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 b6 plr-112685-12 date date legend legend taxpayer -------------------------------------------------- ----------------------------------------------------- company a ------------------ company b ------------------------------------- company c ----------------------------------- company d -------------------------------------------- company e ---------------------- company f ------------------ company g ------------------------------------ city a ------------------------ city b ---------------------------- state a ------------ state b ------------- location a --------------------------- a ---- -- b ---- -- generating station ----------------------------------------- dear -------------------- this is in response to your request for rulings submitted by your authorized representative concerning the federal_income_tax consequences of the transaction described below plr-112685-12 background taxpayer a state a limited_liability_company is treated as a partnership for federal_income_tax purposes it is a joint_venture among company a company b and company c company a is a publicly-traded company that was formed to focus on ways to help power companies that use coal comply with federal and state pollution regulations company b is an affiliate of company d a privately-held company that invests in energy and natural_resources businesses its businesses include buying and selling coal for utilities and arranging rail transportation from mines both companies are headquartered near city a company c is an indirect wholly-owned subsidiary of company e in state b the facility taxpayer owns a refined_coal facility that it placed_in_service near a particular boiler at generating station in city b taxpayer owns the refined_coal facility through a disregarded special-purpose subsidiary called company f technology taxpayer is the exclusive licensee of proprietary technology technology owned by company a and used to produce refined_coal taxpayer has granted company f a limited sublicense to use the technology at its refined_coal facility the technology involves treating the feedstock coal with two chemical additives that are metered on to feedstock coal at a rate proportional to the weight of coal as measured by coal belt scales as the coal is transported by coal belts into bunkers that feed the boiler the first chemical additive -- additive a -- is a granular iron oxide material that changes the chemistry of the coal ash in the cyclone burner allowing for reduced nox emissions the second chemical additive -- additive b -- is a liquid halogen salt that reacts with the mercury and increases mercury capture in the fly ash that is collected in the electrostatic precipitator the technology was developed for cyclone-fired boilers that were originally designed for high-sulfur high-btu bituminous coal and subsequently converted to use low-sulfur low-btu location a subbituminous coal generating station currently burns location a subbituminous coal but is considering moving to a blend of location a coal and bituminous coal the refined_coal facility is on a site that company f uses under a license from utility company f buys raw coal from utility in utility's coal yard at the as delivered plr-112685-12 cost of the coal to the utility treats the raw coal to convert it into refined_coal and then sells the refined_coal back to the utility at the same price as the raw coal testing as part of placing the refined_coal facility in service at generating station taxpayer conducted a full-scale continuous emissions monitoring system cems field test at the boiler to measure the reduction in nitrogen oxide and mercury emissions nox and mercury emissions were measured as required by the cems field testing procedures described in section of notice_2010_54 emissions for both the feedstock coal and refined_coal were measured under the same operating conditions except for adjustments to secondary air directly attributable to the refined_coal as allowed in section a iv of notice_2010_54 over a period of at least three hours during which the boiler operated at a steady state and at least of full load the cems devices for measuring nitrogen oxide and mercury are located in the stack downstream of the electrostatic precipitator particulate control device data was collected to ensure that the device was operating the same when the feedstock coal and refined_coal were each tested the tests were done with location a coal the cems field test demonstrated that burning the refined_coal made from location a subbituminous coal led to a a reduction in hg emissions and a b reduction in nox emissions compared to the baseline measurements for the feedstock coal as for future determinations taxpayer may elect to use a laboratory analysis establishing that the sulfur and hg contents of both the feedstock coal and the refined_coal do not vary by more than from the sulfur and hg content of the feedstock coal and refined_coal used in the most recent determination pursuant to section b of notice_2010_54 taxpayer indicates that samples will be taken for redetermination testing within six months after the last emissions test satisfying the qualifying emissions reduction requirement thereafter within six months after such date another set of samples will be taken for redetermination testing all samples will be taken from the moving coal belts upstream and downstream of the refined_coal facility the samples will be taken using a collection device that reaches over the moving conveyor belt and collects a part- stream cut of the coal on the belt samples will be prepared for analysis using procedures for dividing samples as described in astm d2234 the samples will then be crushed and further prepared for analysis according to astm d2013 standard laboratory techniques will be used to measure sulfur and mercury content of the coal samples however taxpayer has also indicated that it may decide to use epa method 30b when not using laboratory testing to test for hg emissions in that case taxpayer will also test for nox emissions using traditional cems testing methodology plr-112685-12 rulings requested based on the foregoing you have requested that we rule as follows the refined_coal