internal_revenue_service number release date index number ------------------- ------------------------ ---------------------------- ------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no ---------- telephone number --------------------- refer reply to cc psi b05 plr-137140-10 date date legend taxpayer -------------------------------------------------------------------- ---------------------------- state a area dear ------------------ ------ --------------------------------------------------- this is in response to a request for rulings dated date submitted by your authorized representative the rulings concern the interplay of the rules in subchapter_t of the internal_revenue_code concerning the taxation of cooperatives and their patrons and the calculation of the sec_199 deduction for certain cooperatives contained in sec_199 taxpayer is a farmers’ cooperative organized under the state a cooperative law taxpayer is a local grain marketing and farm supply cooperative headquartered in state a taxpayer serves farmers through a network of --------- facilities located in area taxpayer markets grain for its farmer members and for others during its fiscal_year ended ------------------------- ------- taxpayer’s grain sales totaled approximately dollar_figure- --------million taxpayer markets principally corn soybeans and wheat in addition taxpayer provides its members and others with a broad range of supplies used in farming - including principally agronomy products fertilizer farm chemicals seed energy products propane diesel_fuel gasoline fuel oil etc feed and general farm supplies during ------- taxpayer’s supply sales totaled approximately dollar_figure--- million plr-137140-10 taxpayer’s members must be producers ie farmers or cooperative associations of producers who do business with taxpayer taxpayer currently has approximately --------members taxpayer pays patronage_dividends to members and to other persons with whom the association by written_agreement does business on a cooperative basis these other persons are referred to in this ruling as other participating patrons taxpayer does not have any persons who qualify as participating patrons at the present time taxpayer does not pay patronage_dividends to other nonmembers taxpayer is organized and operated on a cooperative basis state a has a special law for the incorporation of cooperative associations known as the state a cooperative law state a revised code chapter ------- the state a cooperative law provides that associations organized under the act shall be corporations that are deemed nonprofit because they are not organized for the purpose of making a profit for themselves as such or for the purpose of making a profit for their members as such but for their members as patrons section -------------- the state a cooperative law provides that cooperative associations shall distribute their earnings on a patronage basis a an association may pay dividends annually on its capital stock all of its other net_income from business with or for members and other eligible patrons less reserves which shall be provided for in the bylaws or other written agreements shall be distributed to its members and other eligible patrons on the basis of patronage as provided in the bylaws or other written agreements section ---------------- taxpayer’s articles of incorporation describe taxpayer’s purpose as follows purpose the purpose of the association is to associate producers and others to provide them economic benefit through joint action in procuring supplies services and equipment and in marketing products that they produce the primary purpose and general nature of its business shall be to market grain and to procure crop and livestock production inputs and related_services supplies and equipment for its members and other persons sec_3_1 taxpayer is organized with capital stock sec_4 it has one class of common_stock and two classes of preferred_stock class a preferred and class b preferred sec_4 the common_stock is membership stock sec_4 and only producers and cooperative associations of producers are eligible to be members and to own common_stock sec_4 a for this purpose plr-137140-10 ‘producer’ means a person engaged in the production of agricultural products for the market including lessor of property used for the production of agricultural products for the market who receive as rent part of the agricultural product ‘cooperative’ means a producer-controlled entity that is operated on a cooperative basis sec_4 a each voting member must one at least one share of common_stock the common_stock has a par_value of dollar_figure per share sec_4 holders of common_stock are not entitled to receive dividends with respect to the shares sec_4 c the articles of incorporation provide that only members are entitled to vote and that each member has one vote member voting the members shall be entitled to exercise all of the voting control of the association each member of the association shall be entitled to one vote in any matter submitted to a vote of the members ownership of capital stock or other equity interests shall not otherwise confer upon the holder any other voting rights in the association except that affected stockholders shall be entitled to notice and participation in matters to be decided by the members to the extent provided in the state a cooperative law absentee votes may be cast as provided in the bylaws sec_5 the remaining classes of stock class a preferred and class b preferred have a par_value of dollar_figure per share and dollar_figure per share respectively sec_4 shares of class a preferred may be issued in series and may bear either a noncumulative or cumulative dividend not to exceed -- percent of par_value per annum sec_4 b and a holders of class b preferred shares are entitled to a noncumulative dividend of not more than -- percent of par_value per annum sec_4 b historically this stock traces back to stock issued by taxpayer and its predecessors to provide capital needed for the business the par values of the outstanding class a preferred shares and class b shares were dollar_figure----------and dollar_figure----------- respectively at ------ ------------------------ taxpayer’s articles of incorporation provide that its net_earnings shall be distributed on a cooperative basis as provided in its bylaws patronage refunds the net margins savings of the association in excess of ‘association net margins’ shall be distributed as ‘patronage refunds’ to ‘patrons’ annually on the basis of ‘patronage transactions’ all as defined and provided for in the bylaws sec_4 article seven of taxpayer’s bylaws provides a detailed description of how taxpayer computes and pays patronage refunds article seven begins with the following general statement plr-137140-10 cooperative operation the association shall be operated upon a cooperative basis the patrons of the association are members doing business with the association on a cooperative basis and other persons with whom the association by written_agreement does business on a cooperative basis each transaction conducted on a cooperative basis between the association and a patron shall be a patronage transaction and shall include as part of its terms each provision of the articles and bylaws whether referred to in the transaction or not each patron shall be entitled to patronage refunds as provided in these bylaws section the computation of patronage refunds begins with a determination of net margins from all of taxpayer’s business patronage and nonpatronage for the fiscal_year section a and b amounts deducted in that determination of net margins include additions to reserves and other charges including the amount of income and other taxes section b then taxpayer is required to deduct i the amount declared by the board for dividends and ii the net margins attributable to sources other than patronage transactions section a and amounts held back for dividends are subtracted out of net margins from nonpatronage sources to the extent thereof section a if earnings from nonpatronage sources exceed the amounts required to be retained then any excess nonpatronage earnings are also set_aside in the capital reserve section a taxpayer refers to the amounts required to be retained for these purposes as the association net margins section a taxpayer’s bylaws then provide patronage refunds the balance of net margins after deduction of b the association net margins shall be the patrons net margins the patrons net margins shall belong and be allocated to the patrons on the basis of their respective patronage transactions section b this section of the bylaws goes on to provide that taxpayer may pay patronage_dividends based upon allocation units patronage refunds may be allocated on the basis of the patrons’ respective patronage transactions with and the net margins that resulted from the operations of such divisions or departments of the association as the board deem fair and equitable to the patrons section b taxpayer allocates patronage_dividends upon the basis of two allocation units - one for grain marketing and the second for supplies patrons net margins attributable to the grain allocation unit are allocated among members and other participating patrons marketing their grain through taxpayer based upon bushels patrons net margins attributable to the supplies unit are allocated among the members and other participating patrons doing business with the unit based upon their dollars of purchases plr-137140-10 section a of the bylaws authorizes taxpayer to pay patronage refunds in cash capital stock or capital credits or any combination thereof taxpayer historically has paid its patronage_dividends in a combination of cash and capital credits for taxpayer paid its patronage dividend-----percent in cash and ------- percent in capital credits capital credits are authorized in taxpayer’s articles of incorporation and described as follows capital credits the association may issue scrip to be known as ‘capital credits’ representing