(g) of the Code. These proposed regulations also provide guidance on section 199A(b)(7), the rule requiring patrons of Specified Cooperatives to reduce their deduction for QBI under section 199A(a). In addition, these proposed regulations include a single definition of patronage and nonpatronage under section 1388 of the Code. Finally, these proposed regulations propose to remove the final regulations, and withdraw the proposed regulations that have not been finalized, under former section 199. These proposed regulations affect Cooperatives as well as patrons that are individuals, partnerships, S corporations, trusts, and estates engaged in domestic trades or businesses. DATES: Written (including electronic) comments and requests for a public hearing must be received by August 19, 2019. As of June 19, 2019, the proposed rule published on August 27, 2015 (80 FR 51978), is withdrawn. ADDRESSES: Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-118425-18) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment received to its public docket, whether submitted electronically or in hard copy. Send hard copy submissions to: CC:PA:LPD:PR (REG-118425-18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-1118425-18), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, James Holmes at (202) 317-4137; concerning submissions of comments and requests for hearing, Regina L. Johnson at (202) 317-6901 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under sections 199A and 1388 of the Code. Section 199A was enacted on December 22, 2017, by section 11011 of “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” Public Law 115-97, 131 Stat. 2054, 2063 (TCJA). Parts of section 199A were amended on March 23, 2018, as if included in TCJA, by section 101 of Division T of the Consolidated Appropriations Act, 2018, Public Law 115-141, 132 Stat. 348, 1151 (2018 Act). Section 199A applies to taxable years beginning after 2017 and before 2026. Unless otherwise indicated, all references to section 199A are to section 199A as amended by the 2018 Act. In addition, section 13305 of the TCJA repealed section 199 (former section 199), which provided a deduction for income attributable to domestic production activities (section 199 deduction). Public Law 115-97, 131 Stat. 2054, 2126. The repeal of former section 199 is effective for all taxable years beginning after 2017. This notice of proposed rulemaking therefore proposes to remove the final regulations under former section 199, and withdraws proposed regulations under former section 199. Section 199A(a) provides taxpayers a deduction of up to 20 percent of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate, and up to 20 percent of qualified real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income (section 199A(a) deduction). Section 199A(b)(7) requires patrons of Specified Cooperatives to reduce their section 199A(a) deduction if those patrons receive certain payments from such cooperatives. Section 199A(g) provides a deduction for Specified Cooperatives and their patrons (section 199A(g) deduction) that is based on the former section 199 deduction. Before the amendments of the 2018 Act, section 199A(g) provided a modified version of the section 199A(a) deduction for Specified Cooperatives. The Treasury Department and the IRS published proposed regulations (REG-107892-18) providing guidance on the section 199A(a) deduction in the Federal Register (83 FR 40884) on August 16, 2018 (August 2018 NPRM). The final regulations were published in the Federal Register (84 FR 2952) on February 8, 2019 (TD 9847). TD 9847 did not address patrons' treatment of payments received from Cooperatives for purposes of section 199A(a) or the section 199A(g) deduction for Specified Cooperatives, though it did restate the reduction required under section 199A(b)(7). See § 1.199A-1(e)(7). The August 2018 NPRM preamble stated that the Treasury Department and the IRS would continue to study the area and intended to issue separate proposed regulations describing rules for applying section 199A to Specified Cooperatives and their patrons. This notice of proposed rulemaking sets forth those proposed regulations and provides additional guidance to patrons calculating their 199A(a) deduction. Explanation of Provisions The purpose of these proposed regulations is to provide guidance regarding the application of sections 199A(a), 199A(b)(7), and 199A(g) to Cooperatives and their patrons as well as to Specified Cooperatives and their patrons. Whereas section 199A(a) is generally available to patrons of all Cooperatives, sections 199A(b)(7) and 199A(g) apply only to Specified Cooperatives and their patrons. These proposed regulations are organized into six sections: Proposed §§ 1.199A-7 through 1.199A-12. Proposed § 1.199A-7 describes rules for patrons of Cooperatives to calculate their section 199A(a) deduction and rules for patrons of Specified Cooperatives to calculate the reduction to their section 199A(a) deduction as required by section 199A(b)(7). Unless otherwise provided in these proposed regulations, all of the rules set forth in TD 9847 relating to the section 199A(a) deduction apply to Cooperatives and their patrons. Specified Cooperatives are a subset of Cooperatives; therefore, the requirements of proposed § 1.199A-7 also apply to Specified Cooperatives. Proposed § 1.199A-8 sets out the criteria that Specified Cooperatives must satisfy to qualify for the section 199A(g) deduction, and sets forth four steps necessary to calculate this deduction. These proposed regulations provide that the section 199A(g) deduction available to Specified Cooperatives and their patrons is generally computed only with respect to patronage gross receipts and related deductions. Exempt Specified Cooperatives (those that qualify under section 521) may compute their section 199A(g) deductions with respect to both patronage and nonpatronage gross receipts and related deductions. Proposed §§ 1.199A-9 through 1.199A-11 provide additional guidance, based on the regulations under former section 199, regarding the four steps set forth in proposed § 1.199A-8. Proposed § 1.199A-9 provides additional rules for determining a Specified Cooperative's domestic production gross receipts (DPGR). Proposed § 1.199A-10 provides additional rules for calculating costs (including cost of goods sold (COGS) and other expenses, losses, and deductions) allocable to a Specified Cooperative's DPGR. Proposed § 1.199A-11 provides additional rules for determining the W-2 wage limitation in section 199A(g)(1)(B). Proposed § 1.199A-12 details rules for applying section 199A(g) in the context of an expanded affiliated group (EAG) and other special rules contained in section 199A(g)(5) that are not otherwise addressed in these proposed regulations. These proposed regulations also include, under section 1388, a single definition of patronage and nonpatronage in proposed § 1.1388-1(f), which is intended to reflect the current case law under section 1388. This Explanation of Provisions describes each section of the proposed regulations in more detail. I. Proposed § 1.199A-7, Rules for Patrons of Cooperatives A. In General As noted in the Background, section 199A(a) may allow a taxpayer a deduction of up to 20 percent of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate, and up to 20 percent of qualified REIT dividends and PTP income. A section 199A(a) deduction is not available for wage income or for business income earned through a C corporation. C corporations are not eligible for the section 199A(a) deduction. Cooperatives are C corporations for Federal income tax purposes and, therefore, are not eligible for the section 199A(a) deduction. Similarly, patrons that are C corporations are also not eligible for the section 199A(a) deduction. However, patrons that are individuals are eligible for the section 199A(a) deduction. Section 1.199A-1(a)(2) provides that, for purposes of applying the rules of §§ 1.199A-1 through 1.199A-6, a reference to an individual includes a reference to a trust (other than a grantor trust) or an estate to the extent that the section 199A(a) deduction is determined by the trust or estate under the rules of § 1.199A-6. These proposed regulations apply this same usage of the term individual. The benefits of section 199A(a) are limited to individuals with income from a trade or business as defined in section 199A(d)(1) and § 1.199A-1(b)(14) (trade or business) with QBI. To the extent a patron operating a trade or business has income directly from that business (as opposed to receiving a patronage dividend from a Cooperative), the patron must follow the rules of §§ 1.199A-1 through 1.199A-6 to calculate the section 199A deduction. However, to the extent a patron receives patronage dividends or similar payments from a Cooperative, the patron must follow the additional special rules and clarification in proposed § 1.199A-7 to calculate the section 199A deduction. For these purposes, patronage dividends or similar payments include money, property, qualified written notices of allocations, and qualified per-unit retain certificates for which an exempt or nonexempt Cooperative receives a deduction under section 1382(b), and nonpatronage distributions paid in money, property, qualified written notices of allocation as well as money or property paid in redemption of a nonqualified written notice of allocation for which an exempt Cooperative receives a deduction under section 1382(c)(2) (hereinafter collectively referred to as patronage dividends or similar payments). Section 1.199A-7(c) and (d) of these proposed regulations provide that these patronage dividends or similar payments may be included in the patron's QBI: (i) To the extent that these payments are related to the patron's trade or business, (ii) are qualified items of income, gain, deduction, or loss at the Cooperative's trade or business level, (iii) are not income from a specified service trade or business (SSTB), as defined in section 199A(d)(2), at the Cooperative's trade or business level (except as permitted by the threshold rules, see § 1.199A-5(a)(2)), and (iv) provided the patron receives certain information from the Cooperative about these payments (see proposed § 1.199A-7(c)(3) and (d)(3)). Proposed § 1.199A-7(e) provides that in situations in which a patron conducts a trade or business that receives patronage dividends or similar payments from a Cooperative, the W-2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified property considered are those of the patron's trade or business and not of the Cooperative that directly conducts the trade or business from which the payments arise. All of these proposed rules are discussed further in this section. B. QBI of Patrons Although Cooperatives are C corporations for Federal income tax purposes, section 1382(b) and (c) allow Cooperatives to determine taxable income after deducting distributions of patronage dividends or similar payments to patrons. The effect of these deductions is to remove the distributions from income taxed at the Cooperative level leaving it subject to income tax only at the patron level. Exempt and nonexempt Cooperatives are both permitted to deduct patronage distributions if they satisfy the requirements described in section 1382(b). Only exempt Cooperatives are permitted to also deduct nonpatronage distributions if the requirements under section 1382(c) are met. Cooperatives are subject to Federal income tax on income for which no deduction may be taken under section 1382(b) or (c), in the same manner as any C corporation. Section 1.199A-3(b) contains the general rules regarding QBI. QBI is the net amount of qualified items of income, gain, deduction, and loss with respect to any trade or business as determined under those rules. While income from the ownership of a C corporation is generally not QBI, section 199A provides a special rule for patrons receiving patronage dividends from a Cooperative. Section 199A(c)(3)(B)(ii) provides that any amount described in section 1385(a)(1), which concerns patronage dividends, is not treated as an exclusion to a patron's QBI. The Joint Committee on Taxation Report (JCX-6-18, released March 22, 2018) (Joint Committee Report) states that QBI includes any patronage dividend (as defined in section 1388(a)), per-unit retain allocation (as defined in section 1388(f)), qualified written notice of allocation (as defined in section 1388(c)), or any other similar amount received from a Cooperative, provided such amount is otherwise a qualified item of income, gain, deduction, or loss (that is, such amount is (i) effectively connected with the conduct of a trade or business within the United States, and (ii) included or allowed in determining taxable income for the taxable year). Joint Committee Report, pages 24-25. As a result, the rules of proposed § 1.199A-7(c) provide that patronage dividends or similar payments (as previously discussed) are included in calculating QBI for purposes of the patrons' section 199A(a) deduction provided the amounts are otherwise qualified items. To be otherwise qualified, these amounts must be qualified items of income, gain, deduction, and loss under section 199A(c)(3). Unlike nonexempt Cooperatives, exempt Cooperatives are permitted to deduct nonpatronage distributions under section 1382(c). As a result, this income is subject to taxation only at the patron level. The rules of proposed § 1.199A-7(c) provide that a patron's QBI can include payments to patrons for which the exempt Cooperative receives a deduction under section 1382(c)(2) in addition to payments for which the exempt Cooperative receives a deduction under section 1382(b). That is, amounts paid under section 1382(c)(2) are treated by a patron as equivalent to patronage dividends under section 1382(b) for purposes of QBI. Amounts paid under section 1382(c)(1) (dividends on capital stock), however, are dividends from ownership of C corporations, which are not included in QBI. TD 9847 generally provides that income is tested at the trade or business level where it is directly generated. Accordingly, these proposed regulations provide that patronage dividends or similar payments are considered to be generated from the trade or business the Cooperative conducts on behalf of or with the patron, and are tested by the