produced and sold by using the technology constitutes refined_coal within the meaning of sec_45 of the code provided that such refined_coal is produced from feedstock coal that is the same source or rank as the feedstock test coal and provided further that the refined_coal satisfies the qualified_emission_reduction test stated in sec_45 of the code increasing the amounts of chemical additives to the feedstock coal will not be construed as a change in process requiring a redetermination to establish qualified emissions reductions provided that the feedstock coals used to produce refined_coal during any redetermination period consist of a blend of location a subbituminous coal and bituminous coal any blend of such coal shall be treated as feedstock coal of the same source and rank for purposes of section dollar_figure of notice_2010_54 regardless of the mine from which such feedstock coal is purchased and will not require a redetermination to establish qualified emissions reductions pursuant to section b of notice_2010_54 the redetermination requirement of section dollar_figure of notice_2010_54 may be satisfied by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal on average do not vary by more than below the bottom nor by more than percent above the top of the range of the sulfur content and range of the mercury content of the feedstock coal and the refined_coal used in the most recent determination pursuant to section dollar_figure of notice_2010_54 as a result i taxpayer will not be required to test for nitrogen oxide and ii taxpayer will not be required to test for baseline emissions so long as there has not been a change in the process for producing refined_coal the use of epa method 30b is an acceptable alternative to the use of cems field testing for measuring mercury emissions reductions under section dollar_figure of notice_2010_54 as a corollary epa method 30b should also qualify as an acceptable method for satisfying the redetermination requirement under section dollar_figure of notice_2010_54 when doing cems field testing for redeterminations law and rationale sec_45 of the code generally provides a credit against federal_income_tax for_the_use_of renewable or alternative resources to produce electricity or fuel for the generation of steam sec_45 of the code provides that in the case of a plr-112685-12 producer of refined_coal the credit available under sec_45 of the code for any taxable_year shall be increased by an amount equal to dollar_figure5 per ton of qualified refined_coal i produced_by_the_taxpayer at a refined_coal_production_facility during the 10-year period beginning on the date that the facility was originally placed_in_service and which is ii sold by the taxpayer to an unrelated_person during such 10-year period and such taxable_year for purposes of sec_45 of the code section dollar_figure of notice_2010_54 provides that the term refined_coal means a fuel which - i is a liquid gaseous or solid fuel including feedstock coal mixed with an additive or additives produced from coal including lignite or high carbon fly ash including such fuel used as a feedstock ii is sold by the taxpayer with the reasonable expectation that it will be used for the purpose of producing steam and iii is certified by the taxpayer as resulting when used in the production of steam in a qualified_emission_reduction section dollar_figure of the notice provides that the term qualified_emission_reduction means in the case of refined_coal produced at a facility placed_in_service after date a reduction of at least twenty percent of the emissions of nitrogen oxide and at least forty percent of the emissions of either sulfur dioxide or mercury released when burning the refined_coal excluding any dilution caused by materials combined or added during the production process as compared to the emissions released when burning the feedstock coal or comparable coal predominantly available in the marketplace as of date sec_45 of the code generally provides that the term refined_coal_production_facility means a facility which is placed_in_service after date and before date section dollar_figure of notice_2010_54 generally provides that a qualified emissions reduction does not include any reduction attributable to mining processes or processes that would be treated as mining as defined in sec_613 a c or i if performed by the mine owner or operator accordingly in determining whether a qualified_emission_reduction has been achieved the emissions released when burning the refined_coal must be compared to the emissions that would be released when burning the feedstock coal feedstock coal is the product resulting from processes that are treated as mining and are actually applied by a taxpayer in any part of the taxpayer’s process of producing refined_coal from coal sec_613 of the code describes treatment processes that are not considered as mining unless they are provided for in sec_613 or are necessary or incidental to a process provided for in sec_613 any cleaning process such as a process that uses ash separation dewatering scrubbing through a centrifugal pump spiral concentration gravity concentration flotation application of liquid hydrocarbons or alcohol to the surface of the fuel particles or to the feed slurry provided such cleaning does not change the physical or chemical structure of the coal and drying to remove plr-112685-12 free water provided such drying does not change the physical or chemical identity of the coal will be considered as mining section of the notice provides in part that emissions reduction may be determined using continuous emission monitoring system cems field testing section a provides in part that cems field testing is testing that meets all the following requirements i the boiler used to conduct the test is coal-fired and steam-producing and is of a size and type commonly used in commercial operations ii emissions are measured using a cems iii if epa has promulgated a performance standard that applies at the time of the test to the pollutant emission being measured the cems must conform to that standard iv emissions for both the feedstock coal and the refined_coal are measured at the same operating conditions and over a period of at least