ownership of a stated portion of the association’s capital capital credits shall be assigned a ‘stated value’ equal to such stated portion of the association’s capital capital credits may be issued as evidence of patronage refunds as defined and provided for in the bylaws or as evidence of dividends on capital stock or for any other purpose for which an equity_interest in the association may be issued sec_4 dividends are not paid with respect to capital credits articles of incorporation sec_4 c in the event of dissolution article of taxpayer’s articles of incorporation provides that creditors shall first be paid any assets then remaining are to be distributed first to the holders of class a preferred_stock an amount equal to the par_value of their shares second to the holders of the class b preferred_stock an amount equal to par_value of their shares and third to the holders of common_stock and capital credits in an amount equal to par_value of their shares and the stated_value of their capital credits any remaining property is then to be shared by the member patrons on the basis of their respective aggregate patronage transactions over the previous ten years as shown by the records of the association this ruling relates to taxpayer’s grain marketing activities taxpayer operates --- -------grain elevators located strategically across the territory it serves it purchases grain from its members at the elevators for marketing on a cooperative basis from the elevators grain can be shipped by truck or rail the storage capacity of taxpayer’s grain elevators is approximately -----million bushels taxpayer also purchases some grain from its members and others for sale directly to several large customers in the case of direct sales the grain generally is delivered by members at taxpayer’s direction directly to the customers’ facilities and taxpayer is not involved in handling the grain taxpayer sells grain to livestock producers for feed to grain processors to be used to produce ethanol and other products to soybean processors to be crushed and sold as soybean meal oil and other further refined products and to others for resale both domestically and in the export market plr-137140-10 taxpayer’s grain business consists of buying grain from members and others handling and storing the grain at its elevators and then selling the grain to terminal grain elevators grain processors feed lots grain exporters and others a small amount of grain is sold by taxpayer direct to customers the issue in this ruling relates to the characterization for purposes of subchapter_t of the code and sec_199 of payments referred to in this ruling as grain payments that taxpayer makes to members and other participating patrons when it acquires their grain for marketing on a patronage basis for purposes of this ruling grain payments do not include any amounts paid to persons not entitled to share in patronage_dividends for purposes of this ruling grain payments also do not include patronage_dividends paid to members with respect to grain marketed for them taxpayer does not operate on a pooling basis thus taxpayer’s grain marketing proceeds are not shared equally on the basis of patronage and distributed in the form of harvest advances and progress payments with a final settlement after the pool closes as they would be if taxpayer pooled commodity price risk does not automatically shift from taxpayer’s members to a pool at the time of harvest rather that risk remains with members until they sell their grain to taxpayer for marketing taxpayer pays each member a market price for his or her grain what that market price is depends upon where when and how a member chooses to sell his or her grain to taxpayer grain farmers historically have retained the decision of when and how to sell their grain and to choose whether to sell their grain to a cooperative for marketing on a patronage basis or to a commercial grain company farmers have a variety of alternatives when they sell their grain to taxpayer the choices are similar to those offered farmers by commercial grain companies though of course commercial grain companies do not market grain on a patronage basis and do not pay patronage_dividends the market price paid for grain is determined without regard to the actual net_proceeds realized by taxpayer from marketing the grain payments are made in cash by check and occur throughout the year as members sell grain to taxpayer for marketing and are paid pursuant to the terms of their grain contracts after purchasing grain from members taxpayer then markets each member’s grain along with the grain of all of its other members in the manner that it judges will produce the best return after year end when net_earnings for the year have been determined taxpayer pays a patronage_dividend to its members and other participating patrons with respect to the grain they market through taxpayer the basic choices available to a farmer selling grain to taxpayer for marketing on a cooperative basis are i to sell the grain for taxpayer’s current cash bid price ii to sell the grain to taxpayer using a forward_contract and iii to sell the grain to taxpayer using a deferred price or a deferred payment contract plr-137140-10 one way for a member to sell grain to taxpayer for marketing is to sell the grain to taxpayer and to be paid the cash bid price typically a country elevator’s cash bid price for a commodity is the nearby futures price in a specified reference market where the commodity is actively_traded eg the chicago board_of trade the minneapolis grain exchange of the kansas city board_of trade plus or minus a fixed spread referred to as the basis set from time to time by the elevator based upon local market conditions thus the cash bid price at a country elevator reflects the condition of the overall market for grain the futures price and the condition of the local market for grain the basis an elevator’s cash bid price changes during the course of each day as the reference futures price fluctuates it also changes though not as often as the elevator adjusts the basis the bid prices are delivered prices at one of taxpayer’s elevators for grain of normal merchantable quality farmers are responsible for the costs of delivering the grain to the elevator grain is tested when it is delivered the grain price is subject_to adjustment if the grain is below normal quality standards provided the grain is still of acceptable quality grain prices constantly fluctuate while basis does not fluctuate as dramatically as the futures prices it also is variable as a result of changes in the markets the bid price schedule at country elevators changes from hour to hour and day to day the bids posted on taxpayer’s website are updated twice a day when a farmer sells grain to taxpayer in a spot sale at the cash bid price a grain settlement document is produced identifying the kind amount and quality of the grain delivered the price per bushel any applicable discounts or other charges and the net amount due to the farmer there is an adjustment for shrink when grain is dried the volume is reduced and a charge for drying the grain the farmer does not immediately sell the grain but rather stored the grain in one of taxpayer’s elevators and there is a charge for storage a member can deliver and sell grain to taxpayer at the cash bid price at the time of harvest delivering the grain directly from the field however it usually is not advantageous for farmers to sell then since prices often are lowest at harvest many farmers have the capacity to store grain on their farm and so can wait until later when they think that the cash bid price is right to deliver and sell their grain to taxpayer other farmers deliver grain to taxpayer for storage not for immediate sale the farmers retain ownership of the grain in the elevator and pay storage fees to taxpayer later when a farmer believes the cash bid price is right he or she can sell the grain to taxpayer for marketing on a cooperative basis a member has the option of entering into a forward_contract to sell his or her grain to taxpayer this is a common way for members to sell their grain to taxpayer forward contracts call for delivery of a specified quantity and quality of grain at a plr-137140-10 specified location during a specified time period forward contracts can be entered into before the grain is planted while it is growing or after harvest while the grain is being stored on the farm or in an elevator forward contracts can be priced in a variety of ways many contracts provide for a fixed price sometimes referred to as a flat price farmers interested in entering into a forward_contract with taxpayer can determine the fixed price taxpayer is willing to pay at any time at any of its locations for delivery at various times in the future from taxpayer’s bid schedules for grain for future delivery or by contacting taxpayer typically a country elevator’s bid price for future delivery is determined in a manner similar to the way the cash bid price is determined however when the bid price is for future delivery it is based upon the nearby futures price for the time specified for delivery plus or minus the basis set by the country elevator for that delivery month the bid price for future delivery changes during the course of each day as the specified reference_price fluctuates it also changes as the country elevator adjusts its basis farmers also can enter into forward contracts where the pricing is left open for future determination for instance the contracts may fix the basis and leave the futures price open to be determined based upon the futures price at the time chosen by the farmer before a specified date in the future a farmer who believes that basis levels are strong but that futures prices could improve might use this kind of pricing alternatively the contracts may specify the futures price and leave the basis open to be determined based upon the elevator’s basis for delivery during the future month at the time chosen by the farmer