Cooperative at its trade or business level. A patron must determine QBI for each trade or business it directly conducts. However, in situations where the patron receives a distribution from a Cooperative that is a patronage dividend or similar payment, the Cooperative determines whether that distribution contains qualified items of income, as defined under section § 1.199A-3(b), and reports that information to the patron. The patron needs this information to determine its section 199A(a) deduction, and the Cooperative directly conducting the trade or business from which the distribution is derived is in the best position to know whether the patronage dividend or similar payment contains qualified items. The Cooperative must report this information regardless of whether the patron's taxable income does not exceed the threshold amount ($315,000 in the case of joint returns and $157,500 for all other taxpayers for any taxable year beginning before 2019). For taxable years beginning after 2018, see Rev. Proc. 2018-57, 2018-49 IRB 827, or its successor (relating to inflation adjustments). A patron must use that information when determining the patron's section 199A(a) deduction. For example, if the Cooperative determines an entire distribution does not contain any qualified item of income, gain, deduction, and loss because it is not effectively connected with the conduct of the Cooperative's trade or business within the United States, the Cooperative does not include such amount when reporting qualified items to the patron, and the patron does not include the distribution in the patron's QBI. In addition, to the extent the distribution includes interest income that is not properly allocable to the Cooperative's trade or business on behalf of, or with, its patrons, the distribution is not a qualified item of income, gain, deduction, and loss. As a result, the Cooperative does not include such amount when reporting qualified items to the patron, and the patron does not include the income in the patron's QBI. Proposed § 1.199A-7(c)(3) provides that the Cooperative must report the amount of qualified items of income, gain, deduction, or loss in the distributions made to the patron on an attachment to or on the Form 1099-PATR, Taxable Distributions Received From Cooperatives (Form 1099-PATR) (or any successor form), issued by the Cooperative to the patron, unless otherwise provided by the instructions to the Form. The Cooperative does not include any items from an SSTB in reporting the amount of qualified items of income, gain, deduction, and loss and must instead follow the rules in proposed § 1.199A-7(d) for income from an SSTB. If a patron does not receive such information from the Cooperative on or before the due date of the Form 1099-PATR, the amount of distributions from the Cooperative that may be included in the patron's QBI is presumed to be zero. This presumption does not apply to amounts of qualified items of income, gain, deduction and loss to the extent that they were not reported on the Form 1099-PATR or attachment thereto before the publication of these proposed regulations in the Federal Register . These rules apply to both exempt and nonexempt Cooperatives as well as patronage and nonpatronage distributions. The Treasury Department and the IRS request comments on these reporting requirements and whether any additional information from Cooperatives that make distributions to their patrons is needed for their patrons to determine their section 199A(a) deduction. C. Specified Service Trade or Business Section 199A(c)(1) provides that only items attributable to a qualified trade or business are taken into account in determining the section 199A(a) deduction for QBI. Under section 199A(d)(1) a “qualified trade or business” excludes (A) an SSTB or (B) the trade or business of performing services as an employee. TD 9847 provides that, unless an exception applies, if a trade or business is an SSTB, none of its items are to be taken into account for purposes of determining a taxpayer's QBI. Under section 199A(d)(3), individuals with taxable income not exceeding the threshold amount ($315,000 in the case of joint returns and $157,500 for all other taxpayers for any taxable year beginning before 2019), are not subject to a restriction with respect to SSTBs. For taxable years beginning after 2018, see Rev. Proc. 2018-57, 2018-49 IRB 827, or its successor. Therefore, if an individual has taxable income not exceeding the threshold amount, the individual is eligible for the section 199A(a) deduction with respect to qualified items of income, gain, deduction, and loss from the SSTB notwithstanding that the trade or business is an SSTB. The inapplicability of the SSTB rules, W-2 wage limitation, and UBIA of qualified property limitation in computing the section 199A(a) deduction is subject to a phase-in for individuals with taxable income within the phase-in range. See the rules in § 1.199A-5 for the rules relating to SSTBs. The rules in proposed § 1.199A-7(d) clarify that a patron (whether the patron is a relevant passthrough entity (RPE) or an individual) must determine whether the trades or businesses it directly conducts are SSTBs. These proposed rules also provide that in the case of a patron's trade or business that receives patronage dividends or similar payments distributed from a Cooperative, the Cooperative must determine whether the distributions from the Cooperative include items of income, gain, deduction, and loss from an SSTB directly conducted by the Cooperative, and whether such items are qualified items with respect to such SSTB. The Cooperative must report to the patron the amount of qualified items of income, gain, deduction, and loss from an SSTB directly conducted by the Cooperative. The patron then determines if the distribution may be included in the patron's QBI depending on the patron's taxable income and the statutory phase-in and threshold amounts. Because the Cooperative may not know whether the patron's taxable income exceeds the threshold amount, the Cooperative must report this information to all patrons. Without this information, a patron with taxable income within the phase-in range or below the threshold amount would not have the information necessary to take into account the amount of qualified items of income, gain, deduction, and loss from an SSTB in determining the patron's section 199A(a) deduction for QBI. The rules in § 1.199A-5 are applied by the Cooperative to determine if the trade or business is an SSTB. For example, the Cooperative will apply the gross receipts de minimis rules in § 1.199A-5(c)(1) to determine if the trade or business is an SSTB. Proposed § 1.199A-7(d)(3) provides that the Cooperative must report to the patron the amount of SSTB income, gain, deduction, and loss in distributions that is qualified with respect to any SSTB directly conducted by the Cooperative on an attachment to or on the Form 1099-PATR (or any successor form) issued by the Cooperative to the patron, unless otherwise provided by the instructions to the Form. If the Cooperative does not report the amount on or before the due date of the Form 1099-PATR, then only the amount that a Cooperative reports as qualified items of income, gain, deduction, and loss under § 1.199A-7(c)(3) may be included in the patron's QBI, and the remaining amount of distributions from the Cooperative that may be included in the patron's QBI is presumed to be zero. This presumption does not apply to amounts of qualified items of income, gain, deduction and loss to the extent that they were not reported on the Form 1099-PATR or attachment thereto before the publication of these proposed regulations in the Federal Register . These rules apply to both exempt and nonexempt Cooperatives as well as to patronage and nonpatronage distributions. The Treasury Department and the IRS request comments on these reporting requirements and whether any additional information from Cooperatives that make distributions to their patrons is needed for their patrons to determine their section 199A(a) deduction. D. Determination of W-2 Wages and UBIA of Qualified Property Section § 1.199A-1(d) addresses the calculation of the section 199A(a) deduction for individuals with taxable income exceeding the threshold amount and provides guidance on the application of these limitations. All of the rules relating to the REIT dividends and qualified PTP income component of the section 199A(a) deduction applicable to individuals with taxable income not exceeding the threshold amount also apply to individuals with taxable income exceeding the threshold amount. The QBI component of the section 199A(a) deduction, however, is subject to limitations for individuals with taxable income exceeding the threshold amount. These include the limitations based on the W-2 wages of the trade or business or a combination of the W-2 wages and the UBIA of qualified property. Under § 1.199A-2, W-2 wages and UBIA of qualified property are determined by the individual or RPE that directly conducts the trade or business. Section 199A(f)(1)(A)(2)(iii) requires that S corporations and partnerships allocate W-2 wages and UBIA of qualified property to their owners in accordance with each owner's applicable share, and § 1.199A-6 contains additional information regarding these reporting requirements. Section 199A does not provide a similar rule for Cooperatives. Section 199A(c)(3)(B)(ii) provides that patronage dividends or similar payments may be treated as qualified items of income. Only the Cooperative knows the origin and character of the patronage dividends or similar payments. As a result, the Cooperative must determine if these payments meet the statutory requirements in section 199A(c)(3), and must provide information to the patron for it to compute its section 199A(a) deduction. In contrast, section 199A contains special rules for W-2 wages and UBIA of qualified property. To provide that Cooperatives allocate their W-2 wages and UBIA of qualified property to their patrons would be to treat the Cooperatives as RPEs when they are C corporations. Therefore, the rules in proposed § 1.199A-7(e) provide that patrons directly conducting trades or businesses that receive patronage dividends or similar payments from a Cooperative calculate the W-2 wage and UBIA of qualified property limitations at the patron level based on the patrons' trades or businesses, without any regard to the Cooperative's W-2 wages or UBIA of qualified property. In summary, a Cooperative must report to patrons: (i) Whether the patronage dividends or similar payments include qualified items of income, gain, deduction, and loss from a non-SSTB and (ii) whether the distributions from the Cooperative include qualified items of income, gain, deduction, and loss from an SSTB directly conducted by the Cooperative, but a Cooperative does not report any W-2 wages or UBIA of qualified property to patrons. The Treasury Department and the IRS request comments on these proposed rules regarding W-2 wages and UBIA of qualified property and whether it would be appropriate for Cooperatives to be required to report such amounts to patrons to determine their section 199A(a) deduction. E. Special Rules for Patrons of Specified Cooperatives Section 199A provides special rules for patrons of Specified Cooperatives. Because patrons of Specified Cooperatives may be eligible to take both a section 199A(a) and section 199A(g) deduction, section 199A(b)(7) provides that if a trade or business of a patron of a Specified Cooperative receives qualified payments (as defined in section 199A(g)(2)(e) and proposed § 1.199A-8(d)(2)(ii)) from such Specified Cooperative that are included in the patron's QBI, the patron must reduce its section 199A(a) deduction by the lesser of (i) 9 percent of so much of the QBI with respect to such trade or business that is properly allocable to qualified payments from the Specified Cooperative, or (ii) 50 percent of so much of the patrons' W-2 wages (determined under section 199A(b)(4)) with respect to such trade or business as are so allocable. This reduction is required by section 199A(b)(7) whether the Specified Cooperative passes through all, some, or none of the Specified Cooperative's section 199A(g) deduction to the patron in that taxable year. Section 1.199A-3(b)(5) provides an allocation method for items of QBI attributable to more than one trade or business. That allocation method also applies to patrons with multiple trades or businesses. The rules in proposed § 1.199A-7(f)(2) provide an additional similar allocation method in situations where a patron receives qualified payments and income that is not a qualified payment in a trade or business. The patron must allocate those items using a reasonable method based on all the facts and circumstances. Different reasonable methods may be used for different items of income, gain, deduction, and loss. The chosen reasonable method for each item must be consistently applied from one taxable year to another and must clearly reflect the income and expenses of each trade or business. The overall combination of methods must also be reasonably based on all the facts and circumstances. The books and records maintained for a trade or business must be consistent with any allocations. The Treasury Department and the IRS are open to considering whether a permissible “reasonable method” should be specified in regulations or permitted to include methods based on direct tracing, allocations based on gross income, or other methods, within appropriate parameters. The Treasury Department and the IRS request comments on possible reasonable methods for the allocation of items not clearly attributable to a single trade or business, and whether any safe harbors may be appropriate. Because the section 199A(b)(7) reduction applies to the portion of a patron's QBI that relates to qualified payments from a Specified Cooperative, these proposed rules provide a safe harbor allocation method for patrons with taxable income not exceeding the threshold amounts set forth in section 199A(e)(2) to determine how to calculate the section 199A(b)(7) reduction. The safe harbor allocation method is intended to provide a straightforward method for patrons if their trade or business receives qualified payments from a Specified Cooperative in