hours during which the boiler is operating at a steady state at least percent of full load and v a qualified_individual verifies the test results in a manner that satisfies the requirement of section b section of the notice provides that methods other than cems field testing may be used to determine the emission reduction the permissible methods include a testing using a demonstration pilot-scale combustion furnace if it establishes that the method accurately measures the emission reduction that would be achieved in a boiler described in section a i and a qualified_individual verifies the test results in a manner that satisfies the requirements of section c i ii v and vi of the notice and b a laboratory analysis of the feedstock coal and the refined_coal that complies with a currently applicable epa or astm standard and is permitted under section b i or ii section of the notice provides that a taxpayer may establish that a qualified_emission_reduction determined under section dollar_figure applies to production from a facility by a determination or redetermination that is valid at the time the production occurs a determination or redetermination is valid for the period beginning on the date of the determination or redetermination and ending with the occurrence of the earliest of the following events i the lapse of six months from the date of such determination or redetermination ii a change in the source or rank of the feedstock coal that occurs after the date of such determination or redetermination or iii a change in the process of producing refined_coal from the feedstock coal that occurs after the date of such determination or redetermination section of the notice provides that in the case of a redetermination required because of a change in the process of producing refined_coal from the feedstock coal the redetermination required under section dollar_figure must use a method that meets the requirements of section in any other case the redetermination requirement may be satisfied by laboratory analysis establishing that - a the sulfur s or mercury content of the amount of refined_coal necessary to produce an amount of useful energy has been reduced by at least percent percent in the case of facilities placed_in_service after date in comparison to the s or mercury plr-112685-12 content of the amount of feedstock coal necessary to produce the same amount of useful energy excluding any dilution caused by materials combined or added during the production process b the s or mercury content of both the feedstock coal and the refined_coal do not vary by more than percent from the s and mercury content of the feedstock coal and refined_coal used in the most recent determination that meets the requirements of the notice finally section dollar_figure of the notice provides that the certification requirement of sec_3 c of the notice is satisfied with respect to fuel for which the refined_coal credit is claimed only if the taxpayer attaches to its tax_return on which the credit is claimed a certification that contains the following a statement that the fuel will result in a qualified emissions reduction when used in the production of steam a statement indicating whether cems field testing was used to determine the emissions reduction if cems field testing was not used to determine the emissions reduction a description of the method used a statement that the emissions reduction was determined or redetermined within the six months preceding the production of the fuel and that there have been no changes in the source or rank of the feedstock coal used in the process of producing refined_coal from feedstock coal since the emissions reduction was most recently determined or redetermined and a declaration signed by the taxpayer in the following form under penalties of perjury i declare that i have examined this certification and to the best of my knowledge and belief it is true correct and complete with respect to the first two issues the technology starts with two chemical additives being added to the feedstock coal prior to its combustion in a furnace the additives provide the chemical structure that results in the reduction of emissions of nitrogen oxide and mercury during combustion section dollar_figure of the notice provides generally that a qualified emissions reduction does not include any reduction attributable to mining processes or processes that would be treated as mining if performed by the mine owner or operator in the instant case the process is not a mining process further section dollar_figure of the notice clarifies sec_45 of the code and specifically provides that refined_coal includes feedstock coal mixed with additives thus additive processes that mix certain chemicals or other additives with the coal in order to achieve emissions reductions may qualify for the refined_coal production_tax_credit additionally section dollar_figure defines comparable coal as coal that is of the same rank as the feedstock coal and that has an emissions profile comparable to the emissions profile of the feedstock coal accordingly we conclude that a the refined_coal produced by using the technology constitutes a refined_coal within the meaning of sec_45 of the code provided that the refined_coal i is produced from feedstock coal that is the same source or rank as the tested coal and ii satisfies the qualified_emission_reduction test stated in sec_45 of the code and b increasing the amounts of chemical additives to the feedstock coal will not be construed as a change in process requiring additional testing for qualified emissions reductions plr-112685-12 with respect to the third issue the emissions profile of the refined_coal product is compared to the emissions profile of either the feedstock coal or a comparable coal predominantly available in the marketplace as of date section dollar_figure of the notice provides that a comparable coal is defined as coal that is of the same rank as the feedstock coal and that has an emissions profile comparable to the emissions profile of the feedstock coal section dollar_figure of provides that a determination or redetermination of a qualified emissions reduction is valid until the occurrence of the earliest of the following