before a specified date in the future this kind of pricing is used if the futures price meets the farmer’s objective but he or she believes that the basis will improve members have the option to deliver grain to taxpayer leaving the determination of the price partly or wholly open contracts of this sort are called by various names - deferred price contracts delayed price contracts credit-sale contracts etc under a delayed price contract ownership of the grain passes from the farmer to taxpayer at the time of delivery farmers are given the opportunity to wait until later to price the grain when the farmer chooses to price the contract the cooperative’s then current bid price is used to fill the open price term once the price is determined the member is paid some farmers prefer to sell their grain to taxpayer on a deferred payment basis grain sold on that basis might be delivered in october the price set at that time but plr-137140-10 with payment to be made in january ownership of the grain passes to taxpayer when the grain is delivered the variety of options available to farmers for selling their grain to taxpayer and other grain companies provide farmers with a great deal of flexibility farmers can lock in prices for their crops even before the crops are planted or while the crops are growing at any time if they think that the price is right by using fixed price forward contracts some farmers prefer to do so after they can estimate the costs of production to lock in a reasonable margin the simplest way to do this is to enter into a fixed price purchase contract if a farmer is happy with the futures price but not the basis the farmer can enter into a basis purchase contract if a farmer is happy with the basis but not the futures price the farmer can enter into a futures cash purchase contract if farmers think that the cash price is low at the time of harvest they can harvest and store their crops either on the farm if they have on-farm storage or at one of taxpayer’s elevators while waiting for the price to improve they can then sell that grain to taxpayer when they think the price is right at the current cash bid price alternatively farmers can deliver the crops to taxpayer at the time of harvest and enter into a delayed price purchase contract keeping the pricing open less delayed price fees these choices are available to all members marketing their grain on a cooperative basis through taxpayer because of these choices two neighbors that market the same quantity and quality of a particular kind of grain through taxpayer during any year will receive different grain payments depending upon where when and how they sell their grain to taxpayer however they will each receive the same patronage_dividend for the fiscal_year ended --------------------------taxpayer made grain payments to members and other participating patrons of approximately dollar_figure--- million taxpayer paid patronage_dividends to members and other participating patrons with respect to that year of approximately dollar_figure-----million of which approximately dollar_figure-----million was paid with respect to grain business in the past taxpayer has treated grain payments made in cash to members as purchases for tax purposes and reported them on schedule a line of its form 1120-c taxpayer did not report grain payments made in cash as per-unit retain allocations paid in money and therefore did not report them on schedule a line 4b of its form 1120-c taxpayer reported the patronage_dividends paid to members in money and qualified written notices of allocation on schedule h line sec_3a and sec_3b of its form 1120-c plr-137140-10 because of this reporting grain payments paid in cash have entered into the determination of taxpayer’s cost_of_goods_sold for tax purposes as is customary in the grain business taxpayer values grain inventories at year end at market for financial statement and tax purposes in prior years taxpayer has not added back grain payments in its sec_199 domestic_production_activities_deduction computations for prior years nor has it passed any portion of its sec_199 deduction through to members recent developments have caused taxpayer to reconsider how it should treat grain payments for purposes of its sec_199 computation taxpayer is seeking confirmation that all grain payments to members and other participating patrons should be classified as per-unit retain allocations paid in money taxpayer plans to disregard grain payments made to members and other participating patrons for purposes of its sec_199 computation taxpayer does not currently plan to make any change in the manner it accounts for inventories for tax purposes thus the timing of the deduction of its grain payments will not be changed but it does plan to treat grain payments deducted on its return as per-unit retains paid in money for sec_199 computation purposes taxpayer will make certain that it does not exclude or deduct grain payments twice on its tax_return and that it does not add back grain payments twice in its sec_199 computation taxpayer may retain all pass through all or retain part and pass through part of its sec_199 deduction based on the foregoing taxpayer requests the following rulings grain payments to members and other participating patrons constitute per-unit retain allocations paid in money within the meaning of sec_1382 of the code for purposes of computing its sec_199 domestic_production_activities_deduction taxpayer’s qualified_production_activities_income and taxable_income should pursuant to sec_199 of the code be computed without regard to any deduction for grain payments to members and other participating patrons nonexempt subchapter_t cooperatives are permitted to exclude or deduct distributions to patrons that qualify as per-unit retain allocations or patronage_dividends provided the distributions otherwise meet the requirements of subchapter_t of the code sec_1388 of the code defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of subchapter_t applies to a patron with respect to products marketed for him the amount of which is fixed without reference to net_earnings of the organization pursuant to an agreement between the organization and the patron plr-137140-10 per-unit retain allocations may be made in money property or certificates per- unit retain allocations paid in money and in property are excludable or deductible under sec_1382 of the code per-unit retain allocations paid in certificates are deductible under sec_1382 if the certificates are qualified if the certificates are nonqualified the cooperative is permitted a deduction under sec_1382 or a tax_benefit figured under sec_1383 when the certificates are later redeemed sec_1388 of the code provides that the term patronage_dividend means an amount_paid to a patron by a cooperative on the basis of the quantity or value of business done with or for such patron sec_1388 provides that a patronage_dividend is an amount_paid under an obligation that must have existed before the cooperative received the amount so paid sec_1388 provides that patronage_dividend means an amount_paid to a patron that is determined by reference to the net_earnings of the cooperative from business done with or for its patrons that section further provides that a patronage_dividend does not include any amount_paid to a patron to the extent that such amount is out of earnings other than from business done with or for patrons sec_1_1382-3 of the income_tax regulations states that income derived from sources other than patronage means incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association patronage_dividends may be paid in money property or written notices of allocation patronage_dividends paid in money and in property are excludable or deductible under sec_1382 of the code patronage_dividends paid in written notices of allocation are deductible under sec_1382 if the written notices of allocation are qualified if the notices are nonqualified the cooperative is permitted a deduction under sec_1382 or a tax_benefit figured under sec_1383 when the notices are later redeemed sec_1388 of the code provides that the term written_notice_of_allocation means any capital stock revolving fund certificate retain certificate certificate of indebtedness letter of advice or other written notice which discloses to the recipient the stated dollar amount allocated to him by the organization and the portion thereof if any which constitutes a patronage_dividend for cooperatives that use pooling revrul_67_333 1967_2_cb_299 provides that pool advances are treated as per-unit retain allocations and the final pool payment made after net_earnings have been determined is treated as a patronage_dividend under sec_199 of the code patrons that receive a qualified_payment from a specified agricultural or horticultural cooperative are allowed a deduction for an amount allocable to their portion of qualified_production_activities_income qpai of the organization received as a qualified patronage_dividend or per-unit_retain_allocation which is paid in qualified per-unit retain_certificates in particular sec_199 plr-137140-10 requires the cooperative to be engaged in the manufacturing production growth or extraction in whole or significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products under sec_199 in the case of a cooperative engaged in the marketing of agricultural and horticultural products the cooperative is treated as having manufactured produced grown or extracted mpge in whole or significant part any qualifying_production_property marketed by the cooperative that its patrons have mpge this is known in the industry as the cooperative attribution rule in addition sec_199 requires the cooperative to designate the patron’s portion of the income allocable to the qpai of the organization in a written notice mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the tax_year under sec_1_199-6 of the regulations for purposes of determining a cooperative’s sec_199 deduction the cooperative’s qpai and taxable_income