addition to other income. To calculate the required section 199A(b)(7) reduction, the patron must allocate the aggregate business expenses and W-2 wages between qualified payments and other gross receipts. The safe harbor allocation method allows patrons to allocate by ratably apportioning business expenses and W-2 wages based on the proportion that the amount of qualified payments bears to the total gross receipts used to determine QBI. The Treasury Department and the IRS request comments on this safe harbor rule and whether there are additional or alternative safe harbors that may be appropriate. Further, to make the calculation required by section 199A(b)(7), the patron will need to know the qualified payments allocable to the patron that were used in calculating a Specified Cooperative's section 199A(g) deduction. In order to enable the patron to make this calculation, proposed § 1.199A-7(f)(3) requires the Specified Cooperative to report the amount of such qualified payments on an attachment to or on the Form 1099-PATR, (or any successor form) issued by the Cooperative to the patron, unless otherwise provided by the instructions to the Form. F. Transition Rule Congress provided a special transition rule relating to qualified payments under former section 199 made by Specified Cooperatives in section 101 of the 2018 Act. Under this transition rule, the repeal of former section 199 for taxable years beginning after December 31, 2017, does not apply to former section 199 qualified payments received by a patron from Specified Cooperatives in a taxable year beginning after December 31, 2017, to the extent such qualified payments are attributable to qualified production activities income (QPAI) with respect to which a deduction is allowable to the Specified Cooperatives under former section 199 for a taxable year of the Specified Cooperatives beginning before January 1, 2018. Such qualified payments remain subject to former section 199, and any deduction under former section 199 allocated by the Specified Cooperatives to their patrons related to such qualified payments may be deducted by such patrons in accordance with former section 199. In addition, no deduction is allowed under section 199A(a) and (g) with respect to such qualified payments. See Public Law 115-97, title I, § 13305(c), Dec. 22, 2017, 131 Stat. 2054, 2126 (codified as amended at I.R.C. § 74 Note), as amended by Public Law 115-141, div. T, § 101(c), Mar. 23, 2018, 132 Stat. 348, 1151, providing a transitional rule for qualified payments of patrons of Cooperatives. Proposed § 1.199A-7(h)(3) and § 1.199A-8(h)(3) provide that the Cooperative must identify in a written notice to its patrons that a section 199A(a) deduction cannot be claimed for qualified payments that otherwise would constitute QBI in the patron's trade or business in a taxable year in which the qualified payments remain subject to former section 199. The Cooperative must report this information on an attachment to or on the Form 1099-PATR (or any successor form) issued by the Cooperative to the patron, unless otherwise provided by the instructions to the Form. II. Proposed § 1.199A-8, Deduction for Income Attributable to Domestic Production Activities of Specified Cooperatives A. In General Section 199A(g) provides a deduction for Specified Cooperatives and their patrons that is similar in many respects to the deduction under former section 199. Proposed § 1.199A-8 provides definitions relating to the section 199A(g) deduction, establishes the criteria that a Specified Cooperative must satisfy to be eligible to claim the section 199A(g) deduction, and sets forth the necessary steps for a Specified Cooperative to calculate the section 199A(g) deduction. B. Definitions Proposed § 1.199A-8 defines the terms patron, Specified Cooperative, and agricultural or horticultural products. In defining patron, the Treasury Department and the IRS sought consistency with the rules under subchapter T of chapter 1 of subtitle A of the Code. Thus, the rules in proposed § 1.199A-8 cross-reference the definition of patron found in § 1.1388-1(e). The definition of Specified Cooperative is consistent with the definition set forth in section 199A(g)(4). This definition is different from the definition of Specified Cooperative as originally provided by section 11011(a) of the TCJA (former section 199A(g)(3)), as it no longer includes a Cooperative solely engaged in the provision of supplies, equipment, or services to farmers or other Specified Cooperatives (former section 199A(g)(3)(C)). Proposed § 1.199A-8(a)(4) defines agricultural or horticultural products as agricultural, horticultural, viticultural, and dairy products, livestock and the products thereof, the products of poultry and bee raising, the edible products of forestry, and any and all products raised or produced on farms and processed or manufactured products thereof within the meaning of the Cooperative Marketing Act of 1926, 44 Stat. 802 (1926). Agricultural or horticultural products also include aquatic products that are farmed whether by exempt or nonexempt Specified Cooperatives. See Rev. Rul. 64-246, 1964-2 C.B. 154. In addition, agricultural or horticultural products include fertilizer, diesel fuel, and other supplies used in agricultural or horticultural production that are manufactured, produced, grown, or extracted (MPGE) by the Specified Cooperative. See Joint Committee Report, at 23, footnote 120. Agricultural or horticultural products do not include intangible property. For example, an agricultural or horticultural product includes a seed that is grown, but does not include an intangible property right to reproduce a seed for sale. This exclusion of intangible property does not apply to intangible characteristics of any particular agricultural or horticultural product. For example, gross receipts from the sale of different varieties of oranges would all qualify as DPGR from the disposition of agricultural or horticultural products (assuming all other requirements of section 199A(g) are met). However, gross receipts from the license of the right to produce and sell a certain variety of oranges would be considered separate from the tangible oranges themselves and therefore not gross receipts from an agricultural or horticultural product. This exclusion is consistent with former section 199, which excluded intangible property other than computer software, any property described in section 168(f)(4) (sound recordings), and qualified film products. The Treasury Department and the IRS considered a similar but alternative definition of agricultural or horticultural products as agricultural, horticultural, viticultural, and dairy products, livestock and poultry, bees, forest products, fish and shellfish, and any products thereof, including processed and manufactured products, and any and all products raised or produced on farms and any processed or manufactured product thereof within the meaning of the Agricultural Marketing Act of 1946, 60 Stat. 1091 (1946). While very similar to the definition set forth in these proposed rules, the Treasury Department and the IRS proposed using the definition based on the Cooperative Marketing Act of 1926, which specifically concerns cooperatives, unlike the Agricultural Marketing Act of 1946, which concerns the marketing and distribution of agricultural products. The Treasury Department and the IRS also considered an alternative definition of agricultural or horticultural products based on general regulations under the Commodity Exchange Act. The Commodity Futures Trading Commission defines agricultural commodities as wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, but not onions; other commodities that are, or once were, or are derived from, living organisms, including plant, animal and aquatic life, which are generally fungible, within their respective classes, and are used primarily for human food, shelter, animal feed or natural fiber; tobacco, products of horticulture, and such other commodities used or consumed by animals or humans. 17 CFR 1.3. The Treasury Department and the IRS concluded that this definition was too narrow, because it is limited to products that can be commodities. The Treasury Department and the IRS are considering alternative definitions of agricultural or horticultural products to address concerns that the definition could be interpreted inconsistently with the ordinary meaning of agricultural or horticultural products. A clarification of the definition that is under consideration is the limitation of agricultural or horticultural products to products acquired from original producers, such as farmers, planters, ranchers, dairy farmers, or nut or fruit growers, and products thereof that are MPGE by Specified Cooperatives. The Treasury Department and the IRS request comments on whether the original producer approach being considered would be appropriate, as well as other approaches to defining agricultural or horticultural products. The Treasury Department and the IRS also request comments on the impact, if any, of the proposed definition on which products are MPGE by Specified Cooperatives. A Specified Cooperative's gross receipts from the disposition of agricultural or horticultural products qualify as DPGR if the products were MPGE by the Specified Cooperative in whole or significant part within the United States. The proposed regulations define in whole or significant part for these purposes in proposed § 1.199A-9(h) and provide a 20 percent safe harbor for such determination in proposed § 1.199A-9(h)(3). The definition of gross receipts in proposed § 1.199A-8(b)(2)(iii) is essentially the same as in § 1.199-3(c) issued under former section 199, except that this definition has been modified by removing references to section 1031 (exchange of real property held for productive use or investment) and tax-exempt interest within the meaning of section 103 (interest on State and local bonds). The reference to section 1031 is removed because that provision now applies only to real property. The section 199A(g) deduction is based on gross receipts derived from the disposition of agricultural or horticultural products and section 199A(g)(3)(D)(i) expressly excludes gross receipts derived from the disposition of land from DPGR. The reference to tax-exempt interest under section 103 is removed because it is appropriate for the definition of gross receipts to include only gross receipts that are taken into account in computing gross income under the Cooperative's methods of accounting used for Federal income tax purposes for the taxable year. The Treasury Department and the IRS welcome comments regarding all aspects of these proposed definitions, including whether there is an alternative or more appropriate definition of Specified Cooperative or agricultural or horticultural products, and clarification of when MPGE is performed in whole or significant part in the United States that would provide greater certainty for taxpayers in complying with, and the IRS in administering, the requirements for claiming the section 199A(g) deduction. The Treasury Department and the IRS also welcome comments on the appropriateness of the 20 percent safe harbor in proposed § 1.199A-9(h)(3). C. Steps for Calculating Section 199A(g) Deduction Proposed § 1.199A-8 sets forth four required steps to determine the amount of a nonexempt Specified Cooperative's section 199A(g) deduction and provides rules to determine the amount of an exempt Specified Cooperative's section 199A(g) deduction. i. Patronage/Nonpatronage Split The first step under the rules of proposed § 1.199A-8 for calculating the section 199A(g) deduction requires nonexempt Specified Cooperatives to identify the gross receipts and related deductions (other than a deduction under section 199A(g)) that are from patronage sources and from nonpatronage sources. Specified Cooperatives must separate their patronage and nonpatronage gross receipts and related deductions when determining taxable income and allocating expenses between patronage and nonpatronage income to claim the tax deductions under section 1382(b) and (c). Cooperatives that have gross receipts only from patronage sources will be unaffected. Accordingly, the proposed regulations' requirement to divide patronage/nonpatronage gross receipts and related deductions should not significantly impact the existing allocation requirements applicable to Specified Cooperatives. This step is expressly included in these proposed rules because proposed § 1.199A-8 provides that for all purposes of the section 199A(g) deduction, nonexempt Specified Cooperatives may use only patronage gross receipts and related deductions to calculate DPGR, QPAI (including oil-related QPAI), taxable income, and the W-2 wage limitation. Separating a nonexempt Specified Cooperative's patronage items from its nonpatronage items is consistent with the structure and intent of section 199A. Section 199A in its entirety is structured to give businesses that are not operating as C corporations a deduction that corresponds to the TCJA's reduction of the top corporate rate of tax under section 11. C corporations are expressly prohibited under section 199A(a) from claiming a section 199A(a) deduction, and under section 199A(g)(2)(D)(i) from claiming a section 199A(g) deduction. Although section 199A(g) provides a deduction for Specified Cooperatives, the statutory prohibitions preventing C corporations from benefiting under section 199A(g) (which were absent from the statutory text of former section 199) are in conflict with permitting a section 199A(g) deduction for the nonpatronage business of a nonexempt Specified Cooperative. Instead, nonpatronage source income of a nonexempt Specified Cooperative receives an alternate benefit shared by other C corporations: The TCJA's reduction of the top rate of tax under section 11 from 35 percent to 21 percent. Moreover, the 2018 Act amended section 199A to address concerns that the TCJA created an unintended incentive for farmers and other producers to sell their agricultural or horticultural products to Cooperatives over independent buyers. The amendment to section 199A was intended to ensure a level playing field between Cooperatives and independent buyers. Without the split between patronage and nonpatronage businesses, Specified