events i the lapse of six months from the date of such determination or redetermination ii a change in the source or rank of the feedstock coal that occurs after the date of such determination or redetermination or iii a change in the process of producing refined_coal from the feedstock coal that occurs after the date of such determination or redetermination we have determined that the blending of subbituminous coal and bituminous coal may be permissible under certain circumstances not requiring emissions reductions testing so long as the average blend range over the period of up to six months since the most recent determination or redetermination does not vary by more than percentage points for a total of percentage points each for the subbituminous coal and the bituminous coal from the most recent determination in the instant case taxpayer’s most recent cems determination involved location a subbituminous coal therefore taxpayer can blend location a subbituminous coal with bituminous coal without additional qualified emissions reductions testing on the other hand if taxpayer desires to refine coal including a blend range of for example to location a subbituminous coal and up to bituminous coal it would have to conduct redetermination testing pincite location a subbituminous coal and bituminous coal location a subbituminous coal and bituminous coal and or location a subbituminous coal and or bituminous coal however any change_of blend within that blend range would be treated as comparable coal and would not require additional testing for qualified emissions reductions with respect to the fourth issue section of notice_2010_54 provides that where a redetermination is required because of a change in the process of producing refined_coal the redetermination must use one of the general methods for satisfying the emissions reduction requirements listed in section dollar_figure of the notice however in any other case section of the notice provides that the redetermination requirement may be satisfied by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal do not vary by more than from the sulfur and mercury content of the feedstock coal and the refined_coal used in the most recent determination which may be the original cems test that meets the requirements of notice_2010_54 in the instant case periodic laboratory analysis will be performed to confirm that the average sulfur and mercury content of the feedstock for input into the facility as well as the average sulfur and mercury content of the refined_coal output from the facility regardless of the actual blend of ranks of coal or the source of the coal will not vary by more than below the bottom range for sulfur and mercury or plr-112685-12 ten percent above the top of the range of these chemicals in the tested feedstock coals accordingly we conclude that pursuant to section of notice_2010_54 the redetermination requirement of section dollar_figure of notice_2010_54 may be satisfied by laboratory analysis establishing that the average sulfur and mercury contents of both the feedstock coal and the refined_coal do not vary by more than from the range of sulfur and mercury content of the feedstock coal and the refined_coal used in the most recent determination that meets the requirements of section dollar_figure of notice_2010_54 as a result taxpayer i will not be required to test for nitrogen oxide emissions and ii will not be required to test for baseline emissions so long as there has not been a change in the process for producing refined_coal with respect to the fifth ruling_request taxpayer has also indicated that it may decide to use epa method 30b when not using laboratory testing to test for hg emissions epa method 30b is an epa approved method for measuring mercury emissions from coal-fired boilers the method involves use of a sorbent trap that collects mercury in flue gas as the gas exits the stack downstream from the scrubber or other pollution control devices the collected mercury is then analyzed to determine the mercury emissions epa method 30b is a form of cems testing based on the foregoing we conclude that the use of epa method 30b is an acceptable alternative to the use of a continuous emissions monitoring system during cems field testing for measuring mercury emissions reductions under section dollar_figure of notice_2010_54 as a corollary epa method 30b should also qualify as an acceptable method for satisfying the redetermination requirement under section dollar_figure of notice_2010_54 when doing cems field testing for redeterminations however taxpayer may not mix and match in the sense of using cems field testing to satisfy part of the redetermination requirement while using the laboratory analysis described in section to satisfy the remainder in addition if taxpayer elects to use epa method 30b it will also have to i test for nox emissions using conventional cems methodology and ii baseline emissions in the manner contemplated by section dollar_figure of notice_2010_54 no opinion is expressed regarding any other issue not specifically addressed in this ruling letter in particular no opinion is expressed with respect to whether taxpayer or any of its affiliates is the producer of the refined_coal for purposes of sec_45 of the code whether there has been a sale of refined_coal to an unrelated_person when the facility was in fact placed_in_service or the subchapter_k issues relating to the subsequent formation of a partnership for federal_income_tax purposes including whether the formation of such entity constitutes a partnership for federal_income_tax purposes in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives a copy of this ruling must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling plr-112685-12 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent we are sending a copy of this letter_ruling to the industry director sincerely peter c friedman senior technician reviewer branch