are computed without taking into account any deduction allowable under sec_1382 or c of the code relating to patronage_dividends per-unit retain allocations and nonpatronage distributions an agricultural or horticultural cooperative is permitted to pass-through to its patrons all or any portion of its sec_199 deduction for the year provided it does so in the manner and within the time limits set by sec_199 of the code when a cooperative passes-through all or any portion of the sec_199 deduction the cooperative remains entitled to claim the entire sec_199 deduction on its return but is required under sec_199 to reduce the deduction or exclusion it would otherwise claim under sec_1382 for per-unit retain allocations and patronage_dividends sec_199 of the code provides that a cooperative passes through an amount of its sec_199 deduction by identifying such amount in a written notice mailed to such person during the payment period described in sec_1382 sec_1382 provides that the payment period for a year is the period beginning with the first day of such taxable_year and ending with the fifteenth day of the ninth month following the close of such year sec_1_199-6 of the regulations provides that in order for a patron to qualify for the sec_199 deduction sec_1_199-6 requires that the cooperative identify in a written notice the patron's portion of the sec_199 deduction that is attributable to the portion of the cooperative's qpai for which the cooperative is allowed a sec_199 deduction this written notice must be mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the taxable_year the cooperative may use the same written notice if any that it uses to notify patrons of their respective allocations of patronage_dividends or may use a separate timely written notice s to comply with this section the cooperative must report the amount of the patron's sec_199 deduction on form 1099-patr taxable_distributions received from cooperatives issued to the patron plr-137140-10 while a cooperative is permitted to disregard per-unit retain allocations and patronage_dividends in its sec_199 deduction sec_1_199-6 of the regulations provide that a qualified_payment received by a patron of a cooperative is not taken into account by the patron for purposes of sec_199 sec_1_199-6 of the regulations defines the term qualified_payment to mean any amount of a patronage_dividend or per-unit_retain_allocation as described in sec_1385 or of the code received by the patron from a cooperative that is attributable to the portion of the cooperative’s qpai for which the cooperative is allowed a sec_199 deduction for this purpose patronage_dividends and per-unit retain allocations include any advances on patronage and per-unit retains paid in money during the taxable_year taxpayer is a specified agricultural or horticultural cooperative within the meaning of sec_199 of the code and sec_1_199-6 of the regulations it is an organization to which part i of subchapter_t applies ie it is a nonexempt_cooperative to which subchapter_t applies it is engaged in the marketing of agricultural or horticultural products ie grain which it markets and various farm supplies which it sells to its members and other participating patrons as a specified agricultural or horticultural cooperative taxpayer is entitled to the benefit of sec_199 of the code and sec_1_199-6 of the regulations which permit such cooperatives to disregard deductions under sec_1382 and c for purposes of computing qpai and taxable_income for purposes of sec_199 sec_1382 provides deductions for per-unit retain allocations paid in money property and qualified per-unit retain_certificates as well as for patronage_dividends paid in money property and qualified written notices of allocation it also provides for deductions when nonqualified per-unit retain_certificates and nonqualified written notices of allocation are redeemed as a specified agricultural or horticultural cooperative taxpayer is entitled to the benefit of sec_199 and sec_1_199-6 which permit such cooperatives to disregard deductions under sec_1382 and c for purposes of computing qpai and taxable_income for purposes of sec_199 sec_1382 provides deductions for per-unit retain allocations paid in money property and qualified per-unit retain_certificates as well as for patronage_dividends paid in money property and qualified written notices of allocation it also provides for deductions when nonqualified per-unit retain_certificates and nonqualified written notices of allocation are redeemed taxpayer does not operate on a pooling basis taxpayer purchases grain from members and other participating patrons and markets the grain the amount that each member or other participating patron receives when he or she sells grain to taxpayer for marketing depends upon where how and when the member or participating patron chooses to sell that grain to taxpayer plr-137140-10 members and other participating patrons have a number of options for determining how and when sales are made as stated above two neighbors delivering the same amount of grain to taxpayer during any year will be paid different amounts for that grain depending upon where when and how they sell the grain to taxpayer however all members and other participating patrons share in taxpayer’s net_earnings from marketing operations in proportion to the quantity of grains they market through taxpayer those net_earnings are distributed after the end of each year in the form of patronage_dividends paid in cash and qualified written notices of allocation the question presented in this ruling is whether the grain payments made by taxpayer to members and other participating patrons for grain qualify as per-unit retain allocations paid in money within the meaning of sec_1388 of the code under sec_199 of the code and sec_1_199-6 of the regulations the answer to this question determines who gets to include the grain payments in the sec_199 computation if the grain payments to members and other participating patrons are per-unit retain allocations paid in money then they should be added-back in taxpayer’s sec_199 computation and not included in the members’ and other participating patrons’ sec_199 computations if the grain payments to members and other participating patrons are not per-unit retain allocations paid in money then they should not be added-back in taxpayer’s sec_199 computation but should be included in the members’ and participating patrons’ sec_199 computations these results are the same whether taxpayer decides to keep or to pass-through all or a portion of its sec_199 deduction grain marketing cooperatives like taxpayer have never thought of their grain payments as per-unit retain allocations paid in money however taxpayer’s grain payments appear to meet the definition of per-unit retain allocations paid in money which are excludible or deductible under sec_1382 of the code the grain payments are made in cash so the paid in money requirement is met taxpayer’s grain payments also meet all the requirements of the definition of per-unit_retain_allocation contained in sec_1388 of the code which defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of this subchapter applies to a patron with respect to products marketed for him the amount of which is fixed without reference to the net_earnings of the organization pursuant to an agreement between the organization and the patron first taxpayer’s grain payments to a member or other participating patron are paid pursuant to an agreement namely the particular agreement applicable to the method the member or participating patron uses to determine how and when his or her grain is sold to taxpayer reporting grain payments as per-unit retain allocations paid in money in box of form 1099-patr demonstrates that taxpayer and its patrons agreed to treat grain payments as per-unit retain allocations paid in money plr-137140-10 second taxpayer’s grain payments to a member or other participating patron are made with respect to products marketed for him namely the grain delivered by the member or other participating patron for marketing by taxpayer as described above taxpayer markets the grain it acquires from members and other participating patrons and members and other participating patrons share in taxpayer’s net_earnings from its marketing activities in the form of patronage_dividends third the amount of the grain payments to each member or other participating patron is fixed without reference to the net_earnings of taxpayer since at the time the payments are made taxpayer’s actual net_earnings for the year are neither known nor determinable while per-unit retains are often made on the basis of a specified amount per unit of product marketed what is important is that they not be made with respect to net_earnings revrul_68_236 1968_2_cb_236 provides that to constitute a per-unit_retain_allocation the allocation need not be made strictly on the basis of a specified amount per-unit of product marketed provided it is made with respect to products marketed for the patron and not with respect to the net_earnings of the organization whether an allocation meets the foregoing description will be a question of fact the fact that all members and other participating patrons do not receive the same payments for their grain ie that taxpayer does not pool does not mean that grain payments should not be treated as per-unit retain allocations paid in money in 619_f2d_718 8th cir the eighth circuit_court of appeals characterized payments to farm service’s poultry growers as per-unit retain allocations paid in money even though they were determined under a formula that resulted in some poultry growers receiving more than others depending upon the efficiency of their operations and the market price of chickens when they delivered their chickens to farm service the tax_court in 70_tc_145 described the formula as follows the grower was paid_by petitioner for growing chickens based on the delivery weight to the processing plant less the weight of