Cooperatives that may benefit from both a section 199A(g) deduction (from which taxpayers other than Specified Cooperatives cannot benefit) and the reduced corporate tax rate on nonpatronage business would be significantly advantaged over independent buyers who could benefit only from the reduced corporate tax rate under section 11. Accordingly, the Treasury Department and the IRS have determined that it is appropriate to limit the source of the gross receipts and related deductions taken into account for purposes of the section 199A(g) deduction for nonexempt Specified Cooperatives to items properly allocated to a nonexempt Specified Cooperative's patronage business. The Treasury Department and the IRS request comments regarding these proposed rules, including comments explaining any policy rationale that would justify treating the nonpatronage business of a nonexempt Specified Cooperative differently from the business operations of any other C corporation subject to the tax imposed under section 11. ii. Identifying Patronage DPGR The second step set forth in proposed § 1.199A-8 is for nonexempt Specified Cooperatives to identify patronage gross receipts that qualify as DPGR. The rules in proposed § 1.199A-8 point nonexempt Specified Cooperatives to proposed § 1.199A-9 for additional information on DPGR. The rules in proposed § 1.199A-9 do not refer to gross receipts from patronage or nonpatronage business because the rules only provide additional information supplementing the determination of DPGR from dispositions of agricultural or horticultural products. When applying § 1.199A-9, which occurs after step 1 in § 1.199A-8, the only gross receipts of a nonexempt Specified Cooperative considered would be those derived from patronage sources. Proposed § 1.199A-9 is essentially the same as §§ 1.199-1 and 1.199-3 issued under former section 199, adjusted to apply to Specified Cooperatives. iii. Calculating Patronage QPAI The third step set forth in proposed § 1.199A-8 is for nonexempt Specified Cooperatives to calculate QPAI (including oil-related QPAI) from only their patronage DPGR. To do this, nonexempt Specified Cooperatives must determine COGS and other expenses, losses, or deductions that are allocable to patronage DPGR. Nonexempt Specified Cooperatives are directed to consult proposed § 1.199A-10 for additional information on making these allocations. Proposed § 1.199A-10 does not refer to patronage or nonpatronage QPAI or DPGR because it only provides additional information supplementing the QPAI calculation. Proposed § 1.199A-10 is essentially the same as § 1.199-4 issued under former section 199, adjusted to apply to Specified Cooperatives. iv. Calculating Patronage Section 199A(g) Deduction The fourth and final step set forth in proposed § 1.199A-8 is for nonexempt Specified Cooperatives to calculate their section 199A(g) deduction, which is equal to 9 percent of the lesser of QPAI or taxable income, and subject to the W-2 wage limitation. Nonexempt Specified Cooperatives are directed to consult proposed § 1.199A-11 for additional information on the W-2 wage limitation. Proposed § 1.199A-11 does not refer to patronage or nonpatronage QPAI, taxable income, or W-2 wages because it only provides additional information supplementing the W-2 wage limitation. Proposed § 1.199A-11 is essentially the same as § 1.199-2 issued under former section 199, adjusted to apply to Specified Cooperatives. v. Exempt Specified Cooperatives Proposed § 1.199A-8(c) provides that exempt Specified Cooperatives calculate two separate section 199A(g) deductions, one based on gross receipts and related deductions from patronage sources, and one based on gross receipts and related deductions from nonpatronage sources. Like a nonexempt Specified Cooperative, an exempt Specified Cooperative earns patronage income that is not taxed to the extent of any section 1382(b) deduction for patronage distributions made to patrons. Exempt Specified Cooperatives are also not taxed on any nonpatronage income to the extent of any section 1382(c) deduction for nonpatronage distributions. Unlike the usual taxation of C corporations, the section 1382 deductions allow an exempt Specified Cooperative to be treated more like a passthrough entity by reducing the exempt Specified Cooperative's patronage and nonpatronage income. It is therefore appropriate that the exempt Specified Cooperatives may take a section 199A(g) deduction on both patronage and nonpatronage income that could be deducted under section 1382(b) and (c)(2). As described earlier, calculating two section 199A(g) deductions is consistent with the administration of former section 199. To calculate the two section 199A(g) deductions, an exempt Specified Cooperative is required under proposed § 1.199A-8 to perform steps two through four twice, first using only its patronage gross receipts and related deductions and second using only its nonpatronage gross receipts and related deductions. An exempt Specified Cooperative cannot combine, merge, or net patronage and nonpatronage items at any step in determining its patronage section 199A(g) deduction and its nonpatronage section 199A(g) deduction. D. Special Rule for Oil-Related QPAI Section 199A(g)(5)(E) contains a special rule for Specified Cooperatives with oil-related QPAI, which requires a reduction by 3 percent of the least of oil-related QPAI, QPAI, or taxable income of the Specified Cooperative for the taxable year. The language of this rule is the same as the language used in former section 199(d)(9). Former section 199(d)(9), which applied to taxable years beginning after December 31, 2008, was added by section 401(a), Division B of the Energy Extension Act of 2008, Public Law 110-343, 122 Stat. 3765 (2008). These proposed rules include rules for oil-related QPAI that are similar to those contained in proposed regulations (REG-136459-09) relating to the section 199 deduction published in the Federal Register (80 FR 51978) on August 27, 2015 (2015 Proposed Regulations). The 2015 Proposed Regulations included rules related to a taxpayer's determination of oil-related QPAI (with respect to which no comments were received). Although not finalized, the 2015 Proposed Regulations are the only existing guidance concerning a taxpayer's determination of oil-related QPAI. The preamble to the 2015 Proposed Regulations includes an explanation of the reasons supporting the proposed provisions, and these reasons continue to apply. These include the determination that gross receipts from transportation and distribution of oil are not included in the calculation of oil-related QPAI, unless the gross receipts are considered DPGR under the de minimis rule or an exception for embedded services now contained in proposed § 1.199A-9. Gross receipts from transportation and distribution are not included in QPAI and DPGR (unless an exception applies), and therefore it is appropriate to exclude such gross receipts when calculating oil-related QPAI. E. Rules for Passing Section 199A(g) Deduction to Patrons Once a Specified Cooperative calculates the section 199A(g) deduction, it may pass on the section 199A(g) deduction to patrons who are eligible taxpayers as defined in section 199A(g)(2)(D), that is, (i) a patron that is other than a C corporation or (ii) a patron that is a Specified Cooperative. Section 199A(g)(2)(A) requires the Specified Cooperative to identify the amount of the section 199A(g) deduction being passed to a patron in a notice (required by proposed § 1.199A-8(d)(3)) mailed to the eligible patron during the payment period described in section 1382(d). The amount of the section 199A(g) deduction that a Specified Cooperative can pass through to an eligible taxpayer is limited to the portion of the section 199A(g) deduction that is allowed with respect to the QPAI to which the qualified payments made to the eligible taxpayer are attributable. Section 199A(g)(2)(E) defines qualified payments as those that are included in the eligible taxpayer's income under section 1385(a)(1) and (3) (referencing patronage dividends and per-unit retain allocations). Proposed § 1.199A-8 further provides that a Specified Cooperative that receives a section 199A(g) deduction as an eligible taxpayer can take the deduction only against patronage gross income and related deductions, or pass on the deduction to its patrons that are eligible taxpayers. The proposed rules do not allow an exempt Specified Cooperative to pass through any of the section 199A(g) deduction attributable to nonpatronage activities because no QPAI is attributable to any qualified payments. The rules of proposed § 1.199A-8 are essentially the same as the rules of § 1.199-6, adjusted to include other provisions of the section 199 final regulations as well as proposed rules set forth in the 2015 Proposed Regulations. F. Cooperative as a Partner in a Partnership Proposed § 1.199A-8(f) provides guidance regarding circumstances in which a Specified Cooperative is a partner in a partnership as described under section 199A(g)(5)(B). The proposed rules provide that the partnership must separately identify and report on the Schedule K-1 to the Form 1065, U.S. Return of Partnership Income, (or any successor form) issued to its partner, unless otherwise provided by the instructions to the Form, the Specified Cooperative's allocable share of gross receipts and related deductions. This allows the Specified Cooperative partner to apply the four steps in proposed § 1.199A-8 required to calculate its patronage section 199A(g) deduction (or patronage and nonpatronage section 199A(g) deductions in the case of an exempt Specified Cooperative). III. Proposed § 1.199A-9, Domestic Production Gross Receipts A. In General Section 199A(g)(3)(D) defines the term domestic production gross receipts to mean gross receipts of a Specified Cooperative derived from any lease, rental, license, sale, exchange, or other disposition (collectively, a “disposition”) of any agricultural or horticultural product which was MPGE (determined after application of section 199A(g)(4)(B)) by the Specified Cooperative in whole or significant part within the United States. Such term does not include gross receipts of the Specified Cooperative derived from a disposition of land or from services. These proposed regulations are based on § 1.199-3 issued under former section 199, but remove provisions that would not apply to the disposition of agricultural or horticultural products. DPGR includes the gross receipts that a Specified Cooperative derives from marketing agricultural or horticultural products for patrons. Section 199A(g)(4)(B) treats marketing Specified Cooperatives as having MPGE any agricultural or horticultural product in whole or significant part within the United States if their patrons have done so. The Treasury Department and the IRS considered whether this rule should apply between Specified Cooperatives and patrons taxed as C corporations. These proposed regulations allow attribution to apply as provided in section 199A(g)(4)(B) because the statute does not distinguish between types of patrons. However, these proposed regulations do not allow a Specified Cooperative to pass through to a C corporation any of the section 199A(g) deduction of the Specified Cooperative attributable to the disposition of such agricultural or horticultural products. This is because, under section 199A(g)(2)(D), taxpayers taxed as C corporations are not eligible to claim a section 199A(g) deduction from the Specified Cooperative. These proposed regulations incorporate the rules from § 1.199-1(d)(1) through (3) and (e), issued under former section 199, as applicable. These rules relate to the allocation of gross receipts between DPGR and non-DPGR, and the determination of whether an allocation method is reasonable. Further, the rules include provisions permitting Specified Cooperatives to treat de minimis gross receipts as DPGR or non-DPGR without allocating such gross receipts, and a provision permitting the use of historical data to allocate gross receipts for certain multiple-year transactions. The Treasury Department and the IRS welcome comments regarding all aspects of these proposed rules. When incorporating these concepts from the former section 199 regulations, the Treasury Department and the IRS determined that the appropriate section of these proposed regulations in which to include such guidance was proposed § 1.199A-9. This is not a substantive change, but rather a reorganization to improve clarity. B. Definition of Manufactured, Produced, Grown, Extracted The definition of the term MPGE is included in proposed § 1.199A-9 and is generally consistent with the definition in § 1.199-3(e)(1). However, these proposed regulations revise the rule in § 1.199-3(e)(2) by removing the concept of minor assembly. In the 2015 Proposed Regulations, the Treasury Department and the IRS requested comments on defining the term minor assembly because of the difficulty in identifying a widely applicable objective test. Based on the comments received and the restriction on the section 199A(g) deduction to agricultural or horticultural products, proposed § 1.199A-9 does not include the term minor assembly included in § 1.199-3(e)(2). This exclusion does not impact a taxpayer's obligation to meet all of the other requirements to qualify for the section 199A(g) deduction. The Treasury Department and the IRS request comments on whether the concept of minor assembly should be retained and, if so, how this term should be defined. C. By the Taxpayer With respect to the phrase “by the taxpayer” as used in section 199A(g)(3)(D)(i), these proposed regulations adopt the rule from § 1.199-3(f)(1) as applicable, rather than the rule in the 2015 Proposed Regulations. In a contract manufacturing arrangement, this means that a Specified Cooperative must have the benefits and burdens of ownership of the agricultural or horticultural product during the period in which the MPGE activity occurs in order for the Specified Cooperative to be treated as engaging in such MPGE activity. The 2015 Proposed Regulations provided a different rule for contract manufacturing arrangements. The 2015 Proposed Regulations provided that if a qualifying activity is performed under a contract, then the party that performs the qualifying activity is the