LTR 201141007 rules that a domestic corporation (Finco) owned by the independent, mostly foreign, “members” of a global services company will be operated on a cooperative basis in providing treasury services to the patrons. Therefore, Finco and the foreign patrons apparently will enjoy these U.S. tax benefits:

  • Finco will deduct patronage dividends, paid and thus can operate as a “bank” that is, in effect, mostly tax exempt.
  • Under Rev. Rul. 66-53, foreign patrons of a domestic co-op are not doing business in the United States.
  • The patronage refunds are FDAP income for Section 1441 withholding purposes.
  • Being FDAP does not depend on the co-op having earnings and profits and the refund qualifying as a Section 316 dividend.
  • The patronage refunds probably are U.S. source.
  • The patronage refunds usually are dividends for purposes of treaty withholding rate reduction. See article by Cummings and Shakow at 128 DTR J-1 (2010).

But the only point the IRS ruled on was that Finco will operate on a cooperative basis.


The facts do not state that the taxpayer group is an accounting firm, but it does refer to “practices,” and says the members provide services, that there are quality control issues, local ownership and organization is needed and some sort of brand name collaboration is involved—so if it is not an accounting firm, it is something like that.

Evidently, the local practices have up to now mostly managed their own finances, although a parent level entity has provided some finance services. Now, however, the members will all capitalize a cooperative, Finco, a U.S. corporation, which will borrow from commercial lenders if necessary and essentially bank the patrons.

In a very wordy ruling, the IRS recites extensive explanation by the taxpayer as to why and how it will provide efficiencies of scale and other savings by essentially eliminating the banking relationships of the members in their home countries and funneling all of their financial activities through Finco.

The ruling disavows any intent or need of Finco to be licensed or otherwise treated as any sort of financial institution for either general law or tax purposes. To the extent Finco cannot totally replace the patrons’ local banks, it will “manage” their banking relationships.

The ruling states: “Through Finco, the Member Firms will collectively become a significant, well-organized global client for lenders instead of a confusing, decentralized group of nationally-based ones. Finco should be able to negotiate better terms and rates than can be negotiated by most Member Firms, lowering the total cost of borrowing. Reducing the number of bank relationships should reduce the time, inconvenience and legal expense currently resulting from dealing with banks. Equally important, Finco should be able to better manage the size of credit lines by consolidating the lines, significantly reducing the commitment fees and other costs currently being paid on a collective basis by Member Firms for credit lines that go unused.”


Not only does the statement of facts in the ruling go to unusual lengths to justify the financing plan, but the analysis in the ruling of the law is unusually complete. Its focus is to prove that a domestic cooperative can be owned by foreign patrons. This pattern — domestic co-op, foreign patrons—appears to be growing in use. It combines the signal feature of the co-op — avoiding the two-tier C corporation tax regime — with the possibility of reduction of even the one level of taxation through treaty rate reductions and other features of the taxation of foreign patrons.


The cooperative should be considered by international corporate groups, whether loosely affiliated like a global services firm, or a group of actually affiliated corporations.