chickens condemned by the u s department of agriculture the formula under which the grower was paid also took into account variable market rates for full grown chickens and an efficiency factor that related the number of pounds of feed to the pounds of chickens produced the efficiency factor was figured into the grower's compensation because farm service supplied all chicken feed under the contract provisions established with each of the growers there was also a guaranteed minimum amount the grower would receive from the cooperative irrespective of wholesale market variations for example the contract in effect on date provided that ‘in no event will the grower member receive less than dollar_figure plr-137140-10 cents per pound less u s d a condemnation ’ on its books petitioner treated payments to its growers as a cost of production taxpayer has treated its grain payments as purchases not as per-unit retain allocations paid in money however how the payments have been reported by taxpayer in prior years does not determine how the payments are treated prospectively in this ruling whether or not taxpayer is pooling is a moot issue for purpose of this ruling because its grain payments meet the definition of per-unit retain allocations paid in money in any event nothing in subchapter_t of the code limits the exclusion or deduction for per-unit retain allocations to cooperatives with pools sec_1_199-6 of the regulations provides that sec_1_199-6 is the exclusive method for the cooperative and its patrons to compute the amount of the sec_199 deduction the effect of these sections is that a cooperative such as taxpayer will compute the entire sec_199 deduction at the cooperative level and that none of the distributions whether patronage_dividends or per-unit retain allocations received from the cooperative will be eligible for sec_199 in the patron’s hands that is the patron may not count the qualified_payment received from the cooperative in the patron’s own sec_199 computation whether or not the cooperative keeps or passes through the sec_199 deduction accordingly the only way that a patron can claim a sec_199 deduction for a qualified_payment received from a cooperative is for the cooperative to pass-through the sec_199 amount in accordance with the provisions of sec_199 of the code and the regulations thereunder we note that to prevent a cooperative from deducting the per-unit retain allocations made in money or qualified certificates for the second time when the associated grain is sold the cost_of_goods_sold mechanism associated with inventory must be adjusted to reflect the deductions allowable under subchapter_t of the code specifically cooperatives need to include the per-unit retain allocations in inventory cost for purposes of making inventory and sec_263a of the code computations and then adjust the ending inventory and cost_of_goods_sold to prevent double deduction of the per-unit retain allocations the adjustments can be made to either the inventory or the line item deduction for the per-unit retain allocations in other words if the per-unit retain allocations are deducted on a deduction line in the cooperative's tax_return they should be removed entirely from the ending inventory and cost_of_goods_sold computed for the tax_year alternatively if the per-unit retain allocations are not deducted on a deduction line in the tax_return the per-unit retain allocations reflected in the ending inventory should be removed and included in the cost_of_goods_sold amount for that tax_year this procedure will allow the cooperative to deduct the per-unit retain allocations once while also preserving the integrity of its sec_263a calculation plr-137140-10 for the reasons described above taxpayer’s grain payments to members and other participating patrons meet the definition of per-unit retain allocations paid in money the per-unit retains must be treated as such for all purposes of the code and are reported in box of form 1099-patr if properly treated as per-unit retain allocations paid in money then taxpayer will be entitled to disregard such payments in determining the amount of its sec_199 deduction we also note that payments to nonmembers who are not eligible to share in patronage_dividends ie those with whom taxpayer does not operate on a cooperative basis with do not constitute per-unit retains paid in money within the meaning of sec_1382 of the code and accordingly are treated exclusively as purchases in the cost_of_goods_sold mechanism accordingly we rule as requested that grain payments to members and other participating patrons constitute per-unit retain allocations paid in money within the meaning of sec_1382 of the code for purposes of computing its sec_199 domestic_production activitie sec_2 deduction taxpayer’s qualified_production_activities_income and taxable_income should pursuant to sec_199 of the code be computed without regard to any deduction for grain payments to members and other participating patrons the conclusions set forth in this ruling address only purchases that are per-unit retain allocations paid in money as they relate to grains marketed by the cooperative during the taxable_year and does not apply to purchases of grain that remain in inventory at year end no opinion is expressed or implied regarding the application of any other provision in the code or regulations this ruling is directed only to the taxpayer that requested it under sec_6110 of the code it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours paul f handleman paul f handleman chief branch office of the associate chief_counsel passthroughs special industries -


t c summary opinion united_states tax_court paul w and debbie k colozza petitioners v commissioner of internal revenue respondent docket no 11748-04s filed date paul w colozza pro_se charles m berlau for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 in effect when the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority 1unless otherwise indicated section references hereafter are to the internal_revenue_code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for the sole issue for decision is whether petitioners are entitled to a dependency_exemption deduction under sec_151 for their tax_year for a child of paul w colozza petitioner from a prior marriage some of the facts were stipulated and those facts with the annexed exhibits are so found and are incorporated herein by reference at the time their petition was filed petitioners’ legal residence was kansas city missouri petitioner was previously married to janice lee henderson mrs henderson one child was born of that marriage petitioner and mrs henderson were later divorced prior to the year at issue the divorce decree provided that the child’s primary residence was with mrs henderson in the state court in which they were divorced issued a judgment modifying the divorce decree with regard to petitioner’s support obligations for the child that modification as it pertains to the issue before this court provided that father is awarded the tax exemption each year beginning in calendar_year for the child if he makes his ordered child_support both current and arrearage payments for that year and mother shall sign irs form_8332 or any other necessary documents by january of the following year to ensure that father receives the exemption there is no issue or claim that petitioner did not support the child for the year in accordance with the court decree prior to filing his joint federal_income_tax return for with his current spouse petitioner contacted his former spouse to obtain her consent on form_8332 release of claim to exemption for child of divorced or separated parents in order to enable him and his current spouse a petitioner herein to claim the dependency_exemption for the child petitioner’s former spouse refused to sign the form_8332 petitioners accordingly filed their joint_return for and claimed the child as a dependent petitioners attached to their return an unsigned form_8332 and also attached the pertinent page or pages of the court’s decree quoted above regarding petitioner’s entitlement to the dependency_exemption deduction for the child respondent disallowed the claimed dependency_exemption on the ground that petitioners did not establish that they were entitled to the deduction generally the determinations of the commissioner in a notice_of_deficiency are presumed correct and the burden_of_proof is on the taxpayer to prove that the determinations are in error rule a 290_us_111 2since the issue in this case is legal in nature sec_7491 which in some circumstances shifts the burden_of_proof to respondent is not applicable here sec_151 allows taxpayers to deduct an annual exemption_amount for each dependent as defined in sec_152 under sec_152 the term dependent means certain individuals such as a son daughter stepson or stepdaughter over half of whose support for the calendar_year in which the taxable_year of the taxpayer begins was received from the taxpayer or is treated under subsection c or e as received from the taxpayer the support_test in sec_152 applies if a child receives over half of his support during the calendar_year from his parents the parents are divorced under a decree of divorce and such child is in the custody of one or both of his parents for more than one-half of the calendar_year if these requirements are satisfied as in the present case the child shall be treated for purposes of subsection a as receiving over half of his support during the calendar_year from the parent having custody for a greater portion of the calendar_year referred to as the ‘custodial parent’ thus allowing the dependency_exemption to be claimed by the custodial_parent sec_152 to decide who has custody sec_1_152-4 income_tax regs provides that custody will be determined by the terms of the most recent decree of divorce if there is one in effect since petitioner’s divorce decree declares that the primary residence of the child was with the former spouse she is considered the child’s