taxpayer for purposes of section 199(c)(4)(A)(i). Under the rule in the 2015 Proposed Regulations, a Specified Cooperative that contracts with another party for the MPGE of an agricultural or horticultural product would never qualify as “the taxpayer” for purposes of the section 199A(g) deduction. This result fails to provide any incentive for Specified Cooperatives to retain the benefits and burdens of ownership and to ensure that production occurs within the United States. Therefore, to maintain such an incentive, the proposed regulations maintain the rule from § 1.199-3(f)(1). The Treasury Department and the IRS request comments on the continued use of the rule from § 1.199-3(f)(1). D. Other Provisions in Proposed § 1.199A-9 The remainder of the rules in proposed § 1.199A-9 are based on the existing regulations in § 1.199-3. These rules should be interpreted in a manner consistent with the interpretation under former section 199. The Treasury Department and the IRS request comments on any conception or definition that in application would be over or under-inclusive under the proposed regulations, or any instances where they should interpret the rules differently from the interpretation under former section 199. IV. Proposed § 1.199A-10, Costs Allocable to DPGR Proposed § 1.199A-10 provides guidance on the allocation of costs to DPGR. This section provides rules for allocating a taxpayer's COGS, as well as other expenses, losses, and deductions properly allocable to DPGR. These proposed regulations are based on and follow the section 199 regulations in § 1.199-4. V. Proposed § 1.199A-11, Wage Limitation Proposed § 1.199A-11 provides guidance regarding the W-2 wage limitation on the section 199A(g) deduction. A notice of proposed revenue procedure, Notice 2019-27, 2019-16 IRB, which proposes a draft revenue procedure providing three proposed methods that Specified Cooperatives may use for calculating W-2 wages, is being issued concurrently with this notice of proposed rulemaking. The guidance contained in the notice of proposed revenue procedure is necessary because changes may be made to the underlying Form W-2, Wage and Tax Statement, on a more frequent basis than updates to the regulations under section 199A(g), for regulatory and statutory reasons independent of section 199A. The three proposed methods for calculating W-2 wages in the notice are substantially similar to the methods provided in Rev. Proc. 2006-47, 2006-2 C.B. 869 (relating to the section 199 deduction), and Rev. Proc. 2019-11, 2019-09 IRB 742 (relating to the section 199A(a) deduction). The Treasury Department and the IRS propose these methods in a notice of proposed revenue procedure rather than in the notice of proposed rulemaking to maintain consistency with the rules under former section 199 and the rules under section 199A. The notice of proposed revenue procedure invites comments from the public. Under the proposed regulations, W-2 wages for the purpose of the wage limitation in section 199A(g) are generally determined in a manner that is similar to the manner in which W-2 wages are determined for the purpose of the deduction under section 199A(a) (that is, using the definition of W-2 wages under section 199A(b)(4)), with three significant differences. First, section 199A(g)(1)(B)(ii) provides that W-2 wages are determined without regard to section 199A(b)(4)(B), which excludes from the definition amounts not properly allocable to QBI for purposes of section 199A(c)(1). Second, W-2 wages under section 199A(g) do not include any amount that is not properly allocable to DPGR. Finally, W-2 wages under section 199A(g) do not generally include any remuneration paid for services in the commonwealth of Puerto Rico and other United States territories. Specifically, section 199A(g)(1)(B)(ii) provides that W-2 wages are determined in the same manner as under section 199A(b)(4), and section 199A(b)(4)(A) defines wages as amounts described in section 6051(a)(3) and (8). The amounts described in section 6051(a)(3) are “wages as defined in section 3401(a).” Section 3401(a)(8) generally excludes from the definition of wages in section 3401(a) wages paid with respect to employment in the commonwealth of Puerto Rico and other United States territories. Therefore, wages paid with respect to employment in the commonwealth of Puerto Rico and other United States territories are generally not W-2 wages within the meaning of section 199A(b)(4)(A). This contrasts with the section 199A(a) deduction for which section 199A(f)(1)(C)(ii) allows certain taxpayers with QBI from sources within the commonwealth of Puerto Rico (section 199A(f)(1)(C)(ii) applies only to Puerto Rico and not to other United States territories) to compute section 199A(b)(4) W-2 wages without regard to section 3401(a)(8). Since the section 199A(g) deduction is determined based on QPAI, not QBI, section 199A(f)(1)(C)(ii) does not apply to the deduction under section 199A(g). Given the distinction between QBI and QPAI on which the section 199A(a) and section 199A(g) deductions are respectively provided, and the absence of a provision similar to 199A(f)(1)(C)(ii) with respect to QPAI, the Treasury Department and the IRS have determined that remuneration paid with respect to employment in the commonwealth of Puerto Rico cannot be used in determining W-2 wages for purposes of section 199A(g). The Treasury Department and the IRS request comments with respect to this determination. VI. Proposed § 1.199A-12, EAG Rules Proposed § 1.199A-12 provides guidance on the application of section 199A(g) to an EAG under section 199A(g)(5)(A)(iii) that includes a Specified Cooperative. Unlike the section 199 deduction, the section 199A(g) deduction is limited to Specified Cooperatives. These proposed regulations address how the rules separating patronage and nonpatronage income and deductions apply in the context of an EAG. Proposed § 1.199A-12 provides that in the case of nonexempt Specified Cooperatives, attribution between the members of an EAG is allowed provided the DPGR and related deductions are patronage. In the case of exempt Specified Cooperatives, attribution is allowed in all events because exempt Specified Cooperatives are allowed to take a separate 199A(g) deduction on both their patronage and nonpatronage income. Proposed § 1.199A-12 also provides certain rules for partnerships owned by an EAG as described in section 199A(g)(5)(A)(ii). VII. Proposed § 1.1388-1(f) Proposed § 1.1388-1(f) sets forth a definition of patronage and nonpatronage that is consistent with the current case law under section 1388. Specifically, the proposed definition adopts the directly related test, which is a fact specific test for determining whether income and deductions of a Cooperative are patronage or nonpatronage. The Treasury Department and the IRS request comments with respect to this definition. VIII. Proposed Removal of Section 199 Regulations and Withdrawal of 2015 Proposed Regulations In light of the TCJA, the Treasury Department and the IRS propose to remove the section 199 regulations (§§ 1.199-0 through 1.199-9) and withdraw the 2015 Proposed Regulations because the regulations interpret a provision of the Code that has been repealed for taxable years beginning after December 31, 2017. The proposed removal of these regulations is unrelated to the substance of the rules in the regulations, and no negative inference regarding the stated rules should be made. Such regulations are proposed to be removed from the Code of Federal Regulations (CFR) solely because they have no future applicability. Removal of these regulations is not intended to alter any non-regulatory guidance that cites to or relies upon these regulations. These regulations as contained in 26 CFR part 1, revised April 1, 2019, remain applicable to determining eligibility for the section 199 deduction for any taxable year that began before January 1, 2018. The beginning date of the taxable year of a partnership, S corporation, or a non-grantor trust or estate, rather than the taxable year of a partner, shareholder, or beneficiary is used to determine items that are taken into account for purposes of calculating a section 199 deduction. This is consistent with the initial application of section 199 in 2005. Items arising from a passthrough entity that had a fiscal year beginning before 2005 were not taken into account by calendar-year partners for purposes of the section 199 deduction. Public Law 109-135, section 102(a) (Gulf Opportunity Zone Act of 2005). Further, when section 199 was amended to narrow the definition of W-2 wages, the amendment was effective for taxable years beginning after May 17, 2006. See Public Law 109-222, section 514(a) (Tax Increase Prevention and Reconciliation Act of 2005). Under the transition rule in § 1.199-5(b)(4), partners and partnerships used the taxable year of the partnerships to determine the applicable definition of W-2 wages, and there are similar rules in § 1.199-5(c)(4) for S corporations and § 1.199-5(e)(3) for non-grantor trusts and estates. Proposed Effective/Applicability Date Section 7805(b)(1)(A) and (B) of the Code generally provide that no temporary, proposed, or final regulation relating to the internal revenue laws may apply to any taxable period ending before the earliest of (A) the date on which such regulation is filed with the Federal Register , or (B) in the case of a final regulation, the date on which a proposed or temporary regulation to which the final regulation relates was filed with the Federal Register . Consistent with authority provided by section 7805(b)(1)(A), the proposed regulations are proposed to apply to taxable years beginning after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register . Taxpayers may rely upon these proposed regulations, in their entirety, before the date of publication of the Treasury Decision adopting these rules as final regulations in the Federal Register . Special Analyses I. Regulatory Planning and Review—Economic Analysis Executive Orders 13563 and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. These proposed regulations have been designated by the Office of Management and Budget's Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. OIRA has determined that the proposed rulemaking is significant and subject to review under Executive Order 12866 and section 1(b) of the Memorandum of Agreement. Accordingly, the proposed regulations have been reviewed by the Office of Management and Budget. In addition, the Treasury Department and the IRS expect the proposed regulations, when final, to be an Executive Order 13771 regulatory action and request comment on this designation. A. Background and Overview The TCJA repealed section 199, which provided a deduction for income attributable to domestic production activities. In its place it created section 199A, which provides a deduction for qualified business income derived from passthrough businesses—such as sole proprietorships, partnerships, and S corporations—engaged in domestic trades or businesses. While the repealed section 199 deduction was generally available to all taxpayers, the section 199A deduction is available only to taxpayers other than C corporations. On March 23, 2018, the 2018 Act modified section 199A(g) to provide deductions for Specified Cooperatives and their patrons that are substantially similar to those under the repealed section 199 deduction. Accordingly, these regulations generally formalize prior and current practices based on the rules under former section 199. The 2018 Act also added section 199A(b)(7), which requires patrons of Specified Cooperatives to reduce their section 199A(a) deduction if those patrons receive qualified payments from Specified Cooperatives. The estimated number of Cooperatives affected by the 2018 Act and these proposed regulations is 9,000, including approximately 2,000 Specified Cooperatives, based on 2017 tax filings. B. Need for the Proposed Regulations The proposed regulations provide guidance regarding the application of sections 199A(a), 199A(b)(7), and 199A(g) to Cooperatives, Specified Cooperatives, and their patrons. The proposed regulations are needed because the 2018 Act introduced a number of terms and calculations. Patrons, Cooperatives, and Specified Cooperatives would benefit from greater specificity regarding these and other items. C. Economic Analysis 1. Baseline The Treasury Department and the IRS have assessed the benefits and costs of the proposed regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these proposed regulations. 