custodial_parent under sec_152 petitioner as the noncustodial_parent is allowed to claim a child as a dependent only if one of three statutory exceptions is met under these exceptions the noncustodial_parent is treated as providing over half of a child’s support and therefore entitled to the dependency_exemption if as pertains to this case a the custodial_parent signs a written declaration that such custodial_parent will not claim such child as a dependent and b the noncustodial_parent attaches such written declaration to the noncustodial parent’s return for the taxable_year sec_152 the two other situations in which petitioner could have claimed the exemption are not applicable to this case with respect to the provisions of sec_152 and the pertinent portion of sec_152 described above in order for the noncustodial spouse to claim the dependency_exemption deduction it is specifically required that the custodial_parent sign a written declaration in such manner and form as the secretary may by regulations prescribe that such custodial_parent will not claim such child as a dependent pursuant to this statutory provision temporary regulations were promulgated that provide the written declaration may be made on a form to be provided by the service for this purpose once the service has released the form any declaration made other than on the official form shall conform to the substance of such form sec_1_152-4t a q a-3 temporary income_tax regs fed reg date form_8332 requires the name of the children for which exemption claims were released years for which the claims were released signature of the custodial_parent social_security_number of the custodial_parent date of signature and name and social_security_number of the parent claiming the exemption petitioner argued at trial that the documentation he attached to his income_tax return conformed to the substance of form_8332 the court disagrees there is no statement from the former spouse as to the year or years in which the dependency_exemption is released nor does the information submitted with petitioner’s income_tax return include the social_security_number of his former spouse and most importantly there is no signed statement by the former spouse that she would not claim the dependency_exemption deduction in fact the parties at trial 3the court notes that temporary regulations have binding effect and are entitled to the same weight as final regulations peterson marital trust v commission102_tc_790 affd 78_f3d_795 2d cir 98_tc_141 see 751_f2d_123 2d cir revg on other grounds tcmemo_1984_145 acknowledged that petitioner’s former spouse had claimed the child as a dependent on her income_tax return for although petitioner’s divorce decree provides that he is entitled to the dependency_exemption deduction for the child state courts by their decisions cannot determine issues of federal tax law 327_us_280 783_f2d_966 10th cir nieto v commissioner tcmemo_1992_296 thus the court concludes that pursuant to sec_152 petitioner is not entitled to claim his child as a dependent for his recourse if any lies in the state court for enforcement of the divorce decree reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


internal_revenue_service number release date index number --------------------- ------------------------------ -------------- --------------------- -------------------------- in re ------------------------------- legend department of the treasury washington dc person to contact ----------------------- id no --------------- telephone number --------------------- refer reply to cc intl - plr-154227-03 date date taxpayer ---------------------------------------------------------------------------------------------- ------------------------ ------------------- ------------------------------ ---------------------------------------------- ------------------------------------ ---------------- -------------------------- -------------------------- ---------------------------- ------------------------------ entity a entity b entity c date date date individual a individual b cpa firm dear --------- this replies to a letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to file a separate election agreement described in sec_1_1503-2 with respect to the dual consolidated losses of entity a and entity b that were incurred in the tax_year ended on date and to file the annual certification described in sec_1_1503-2 relating to the dual consolidated losses_incurred by entity a entity b and entity c in the tax_year ended on date with the tax_return of taxpayer for the tax_year ended on date the information submitted for consideration is substantially as set forth below plr-154227-03 the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process individual a is a senior manager at cpa firm and had the responsibility to provide a limited review of taxpayer’s tax_return for the tax_year ended on date individual b is employed by taxpayer as its tax manager and oversees the preparation of taxpayer’s federal_income_tax return the affidavit of individual b indicates that she was advised by individual a to file the election agreements and annual certifications with the tax_return ended on date which was filed on date because individual b inadvertently failed to add these tasks to her list of open items at the time the tax_return was finalized and filed on date without the election agreements and annual certifications sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the election agreements and annual certifications are regulatory elections within the meaning of sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards set forth in sec_301_9100-3 based on the facts and circumstances of this case we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to file a separate election agreement described in sec_1_1503-2 with respect to the dual consolidated losses of entity a and entity b that were incurred in the tax_year ended on date and to file the annual certification described in sec_1_1503-2 relating to the dual consolidated losses_incurred by entity a entity b and entity c in the tax_year ended on date with the tax_return of taxpayer for the tax_year ended on date plr-154227-03 as provided in a the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the election agreements and annual certifications this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling letter should be associated with the election agreements and the annual certifications described above and associated with taxpayer’s tax_return for the tax_year ended on date no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being furnished to taxpayer and the other authorized representative sincerely associate chief_counsel international by s allen goldstein allen goldstein reviewer attachment copy for purposes


tax exempt and government entities department of the treasury internal_revenue_service washington d c jul q uniform issue list t lp rat legend taxpayer a amount b financial_institution c financial_institution d ira x account y dear this is in response to your request submitted on date as supplemented by correspondence dated date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that she received a distribution from ira x totaling amount b taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to an error by financial_institution d taxpayer a invested ira x in a certificate of deposit cd at financial_institution c which matured on date taxpayer a met with a branch manager at financial_institution d and discussed her intention to rollover the distribution of amount b from ira x into another individual_retirement_account ira at financial_institution d at the maturation of the certificate of deposit financial_institution c distributed_amount b from ira x to taxpayer a taxpayer a instructed financial_institution d to deposit amount b into another ira cd at financial_institution d however financial_institution d instead erroneously deposited amount b into account y a non-ira cd taxpayer a further represents that financial_institution d sent no written communications to her concerning account y and that she was unaware that amount b had not been deposited into an ira cd taxpayer a asserts that she became aware that the distribution of amount b from ira x was not successfully rolled over into another tax-qualified account when she received a notice from the internal_revenue_service dated date taxpayer a asserts that amount b has not been used for any purpose based on the above facts and representations you request a ruling that the internal_revenue_service service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount b from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under section - of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a timely rollover of amount b was due to an error by financial_institution d which resulted in the deposit of amount b account y a non-ira cd into therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount b from ira x taxpayer a is granted a period of days from the issuance of this letter_ruling to contribute amount b into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to the contribution of amount b such contribution will be considered a rollover_contribution within the meaning of sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_61 k of the code provides that it may not be used or cited as precedent a copy of this letter_ruling has been sent to your authorized representative pursuant to a _ power_of_attorney on file in this office if you wish to inquire about this ruling please contact address all correspondence to se t ep ra t3 at - please sincerely yours la laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service number release date index number --------------------------------------------- ---------------------------------------- -------------------------------------------- ------------------------------------------------------- ---------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-123050-09 date september legend x ----------------------------------------- ---------------------------- country ---------------------- date ------------------- dear ------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an entity classification election the information submitted states that x was formed under the laws of country on date x represents that x is a foreign_entity eligible to elect to be treated as a partnership for federal tax purposes however x did not timely file a form_8832 entity classification election electing to be treated as a partnership sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification plr-123050-09 sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301 b by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a partnership for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code and the regulations thereunder this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-123050-09 in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service attn mandatory review mc dal commerce st dallas tx date date 501-dollar_figure tax_exempt_and_government_entities_division release number release date legend org organization name xx date address address org address employer_identification_number person to contact id number contact numbers voice fax certified mail - return receipt requested dear this is a final adverse determination_letter with regard to your status under sec_501 of the internal_revenue_code you are a subordinate organization included in group exemption number the parent organization was granted tax exempt status as an organization described in sec_501 of the code in may 19xx the primary activity of org org is the operation a commercial bar open to the general_public all assets and net_earnings of org belong to the owner president members of org do not have a common fraternal bond org is not a domestic fraternal society operating_under_the_lodge_system the net_earnings of which are devoted exclusively to religious charitable scientific literary educational and fraternal purposes the organization does not qualify for exemption under sec_501 of the internal_revenue_code consequently the organization’s exempt status is revoked effective july 20xx you are required to file forms with the appropriate service_center for the tax periods beginning on and after july 20xx you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by jaw that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at not toll-free if you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter sincerely nanette m downing director eo examinations fe ma aas ql department of the treasury internal_revenue_service te_ge eo examinations ms dal tax_exempt_and_government_entities_division org address commerce street dallas auas tx taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization’s exempt status is necessary if you accept our findings please sign and return the enclosed form 6018-a consent to proposed action we will then send you a final letter modifying or revoking your exempt status if we do not hear from you within days from the date of this letter we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final returns for the tax period s shown above if you have not yet filed these returns please file them with the examiner as soon as possible unless a report of income_tax_liability was issued to you with other instructions file returns for later tax years with the appropriate service_center indicated in the instructions for those returns in the event of revocation you will be required to file federal_income_tax if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process please note that fast tract mediation services referred to in publication do not apply to exempt_organizations if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed in lieu of letter if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in the united_states tax_court the united_states court of federal claims or the united_states district_court after satisfying procedural and jurisdictional requirements as described in publication you may also request that we refer this matter for technical_advice as explained in publication exempt_organizations appeal procedures for unagreed issues f a determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter convenient time to call if we need to contact you if you write please provide a telephone number and the most thank you for your cooperation sincerely nanette m downing acting director eo examinations enclosures publication publication form 6018-a report of examination envelope in lieu of letter form 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service june 20xx org ein legend org organization name president president issue ss date state state ceo ceo co-1 co-2 mgr mgr companies whether org is operated exclusively for exempt purposes described within internal_revenue_code sec_501 facts org hereinafter org whose employer_identification_number is was incorporated in the state of state org was recognized as an organization exempt from federal_income_tax as described in sec_501 under the group ruling number org operated a bar named reforms only bar in chapter sec_311 of the state revised statutes liquor control law in order for a licensee to sel intoxicating liquor outside city limits a licensee must meet certain provisions such as having obtained an exemption from the payment of federal income taxes as provided in sec_501 sec_501 sec_501 sec_501 sec_501 sec_501 sec_501 or sec_501 of the united_states internal_revenue_code of as amended in any incorporated city having a population of less than big_number inhabitants as determined by the last decennial census under the provisions and methods set out in this chapter also in chapter sec_311 of the state revised statutes liquor control law states that an organization can obtain a license to sell liquor by the drink if at least of the gross_income of which is derived from the sale of prepared meals or food consumed on such premises or which has an annual gross_income of at least dollar_figure from the sale of prepared meals or food consumed on such premises org was examined on september 20xx mgr the manager was present for the examination mgr was designated to represent president on september 20xx the organization did not provide any financial information at the examination and president the only officer did not attend financial information was also requested on november 20xx to date financial information has not been provided to the service the following information was obtained the organization was established in july of 20xx the bar used to be named co-1 which was a co-2 subordinate president officer purchased the organization and called the co-2 headquarters to inquire about remaining a co-2 subordinate subsequently the organization remained a co-2 and the chapter number changed it was stated in the interview that the only reason the organization became a co-2 is to obtain a liquor license in the interview the taxpayer could not explain or describe the organization’s purpose the organization does not have a clear purpose other than to operate a bar the form 886-a rev department of the treasury - internal_revenue_service page -1- form 886a explanation of items schedule no or exhibit department of the treasury - internal_revenue_service name of taxpayer eae org ein bar is open to the general_public individuals do not have to be a member frequent the bar currently the organization ha sec_26 members and one class of membership as stated in the interview the requirements for membership are as follows anyone who can pay for membership dues can become a member new members give their name and address for membership cards there is no common bond avocation or profession among members the organization recruits new members by putting up a sign at the bar the benefits of being a co-2 member are members receive free food and drinks sometimes the parent organization's constitution and bylaws state that co-2 purpose is to promote fellowship among all living beings respectfully to encourage the elimination of prejudice and help unify divergent groups in the overall interest of american democracy to orientate our youth with full knowledge of responsibilities as well as privileges of citizenship through the wisdom of our seniors to assist the underprivileged and well deserving by maintenance of sponsoring educational opportunities and by providing monetary grants and awards toward their wellbeing overall to fully support the effort of drug free america to encourage compassion for every fellow man woman and child in distress and or deserving to provide social clubs for members and guests for the purpose of fellowship and entertainment of its members to create and initiate new programs to assist the homeless battered and abandoned children the mentally retarded and the needy and well deserving for the purpose of their well-being requirements to become a co-2’s subordinate are as follows start the chapter with members at annual dues of dollar_figure each by the seventh year of incorporation the subordinate is required to have members the dues will be split between the parent organization and subordinate for each membership sold after donate dollar_figure to other approved non-profit entities all donations must be verified by providing the co-2 national headquarters copies of canceled checks submitted for donations if donations are given to needy individuals subordinate must submit the name of the individual social_security_number date of birth address the reason for the donation and the amount of the donation conduct monthly meeting after president contacted the co-2 headquarters to ask for steps and the information to remain a co-2 subordinate he was told it would be a dollar_figure received a package including the following material from the co-2 headquarters transfer fee and he also constitution and bylaws of co-2 membership requirements form 886-a rev department of the treasury - internal_revenue_service page -2- form 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the