2. Economic Rationale for Issuing Guidance for the 2018 Act The Treasury Department and the IRS anticipate that the issuance of guidance pertaining to sections 199A(a), 199A(b)(7), and 199A(g) of the 2018 Act to Cooperatives, Specified Cooperatives, and their patrons will provide a net economic benefit to the overall U.S. economy. The proposed regulations clarify a number of concepts related to the section 199A(a) deduction for patrons of Cooperatives, provide guidance to patrons of Specified Cooperatives who may be required to reduce their section 199A(a) deduction under section 199A(b)(7), and provide guidance to Specified Cooperatives on the section 199A(g) deduction on income attributable to their domestic production activities. In the absence of guidance, affected taxpayers would have to calculate their tax liability without the definitions and clarifications provided by the proposed regulations, a situation that is generally considered more burdensome and could lead to greater conflicts with tax administrators. Thus, the Treasury Department and the IRS project that the proposed regulations will reduce taxpayer compliance burden and the costs of tax administration relative to not issuing any such guidance. This guidance also ensures that section 199A deductions are calculated similarly across taxpayers, avoiding situations where one taxpayer receives preferential treatment over another for fundamentally similar economic activity. For example, in the absence of these proposed regulations, a Specified Cooperative may have uncertainty over what type of income is eligible for the section 199A(g) deduction. If a Specified Cooperative claimed the section 199A(g) deduction on income that already benefits from a lower corporate tax rate, this would confer an unintended economic benefit to the Specified Cooperative over other C corporations performing identical activities that only benefit from a lower corporate tax rate. As discussed further below, this guidance prevents the introduction of distortions of economic decisions in the agricultural or horticultural sector. In the absence of these proposed regulations, uncertainty over statutory interpretation could lead to economic losses to the extent that taxpayers interpret the statute in ways that are inconsistent with the statute's intents and purposes. For example, a Specified Cooperative may pursue a project involving a certain product that is only profitable if that product is deemed “agricultural or horticultural” and thus eligible for the section 199A(g) deduction. If, in fact, this product is ineligible for the deduction based on the intents and purposes of the statute, then the project should not have been pursued and this results in an economic loss. Alternatively, without a definition of “agricultural or horticultural,” a Specified Cooperative may incorrectly assume that a project is not eligible for the deduction and not pursue the project, which could also result in an economic loss. In such cases, guidance provides value by bringing economic decisions closer in line with Congress' intent or, when such intent is broad, with decisions that are economically efficient contingent on the overall Code. While no guidance can fully curtail all inaccurate interpretations of the statute, the proposed regulations significantly mitigate the chance for such interpretations and thereby increase economic efficiency. Due to the lack of readily available data, the Treasury Department and the IRS have not estimated the increase in United States economic activity that would arise from the proposed guidance. The Treasury Department further projects that the issuance of guidance will reduce taxpayer compliance burden and the costs of tax administration relative to a no-action baseline. Due to the lack of readily available data, the Treasury Department has not estimated the decrease in taxpayer compliance burden nor tax administration costs arising from the issuance of guidance. The Treasury Department and the IRS request comments and information that can allow estimation of economic impacts and any changes in taxpayer compliance burden resulting from the proposed guidance. 3. Economic Analysis of Specific Provisions The proposed regulations embody certain regulatory decisions that reflect necessary regulatory discretion. These decisions specify more fully how the 2018 Act is to be implemented. The Treasury Department and the IRS solicit comments on the economic impacts of each of the items discussed in this section and of any other items of the proposed regulations not discussed in this section. The Treasury Department and the IRS particularly solicit comments that provide data, other evidence, or models that could enhance the rigor of the process by which provisions might be developed for the final regulations. i. Determining Section 199A(g) Deduction Specified Cooperatives are taxed differently depending on whether they are exempt (qualified as a cooperative under section 521) or nonexempt (qualified under rules elsewhere in the Code) and also whether their income is from patronage (generally related to the cooperative's marketing, purchasing, or services activities) or nonpatronage sources. In the case of exempt Specified Cooperatives patronage and nonpatronage source income is subject to a single level of tax at the patron level. Whereas, for nonexempt Specified Cooperatives only patronage source income is subject to a single level of tax at the patron level; nonpatronage source income is subject to a double level of tax, similar to other C corporations. Because the Code does not define patronage and nonpatronage source income, proposed § 1.1388-1(f) sets forth a definition of patronage and nonpatronage that is consistent with the current state of federal case law. Specifically, the proposed definition adopts the directly related test, which is a fact specific test for determining whether income and deductions of a Cooperative are patronage or nonpatronage. Specifying a definition that is consistent with current case law will help to minimize the economic impacts of these proposed regulations. The Treasury Department and the IRS request comments with respect to this definition. The TCJA reduced the corporate tax rate for C corporations under section 11 and provided the section 199A deduction for domestic businesses operated as sole proprietorships or through partnerships, S corporations, trusts, or estates. The TCJA also repealed section 199, which did not preclude deductions on income earned by C corporations. The 2018 Act amended section 199A to address concerns that the TCJA created an unintended incentive for farmers to sell their agricultural or horticultural products to Specified Cooperatives over independent buyers. Specifically, the 2018 Act amended section 199A(g) to allow Specified Cooperatives and their patrons a deduction similar to the former section 199 deduction. Because the section 199A(g) deduction is not intended to benefit C corporations and their shareholders in general, the proposed regulations specify that the section 199A(g) deduction can be claimed on income that can be subject to tax only at the patron level. Under the proposed regulations, non-exempt Specified Cooperatives may not claim the section 199A(g) deductions on income that cannot be paid to patrons and deducted under section 1382(b) and exempt Specified Cooperatives may not claim section 199A(g) deductions on income that cannot be paid to patrons and deducted under sections 1382(b) or 1382(c)(2). In the absence of these proposed regulations, a Specified Cooperative may have uncertainty as to whether non-patronage source income, which would be taxed in the same manner as a C corporation, could receive both the lower corporate tax rate and be further offset by a section 199A(g) deduction. Other C corporations performing identical activities would only benefit from the lower corporate tax rate. The Treasury Department and the IRS have determined that this potential uncertainty as to tax treatment could distort economic decisions in the agricultural or horticultural sector. The proposed regulations avoid this outcome, promoting a more efficient allocation of resources by providing more uniform incentives across taxpayers. ii. Definition of Agricultural or Horticultural Products Proposed § 1.199A-8(a)(4) defines agricultural or horticultural products as agricultural, horticultural, viticultural, and dairy products, livestock and the products thereof, the products of poultry and bee raising, the edible products of forestry, and any and all products raised or produced on farms and processed or manufactured products thereof within the meaning of the Cooperative Marketing Act of 1926. Agricultural or horticultural products also include aquatic products that are farmed as well as fertilizer, diesel fuel, and other supplies used in agricultural or horticultural production that are MPGE by the Specified Cooperative. Agricultural or horticultural products, however, do not include intangible property, since agricultural or horticultural products were considered a subset of tangible property under former section 199. Intangible property (defined in § 1.199-3(j)(2)(iii)) was a separate category of property and gross receipts from intangible property did not qualify as DPGR. The Treasury Department and the IRS considered other definitions of agricultural or horticultural products but determined that taxpayer burden and tax administration costs would be lowest under a definition that was consistent with extant law. For example, the Treasury Department and the IRS considered a similar but alternative definition of agricultural or horticultural products as agricultural, horticultural, viticultural, and dairy products, livestock and poultry, bees, forest products, fish and shellfish, and any products thereof, including processed and manufactured products, and any and all products raised or produced on farms and any processed or manufactured product thereof within the meaning of the Agricultural Marketing Act of 1946. While very similar to the definition in these proposed rules, the Treasury Department and the IRS proposed using the definition based on the Cooperative Marketing Act of 1926, which specifically concerns cooperatives and with which Specified Cooperatives are familiar, unlike the Agricultural Marketing Act of 1946, which concerns the marketing and distribution of agricultural products without reference to Cooperatives. The Treasury Department and the IRS looked to the United States Department of Agriculture (USDA) for definitions because there is no definition of agricultural or horticultural products in the Internal Revenue Code or Income Tax Regulations and because the USDA has expertise concerning Specified Cooperatives and because Specified Cooperatives are likely familiar with USDA law. The Treasury Department and the IRS also considered an alternative definition of agricultural or horticultural products based on the definition of agricultural commodities within the meaning of general regulations under the Commodity Exchange Act. The Treasury Department and the IRS concluded that this definition was too narrow, because it is limited to products that can be commodities. The use of this narrow definition would have restricted the range of products for which the section 199A(g) deduction would be otherwise be available. The Treasury Department and the IRS request comments on other approaches to defining agricultural or horticultural products. The Treasury Department and the IRS did not attempt to provide quantitative estimates of the revenue effects or economic consequences of different designations of agricultural or horticultural products because suitable data are not readily available at this level of detail. The Treasury Department and the IRS request comments that can inform such estimation. iii. De Minimis Threshold In general, proposed § 1.199A-9 requires that Specified Cooperatives allocate gross receipts between domestic production gross receipts (DPGR) and non-DPGR. However, proposed § 1.199A-9(c)(3) includes a de minimis provision that allows Specified Cooperatives to allocate total gross receipts to DPGR if less than 5 percent of total gross receipts are non-DPGR or to allocate total gross receipts to non-DPGR if less than 5 percent of total gross receipts are DPGR. The Treasury Department and the IRS chose to include a de minimis rule to reduce compliance costs and simplify tax filing relative to an alternative of no de minimis rule. The de minimis threshold modestly reduces compliance costs for businesses with relatively small amounts of non-DPGR or DPGR by allowing them to avoid allocating receipts between DPGR and non-DPGR activities. The de minimis threshold is unlikely to create any substantial effects on market activity because any change in the ratio of DPGR to non-DPGR will be localized around the threshold, meaning that the movement will be a small fraction of receipts to get below the de minimis threshold. The thresholds provided in the proposed regulations are based on the thresholds set forth in § 1.199-1(d)(3). The Treasury Department and the IRS maintained the de minimis rule from the final regulations under former section 199 because the 2018 Act directed that regulations concerning the section 199A(g) deduction be based on the regulations applicable to Cooperatives and their patrons under former section 199. The Treasury Department and the IRS considered changes in the de minimis provisions but determined that changing these from provisions that were previously available would lead to taxpayer confusion. Because the de minimis provision exempts taxpayers from having to perform certain allocations, the Treasury Department and the IRS do not have sufficient information on taxpayers' use of this exemption under former section 199 to perform a quantitative analysis of the impacts of the de minimis provision. The Treasury Department and the IRS solicit comments on the de minimis thresholds and particularly request comments that provide data, other evidence, and models that can enhance the rigor of the process by which such thresholds might be determined for the final regulations while maintaining consistency with the statute's directive that the thresholds be based on regulations issued under former section 199. iv. Reporting Requirements Proposed § 1.199A-7(c) and (d) provide that, when a patron conducts a trade or business that receives distributions from a Cooperative, the Cooperative is required to provide the patron with qualified items of income, gain, deduction, and loss and specified service trade or business (SSTB) determinations with respect to those distributions. This increases the compliance burden on such Cooperatives. However, in the absence of these proposed regulations, the burden for determination of the amount of distributions from a Cooperative that constitute qualified items of income, gain, deduction, and loss from a non-SSTB and an SSTB would lie with the patron. Because patrons are less well positioned to acquire the relevant information to determine whether distributions from a Cooperative are qualified items of income, gain, deduction, and loss and whether items that would otherwise qualify are from an SSTB, the Treasury Department and the IRS expect that these proposed regulations will reduce overall compliance costs relative to an alternative approach of not introducing a reporting requirement. v. Allocation Safe Harbor If a patron receives both qualified payments and payments that are not qualified payments in a qualified trade or business, the patron must allocate those items and related deductions using a reasonable method based on all of the facts and circumstances. The proposed regulations provide a safe harbor that allows patrons who receive qualified payments in addition to other income to use a simpler method to allocate business expenses and W-2 wages between qualified payments and other gross receipts to calculate the section 199A(b)(7) reduction to the section 199A(a) deduction. The safe harbor allocation method allows patrons to allocate by ratably apportioning business expenses and W-2 wages based on the proportion that the amount of qualified payments bears to the total gross receipts used to determine QBI. This safe harbor is available to patrons with taxable incomes below the threshold amounts set forth in section 199A(e)(2). The Treasury Department and the IRS considered an alternative of not allowing a safe harbor but determined that a safe harbor could reduce compliance costs and simplify tax filing. The threshold was set at amounts set forth in section 199A(e)(2) to avoid a proliferation of thresholds applicable to taxpayers claiming a section 199A(a) deduction. Because the threshold amounts are relatively low, the Treasury Department and the IRS expect that the safe harbor would not distort business decisions or reduce revenue to any meaningful extent. II. Paperwork Reduction Act The collections of information in these proposed regulations are in proposed § 1.199A-7(c)(3), (d)(3), (f)(3), and (h)(3), as well as proposed § 1.199A-8(d)(3), (f), and (h)(3). The collections of information in proposed § 1.199A-7(c)(3), (d)(3), (f)(3), and (h)(3), as well as proposed § 1.199A-8(d)(3) and (h)(3) will be conducted through Form 1099-PATR, while the collection of information in proposed § 1.199A-8(f) will be conducted through Schedule K-1 to Form 1065. In 2018, the IRS released and invited comments on the draft of Form 1065, Schedule K-1. The IRS received no comments on the form during the comment period. Consequently, the IRS made the form available December 6, 2018 for use by the public. On February 26, 2019, the IRS invited comments on Form 1099-PATR and the comment period closed on April 29, 2019. The IRS plans to issue in the near term an additional notice with a thirty-day comment period on Form 1099-PATR. The IRS is contemplating making additional changes to those two forms as discussed below in these proposed regulations. A. Collections of Information Conducted Through Form 1099-PATR The collection of information in proposed § 1.199A-7(c)(3) requires the Cooperative to inform its patron of the amount of any distribution to the patron that constitutes qualified items of income, gain, deduction, and loss from a non-SSTB conducted directly by the Cooperative. Not all distributions to patrons are qualified items of income, gain, deduction, and loss because the source of the distribution may not be effectively connected with the conduct of a trade or business within the United States or may include interest income that is not properly allocable to the patron's trade or business. The Cooperative directly conducting the trade or business from which the distribution to the patron originates is in the best position to know how much of the distribution is qualified items of income, gain, deduction, and loss. The Cooperative is also in the best position to know if it is generating income from an SSTB. Accordingly, the collection of information is necessary for the patron to calculate correctly the patron's section 199A(a) deduction for the patron's trade or business. The collection of information in proposed § 1.199A-7(d)(3) requires the Cooperative to inform its patron of the amount of any distributions to the patron that constitutes qualified items of income, gain, deduction, and loss from an SSTB conducted directly by the Cooperative. Accordingly, the collection of information is necessary for the patron to correctly calculate the patron's section 199A(a) deduction for the patron's qualified trade or business. The collection of information in proposed § 1.199A-7(f)(3) is essential for the eligible taxpayer's calculation of the reduction in the eligible taxpayer's section 199A(a) deduction for the eligible taxpayer's trade or business that is required by section 199A(b)(7). Section 199A(g)(2)(A) requires the Specified Cooperative to identify the amount of qualified payments being distributed to an eligible taxpayer and identify the portion of the deduction allowed in a notice mailed to the eligible taxpayer during the payment period described in section 1382(d). Section 199A(b)(7) provides that an eligible taxpayer who receives qualified payments from a Specified Cooperative must reduce the eligible taxpayer's section 199A(a) deduction by an amount set forth in this section. Without the notice described in proposed § 1.199A-7(f)(3), the eligible taxpayer cannot calculate the reduction required by section 199A(b)(7). The collection of information in proposed § 1.199A-8(d)(3) is necessitated by section 199A(g)(2)(A). Section 199A(g)(2)(A) permits a Specified Cooperative to pass through an amount of its section 199A(g) deduction to an eligible taxpayer. The amount of the section 199A(g) deduction that the Specified Cooperative is permitted to pass through is an amount that is allocable to the QPAI generated from qualified payments distributed to the eligible taxpayer and identified by such cooperative in a written notice mailed to such taxpayer during the payment period described in section 1382(d). Without the notice required in proposed § 1.199A-8(d)(3) the eligible taxpayer would not know that the Specified Cooperative is passing a portion of its section 199A(g) deduction to the eligible taxpayer. The collections of information in proposed §§ 1.199A-7(h)(3) and 1.199A-8(h)(3) are necessitated by a special transition rule in section 101 of the 2018 Act. Under this transition rule, the repeal of former section 199 for taxable years beginning after December 31, 2017, does not apply to a qualified payment received by a patron from a Specified Cooperative in a taxable year beginning after December 31, 2017, to the extent such qualified payment is attributable to QPAI with respect to which a deduction is allowable to the Specified Cooperative under former section 199 for a taxable year of the Specified Cooperative beginning before January 1, 2018. Such qualified payment remains subject to former section 199 and no deduction is allowed under section 199A(a) or (g) with respect to such qualified payment. Without these collections of information by the Specified Cooperative, the patron has no way of knowing that the patron is barred by the transition rule from using a qualified payment received that is QBI for the patron's trade or business to claim a section 199A(a) deduction for the patron's trade or business. The collections of information in proposed § 1.199A-7(c)(3), (d)(3), (f)(3), and (h)(3) as well as proposed § 1.199A-8(d)(3) and (h)(3) are satisfied by providing information about qualified items of income, SSTB determinations, qualified payments, the section 199A(g) deduction, and the use of qualified payments tied to the former section 199 deduction, as applicable, on an attachment to or on the Form 1099-PATR (or any successor form) issued by the Cooperative to the patron, unless otherwise provided by the instructions to the Form. For purposes of the Paperwork Reduction Act of 1995, (44 U.S.C. 3507(d)) (PRA), the reporting burden associated with proposed § 1.199A-7(c)(3), (d)(3), (f)(3), and (h)(3) as well as proposed § 1.199A-8(d)(3) and (h)(3) will be reflected in the PRA Submission associated with Form 1099-PATR (OMB control number 1545-0118). As further discussed in this section, the estimated number of respondents for the reporting burden associated with these information collections is 9,000 based on 2017 tax filings. B. Collections of Information Conducted Through Schedule K-1, Form 1065 The collection of information in proposed § 1.199A-8(f) is required by section 199A(g)(5)(B). This section allows a Specified Cooperative that is a partner in a partnership to use its allocable share of gross receipts and related deductions to calculate its section 199A(g) deduction. The proposed rules provide that the partnership must separately identify and report the allocable share of gross receipts and related deductions on or attached to the Schedule K-1 to the Form 1065 (or any successor form) issued to a Specified Cooperative partner, unless otherwise provided by the instructions to the Form. Without this reporting, the Specified Cooperative partner would not have the information necessary to calculate its section 199A(g) deduction from its activities with the partnership. The Schedule K-1 to the Form 1065 will be modified to include a mechanism to report the Specified Cooperative partner's allocable share of gross receipts and related deductions. The collection of information in proposed § 1.199A-8(f) is satisfied when the partnership provides the required information to its Specified Cooperative partners on or attached to the Schedule K-1 of Form 1065 (or any successor form), unless otherwise provided by the instructions to the Form. For purposes of the PRA, the reporting burden associated with proposed § 1.199A-8(f) will be reflected in the PRA Submission associated with Form 1065 (OMB control number 1545-0123). As provided in this section, the estimated number of respondents for the reporting burden associated with these information collections is 407 based on 2017 tax filings. C. Revised Tax Forms The revised tax forms are as follows: New Revision of existing form Number of respondents Form 1099-PATR ✓ 9,000 Schedule K-1 (Form 1065) ✓ 407 The current status of the PRA submissions related to the tax forms that will be revised as a result of the information collections in the proposed regulations is provided in the accompanying table. As described previously, the burdens associated with proposed § 1.199A-7(c)(3), (d)(3), (f)(3), and (h)(3) as well as proposed §§ 1.199A-8(d)(3) and (h)(3) will be included in the aggregated burden estimates for OMB control number 1545-0118, which represents a total estimated burden time of 509,895 hours and total estimated monetized costs of $44.733 million ($2018). The burdens associated with the information collection in proposed § 1.199A-8(f) will be included in the aggregated burden estimates for OMB control number 1545-0123, which represents a total estimated burden time for all forms and schedules of 3.157 billion hours and total estimated monetized costs of $58.148 billion ($2017). The overall burden estimates provided for 1545-0118 and 1545-0123 are aggregate amounts that relate to all information collections associated with the applicable OMB control number. No burden estimates specific to the forms affected by the proposed regulations are currently available. The Treasury Department and the IRS have not estimated the burden, including that of any new information collections, related to the requirements under the proposed regulations. Those estimates would need to capture both changes made by the 2018 Act and those that arise out of discretionary authority exercised in the proposed regulations. The Treasury Department and the IRS request comments on all aspects of information collection burdens related to the proposed regulations, including estimates for how much time it would take to comply with the paperwork burdens described above for each relevant form and ways for the IRS to minimize the paperwork burden. Proposed revisions to these forms that reflect the information collections contained in these proposed regulations will be made available for public comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.htm and will not be finalized until after these forms have been approved by OMB under the PRA. Form Type of filer OMB No.(s) Status Form 1099-PATR [Business (Legacy Model)] 1545-0118 Existing collection of information approved by OIRA on 6/3/2016. Public comments will be sought on a revised collection of information that will be submitted for OIRA review before 6/30/2019. Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201602-1545-024. Form 1065, Schedule K-1 Business (NEW Model) 1545-0123 Published in the Federal Register on 10/11/18. Public Comment period closed on 12/10/18. Approved by OIRA on 12/21/18. Link:https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd. III. Regulatory Flexibility Act As described in more detail in this section, pursuant to the Regulatory Flexibility Act (RFA), 5 U.S.C. chapter 6, the Treasury Department and the IRS hereby certify that these proposed regulations will not have a significant economic impact on a substantial number of small entities. Notwithstanding this certification, the Treasury Department and the IRS invite comments on any impact this rule would have on small entities. A. Proposed § 1.199A-7(c)(3) and (d)(3) Although proposed § 1.199A-7(c)(3) and (d)(3) will have an impact on a substantial number of small entities, the economic impact will not be significant. The IRS creates the Business Master File which contains data from Form 1120-C, U.S. Income Tax Return for Cooperative Associations. According to the Business Master File data, in 2017, the IRS received approximately 9,000 Forms 1120-C from Cooperatives. Under the North American Industry Classification System (NAICS), a Cooperative is considered a small entity if it has less than $750,000 in annual gross receipts. Approximately 4,050 (45 percent) of the 9,000 filers of Forms 1120-C reported annual gross receipts of less than $750,000. Therefore, a substantial number of small entities are affected by the requirements in proposed § 1.199A-7(c)(3) and (d)(3). Proposed § 1.199A-7 provides rules similar to those provided in § 1.199A-6. In § 1.199A-6, relevant passthrough entities (RPEs) are not permitted to take the section 199A deduction but are required to determine and report the information necessary for their direct and indirect owners to determine their individual section 199A(a) deductions. Section 1.199A-6 requires RPEs to determine and report on or attach to the RPEs' Schedule K-1s to the Form 1065 for each trade or business in which the RPE was directly engaged four items: (1) The amount of QBI, (2) W-2 wages, (3) UBIA of qualified property, and (4) SSTBs. Although Cooperatives are not RPEs, Cooperatives make distributions to patrons that such patrons are permitted to include in calculating their individual section 199A(a) deductions. Proposed § 1.199A-7(c) and (d) require the Cooperatives to determine and report to their patrons whether the distributions for which the Cooperatives take deductions under section 1382(b) and/or (c)(2), as applicable, constitute qualified items of income, gain, deduction, and