vreasury - internal_revenue_service june 20xx org ein c d instructions on how to prepare articles of incorporation state liquor control checklist prepared by co-2 national headquarters to help the organization prepare all necessary forms filed with division of liquor control to obtain liquor license the following information listed on the checklist n w r m a n certificate of incorporation articles of incorporation copy after filed with the state secretary of states office property dwelling lease agreement bill of sales of inventory fixtures managing officers appointment form subordinate group authorized form_2 page tax exemption_letter receivable on payment of charter fees and membership dues article iii part of the articles of incorporation states that each co-2 post lodge will be committed to contribute dollar_figure each year to charity s of the post lodge choice these charities may be within the post’s own community verification of donations must be submitted to the co-2 national headquarters monthly to be placed in each post lodge file there is a complete lack of regalia or memorabilia specific to the co-2 either inside or outside the organization the organization is devoid of any rites or rituals specific to the co-2 culture when the meetings are held or when new members are recruited org only exist to operate a bar law internal_revenue_code sub sec_501 provides an exemption for domestic_fraternal_societies orders or associations operating_under_the_lodge_system the net_earnings of which are devoted exclusively to religious charitable scientific literary educational and fraternal purposes and which do not provide for the payment of life sick accident or other_benefits income_tax regulation sec_1_501_c_10_-1 provides that an organization will qualify for exemption under sec_501 if it is a domestic fraternal beneficiary society order or association described in sec_501 and the regulations thereunder except that it does not provide for the payment of life sick accident or other_benefits to its members and devotes its net_earnings exclusively to religious charitable scientific literary educational and fraternal purposes internal_revenue_code sec_501 provides an exemption from taxation for fraternal beneficiary societies orders or associations operating_under_the_lodge_system or form 886-a rev department of the treasury - internal_revenue_service page -3- form 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the ‘treasury - internal_revenue_service june 20xx org ein for the exclusive benefit of the members of a fraternity itself operating_under_the_lodge_system and providing for the payment of life sick accident or other_benefits to the members of such society order or association or their dependents revrul_81_117 1981_1_cb_346 states that an organization that does not conduct any fraternal activities or operate under the lodge_system but does operate exclusively for the benefit of members of certain related domestic_fraternal_societies operating_under_the_lodge_system does not qualify for exemption under sec_501 of the code revrul_73_165 c b 224a defines a fraternal beneficiary society order or association exempt under sec_501 as one that in addition to being operated in furtherance of fraternal purposes is so operated under the lodge_system or for the exclusive benefit of the members of a fraternity that is so operated under the lodge_system and has an established system for the payment to its members or their dependents of life sick accident or other_benefits there is no requirement that either the fraternal features or the insurance features predominate so long as both features are present in national union v marlow 374_f_775 a fraternal beneficial society was defined as one whose members have adopted the same or a very similar calling avocation or profession or who are working in union to accomplish some worthy object and who for that reason have banded themselves together as an association or society to aid and assist one another and to promote the common cause the term fraternal can properly be applied to such an association for the reason that the pursuit of a common object calling or profession usually has a tendency to create a brotherly feeling among those who are thus engaged the national union did not fit this definition because it was an association of individuals who were associated for the purpose of obtaining insurance the court concluded that ‘jn its practical operations therefore the defendant company cultivates fraternity and confers benefits in the same manner that every insurance_company doing business on the mutual plan cultivates feelings of fraternity and confers benefits upon its members or in other words when the defendant is stripped of all disguises and judged by the standard of what it is engaged in doing and what it was most likely organized to do it is simply an insurance_company which carries on an extensive business on the assessment plan the court in 24_tc_891 reversed on other grounds 236_f2d_509 3rd cir concluded that an organization had not established its exemption as a fraternal beneficiary society because members lacked a common tie to qualify for the exemption an organization must be fraternal here only the active members comprising less than per cent of the total membership of the post had a common tie they of course had the bond of having formerly served in the polish army but approximately percent of the total membership of the post was social form 886-a rev department of the treasury - internal_revenue_service page -4- form 886a name of taxpayer schedule no or exhibit yeat period ended explanation of items department of the ‘treasury - internal_revenue_service june 20xx org ein members who were not ex-members of the polish armed_forces and who had nothing in common with the active members or with each other an organization cannot be classed as fraternal where the only common bond between the majority of the members is their membership in that organization 19_tc_240 provided that the requirement of common ties and objectives is not satisfied merely by a recitation of such purposes in the association's constitution or bylaws it is necessary that the stated purposes be implemented or accomplished by specific acts the tax_court denied exemption to an organization whose constitution called for among other things the promotion of civic enterprises in the community it engaged in no civic or charitable activities during the period under review the court in 2_f2d_367 e d mo stated that by the ‘lodge system' is generally understood as an organization which holds regular meetings at a designated place adopts a representative form of government and performs its work according to ritual philadelphia and reading relief association 4_bta_713 held that where the sole motive in joining an organization is to receive insurance benefits and there are no lodges rituals ceremonies or regalia then there is no fraternal element present knights of columbus building association of stamford conn inc v united_states aftr 2d dc conn held that an organization that operated a bar and buffet that was utilized by nonmember community organizations was not operating with the exemption provisions and therefore was not exempt under sec_501 taxpayer’s position the taxpayer position is unknown at this time government’s position org is not a domestic fraternal society because the members do not have a common tie or objective the only common bond between the members is their membership in org members of org do not have a common fraternal bond the members do not possess a similar calling avocation or profession and are not working in unison to accomplish any worthy objective or common cause rituals ceremonies and regalia that are evidence of fraternal activities are not found in org org has not been neither operating for religious charitable scientific literary educational and fraternal purposes nor devoting its net_earnings exclusively to religious charitable scientific literary educational and form 886-a rev department of the treasury - internal_revenue_service page -5- form 886a name of taxpayer schedule no or exhibit year period ended explanation of items department of the treasury - internal_revenue_service org ein june 20x x fraternal purposes the current officer ceo created org with the intent to generate profits all assets and net_earnings of org belong to the owner president org is not operating_under_the_lodge_system org is a member of the parent organization through the payment of dues and a charter fee the term membership dues implies that each member pays a fee for membership because they place a value on their association with the organization and that there are rights privileges or benefits associated with membership the organization does not have a set meeting schedule and there are no rituals associated with the meetings the organization does not have a representative form of government because the members have no voice or voting rights in the business operation of the organization or the net_earnings the officers are not selected or elected by the membership during the year under audit although org made contributions to some charities that does not qualify org exempt status under c org is operating in a commercial manner which is not an exempt activity described under internal_revenue_code sec_501 conclusion in the case of org it is held that where the primary purpose or activity of the organization is the commercial manner in which the bar operates org is not a domestic fraternal society operating_under_the_lodge_system the net_earnings of which are devoted exclusively to religious charitable scientific literary educational and fraternal purposes the organization does not qualify for exemption under sec_501 of the internal_revenue_code consequently the organization’s exempt status is revoked effective july 20xx forms should be filed for the tax periods ending on and after july 20xx form 886-a rev department of the treasury - internal_revenue_service page -6-