loss and whether they are from an SSTB in which the Cooperative was directly engaged. In TD 9847 the Treasury Department and the IRS determined that the reporting burden in § 1.199A-6 was estimated at 30 minutes to 20 hours, depending on individual circumstances, with an estimated average of 2.5 hours for all affected entities, regardless of size. The burden on entities with business receipts below $10 million was expected to be at the lower end of the range (30 minutes to 2.5 hours). The estimated compliance burden for passthrough entities that issue Schedules K-1 is $53 per hour. This estimate was derived from the Business Taxpayer Burden model developed by the IRS's Office of Research, Applied Analytics, and Statistics (RAAS), which relates time and out-of-pocket costs of business tax preparation, derived from survey data, to assets and receipts of affected taxpayers along with other relevant variables. See Tax Compliance Burden (John Guyton et al., July 2018) at https://www.irs.gov/pub/irs-soi/d13315.pdf. Thus, the annual aggregate burden on businesses with gross receipts below $10 million was estimated to be between $19.50 and $132.50 per business. The Treasury Department and the IRS determined in TD 9847 that the requirements in § 1.199A-6 imposed no significant economic impact on affected entities. The reporting requirements under proposed § 1.199A-7(c)(3) and (d)(3) require Specified Cooperatives to report only two of the four pieces of information RPEs are required to report under proposed § 1.199A-6: The amount of qualified items of income, gain, deduction, and loss and whether the distributions are from an SSTB in which the Cooperative was directly engaged. The burden imposed by proposed § 1.199A-7(c)(3) and (d)(3) only occurs when a Cooperative has net income that it may distribute to its patrons such that the income will qualify for the income tax deductions under section 1382(b) and/or (c), as applicable. With respect to this net income, Cooperatives already know the source of their income and deductions without which information they would not be able to determine the correct distributions to their patrons and to claim the income tax deduction for these distributions under section 1382(b) and/or (c)(2), as applicable. Finally, assuming that the approximately 4,050 filers of Forms 1120-C that reported annual gross receipts of less than $750,000 in 2017 and that each business incurred half of the higher figure of $132.50 ($66.25) determined for the § 1.199A-6 regulations to satisfy the reporting requirements under proposed § 1.199A-7(c)(3) and (d)(3), the annual burden imposed by the reporting requirements would not exceed $66.25 per business. Accordingly, the Treasury Department and the IRS conclude that the requirements in proposed § 1.199A-7(c)(3) and (d)(3) will not impose a significant economic impact on small entities. B. Proposed § § 1.199A-7(h)(3) and 1.199A-8(h)(3) Although proposed §§ 1.199A-7(h)(3) and 1.199A-8(h)(3) will have an impact on a substantial number of small entities, this economic impact will not be significant. As previously noted, in 2017, approximately 45 percent of Cooperatives reported on Forms 1120-C gross receipts of less than $750,000. Therefore, a substantial number of small entities are affected by proposed §§ 1.199A-7(h)(3) and 1.199A-8(h)(3). Proposed §§ 1.199A-7(h)(3) and 1.199A-8(h)(3) requires Cooperatives to notify patrons if, pursuant to the transition rule in section 101 of the 2018 Act, the patron is barred from using certain qualified payments from a Cooperative to claim a section 199A(a) deduction in a taxable year because these qualified payments are attributable to QPAI with respect to which a deduction is allowable to the Cooperative under former section 199 in a taxable year beginning before January 1, 2018. The Cooperative knows which patrons are impacted since, in order to claim its deduction under former section 199, the Cooperative must identify which qualified payments to use. The Treasury Department and the IRS estimate that the annual burden imposed by the requirement in proposed §§ 1.199A-7(h)(3) and 1.199A-8(h)(3) will be far less than the $66.25 per business estimated for the requirements in proposed §§ 1.199A-7(c)(3) and 1.199A-8(c)(3) discussed above, since the Cooperatives know which patrons are impacted and the reporting is limited to informing these patrons that they cannot use such qualified payments to calculate their section 199A(a) deduction. In addition, absent notice from the Cooperatives, patrons would have no way of determining whether they were barred from claiming the section 199A(a) deduction using such qualified payments. Finally, Cooperatives are not able to claim a deduction under former section 199 for taxable years beginning after December 31, 2017. Therefore, the reporting required by proposed §§ 1.199A-7(h)(3) and 1.199A-8(h)(3) will be for a short duration and have a limited impact on Cooperatives. Accordingly, for all these reasons, the requirements in proposed §§ 1.199A-7(h)(3) and 1.199A-8(h)(3) will not impose a significant economic impact on small entities. C. Proposed §§ 1.199A-7(f)(3) and 1.199A-8(d)(3) Sections 1.199A-7(f)(3) and 1.199A-8(d)(3) will not have a significant economic impact on a substantial number of small entities. This claim is based on the fact that this rulemaking will impact a population of Specified Cooperatives, only a small percentage of which are considered small entities. According to the Business Master File filing data from the transcribed fields from the Forms 1120-C for 2017, of the approximately 9,000 Forms 1120-C filed by Cooperatives, approximately 2,000 filers identified their Cooperatives as involving agriculture or horticulture using the NAICS. As noted previously, a Cooperative is considered small if it reports less than $750,000 in annual gross receipts. Of the 2,000 filers of Forms 1120-C identifying as Specified Cooperatives, only 175 filers (less than 1 percent) reported annual gross receipts of less than $750,000. Accordingly, proposed §§ 1.199A-7(f)(3) and 1.199A-8(d)(3) will not impose a significant economic impact on a substantial number of small entities. D. Proposed § 1.199A-8(f) Although proposed § 1.199A-8(f) will have an impact on a substantial number of small entities, this impact will not be economically significant. According to the Business Master File filing data from the transcribed fields from the Forms 1065 for 2017, the IRS estimates that there were 3,954,000 partnerships reporting their partners' share of partnership items on Schedules K-1 (Form 1065). The IRS also identified approximately 407 different partnerships that issued a Schedule K-1 to 680 different Cooperatives in 2017. The IRS does not have information as to whether the 680 Cooperatives all qualified as Specified Cooperatives. Of the 407 different partnerships, the IRS determined that 344 of the partnerships conducted activities in 2017 that would have required the partnerships to file under proposed § 1.199A-8(f). The IRS does not have sufficient data to determine the type of business activities of the remaining 63 partnerships. To be as comprehensive and transparent as possible in analyzing the potential impact of the proposed regulations, it is assumed that all 63 of these partnerships would be required to file under proposed § 1.199A-8(f) and would be considered small entities. Of the 344 partnerships identified as having both issued a Schedule K-1 to a Cooperative and conducting eligible activities in 2017, the IRS determined that 158 of these partnerships conducted activities for which the Small Business Administration (SBA) uses the number of employees to determine if an entity is a small entity using the NAICS. The IRS determined that 153 of these 158 partnerships would be small entities, while five would not be small entities based on the reported number of Forms W-2 filed in connection with the Forms 1065 the partnerships filed in 2017. The SBA uses income to determine if an entity is a small entity for the reported business activities of the remaining 186 partnerships using the NAICS. Based upon the reported income for 2017, 140 of the remaining 186 partnerships are small entities, while 46 partnerships are not small entities. Therefore, a substantial number of small entities are affected by requirements in proposed § 1.199A-8(f). The economic impact of proposed § 1.199A-8(f), however, will not be significant because the information required to be reported is gross receipts and related deductions. This information is readily available to each partnership and already known for the purpose of determining tax obligations. Because the information required to be reported is already available and familiar to each partnership, the reporting required by proposed § 1.199A-8(f) will not impose a significant economic impact on small entities. Accordingly, the Treasury Department and the IRS hereby certify that the proposed regulations will not have a significant economic impact on a substantial number of small entities. We invite public comments with respect to this conclusion. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. IV. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2018, that threshold is approximately $150 million. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. V. Executive Order 13132: Federalism Executive Order 13132 (titled Federalism ) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This proposed rule does not have federalism implications, and does not impose substantial direct compliance costs on state and local governments or preempt state law, within the meaning of the Executive Order. Comments and Requests for a Public Hearing The Treasury Department and the IRS request comments on all aspects of the proposed rules. Before these proposed regulations are adopted as final regulations, consideration will be given to any written or electronic comments that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person who timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register . Statement of Availability of IRS Documents IRS Revenue Procedures, Revenue Rulings, Notices and other guidance cited in this document are published in the Internal Revenue Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. Drafting Information The principal author of these proposed regulations is Theresa Melchiorre, Office of Associate Chief Counsel (Passthroughs and Special Industries). Other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Withdrawal of Notice of Proposed Rulemaking Accordingly, under the authority of 26 U.S.C. 7805, the notice of proposed rulemaking (REG-136459-09) published in the Federal Register (80 FR 51978) on August 27, 2015, is withdrawn. Proposed Amendments to the Regulations Accordingly, 26 CFR parts 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by: 1. Removing the entries for §§ 1.199-0 through 1.199-9, and 2. Adding entries in numerical order to read in part as follows: Authority: 26 U.S.C. 7805. Section 1.199A-7 also issued under 26 U.S.C. 199A(f)(4) and (g)(6). Section 1.199A-8 also issued under 26 U.S.C. 199A(g)(6). Section 1.199A-9 also issued under 26 U.S.C. 199A(g)(6). Section 1.199A-10 also issued under 26 U.S.C. 199A(g)(6). Section 1.199A-11 also issued under 26 U.S.C. 199A(g)(6). Section 1.199A-12 also issued under 26 U.S.C. 199A(g)(6). §§ 1.199-0 through 1.199-9 [Removed] Par. 2. Sections 1.199-0 through 1.199-9 are removed. Par. 3. Sections 1.199A-7 through 1.199A-12 are added to read as follows: Sec. 1.199A-7 Section 199A(a) Rules for Cooperatives and their Patrons. 1.199A-8 Deduction for income attributable to domestic production activities of specified agricultural or horticultural cooperatives. 1.199A-9 Domestic production gross receipts. 1.199A-10 Allocation of costs of goods sold (COGS) and other deductions to domestic production gross receipts (DPGR), and other rules. 1.199A-11 Wage limitation for the section 199A(g) deduction. 1.199A-12 Expanded affiliated groups. § 1.199A-7 Section 199A(a) Rules for Cooperatives and their Patrons. (a) Overview —(1) In general. This section provides guidance and special rules on the application of the rules of §§ 1.199A-1 through 1.199A-6 regarding the deduction for qualified business income (QBI) under section 199A(a) (section 199A(a) deduction) of the Internal Revenue Code (Code) by patrons (patrons) of cooperatives to which Part I of subchapter T of chapter 1 of subtitle A of the Code applies (Cooperatives). Unless otherwise provided in this section, all of the rules in §§ 1.199A-1 through 1.199A-6 relating to calculating the section 199A(a) deduction apply to patrons and Cooperatives. Paragraph (b) of this section provides special rules for patrons relating to trades or businesses. Paragraph (c) of this section provides special rules for patrons and Cooperatives relating to the definition of QBI. Paragraph (d) of this section provides special rules for patrons and Cooperatives relating to specified service trades or businesses (SSTBs). Paragraph (e) of this section provides special rules for patrons relating to the statutory limitations based on W-2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified property. Paragraph (f) of this section provides special rules for specified agricultural or horticultural cooperatives (Specified Cooperatives) and paragraph (g) of this section provides examples for Specified Cooperatives and their patrons. Paragraph (h) of this section sets forth the applicability date of this section and a special transition rule relating to Specified Cooperatives and their patrons. (2) At patron level. The section 199A(a) deduction is applied at the patron level, and patrons who are individuals (as defined in § 1.199A-1(a)(2)) may take the section 199A(a) deduction. (3) Definitions. For purposes of section 199A and § 1.199A-7, the following definitions apply— (i) Individual is defined in § 1.199A-1(a)(2). (ii) Patron is defined in § 1.1388-1(e). (iii) Patronage and nonpatronage is defined in § 1.1388-1(f). (iv) Relevant Passthrough Entity (RPE) is defined in § 1.199A-1(a)(9). (v) Qualified payment is defined in § 1.199A-8(d)(2)(ii). (vi) Specified Cooperative is defined in § 1.199A-8(a)(2) and is a subset of Co [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-11501. Public record. Not legal advice.