internal_revenue_service number release date index number -------------------------------------------------- ----------------------------------------------- ----------------------------- -------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b05 plr-114225-08 date date legend coop ----------------------------------------------------------------------- ----------------------------------------------- state a -------------- states --------------- ------------------------------------------------------------------------- ----------------------------------------------------------------------- b c ------ ------ dear ------------- this is in response to a request_for_ruling dated date submitted by your authorized representative the ruling concerns 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 coop is a nonexempt agricultural_cooperative corporation organized and existing under the laws of the state a coop operates in accordance with its bylaws to process and market b products for the b farmer members of coop the members of coop are b farmers in states who deliver their c to coop coop processes the c into a variety of plr-114225-08 products and then markets those products coop has a december year end at the end of each year coop computes its net_proceeds and distributes the patronage income to its members the coop’s bylaws clearly state that the cooperative must distribute the net_proceeds but like many other c cooperatives around the country coop have capitalized a portion of the net_proceeds known as the c check into inventory all member b products received by the cooperative are mingled with other members’ products and pooled the duration of the pools will be coop’s fiscal_year unless coop chooses another period coop has consistently used an annual pool beginning on january and ending on december bylaw c defines the net_proceeds of the cooperative as the amount remaining after reducing the ‘gross receipts from patronage’ by the deductions specified in b of the bylaws b defines deductions from gross_receipts from patronage a sec_1 all necessary marketing expenses the actual cost of supplies commodities equipment and other_property procured for patrons the actual cost of services performed for patrons and amounts attributable to gross_receipts from patronage of taxes other than taxes based on income all other necessary expenses and reasonable and necessary additions to reserves for depreciation for depletion for obsolescence of physical property for doubtful accounts and for other valuation reserves all established and computed in accordance with usual and customary accounting practices none of the payments to the members are included in the net_proceeds computation c of the bylaws also provides the net_proceeds from patronage shall be distributed to patrons of the cooperative subject only to the deductions therefrom and the exceptions thereto provided in dollar_figure of the bylaws b of the bylaws sets the pre-existing legal obligations of the cooperative to pay the members their proportionate share of the net_proceeds derived from patronage sourced income based on their respective patronage for that year coop makes payments to its patrons each year based on the patrons’ patronage sourced net_proceeds computed on a book basis because c is delivered daily throughout the year the member receives one or more advances following delivery and acceptance of the member’s c coop has historically made payments to the members on or about the 17th and 26th of each month for these advances these payments are also known as the c checks coop references several pricing mechanisms to determine the c checks this advance amount keeps the cooperative competitive with non-cooperative c processors but as the bylaws clearly state this amount is merely an advance on the ultimate net_proceeds due to the member at the end of the year coop distributes the remaining amount of net_proceeds to the patrons as will be discussed below for federal tax purposes the advance_payments or c checks are considered advances on the net_proceeds and treated as per-unit retains paid in money the final payment is made after the audited financial plr-114225-08 statements are complete for the remaining amount of the actual net_proceeds for the c marketed during the underlying fiscal_year the final payment is considered a patronage_dividend for federal_income_tax purposes and there is a requirement that at least percent of the patronage_dividend be paid in cash and the remainder in qualified written notices of allocation for the full amount to be deductible by the coop and includible in the income of the patrons coop operates as many marketing cooperatives around the country do as a pooling cooperative in general a pooling cooperative is a marketing_cooperative that segregates the patronage product received during the year into a pool a pool opens as deliveries of a product are made and closes after all or substantially_all of the product is sold or disposed of in some cases a cooperative will leave the pool open into the next year called the open pool method in other cases where sufficient information is available the cooperative will close the pool at its year end and sell the remaining patronage product in inventory forward to the next year’s pool at the product’s value determined at the lower_of_cost_or_market called the closed pool method the cooperative distributes the net_proceeds from the sale of each pool to the patrons generally in proportion to the volume of the commodity delivered to the pool pooling is essentially a risk sharing device rather than each patron separately selling his or her product for a market price at the time of delivery all patrons commingle their product and share the revenues and expenses of processing and selling in effect each producer receives an average price coop’s pooling arrangement is such that a separate pool is opened with each fiscal_year coop is using the closed pool method in its financial statement and tax_return accounting coop has always capitalized into inventory the c check payments thus the ending inventory includes the capitalized c check amount adjusted for the lower_of_cost_or_market effectively the cooperative is selling inventory forward to the next year and measuring its year end profit at the lower_of_cost_or_market lcm this means that the product on hand at the end of the year is sold forward to the next year’s pool at the lcm and the next year’s pool will get any benefit or cost of a difference between the lcm and the actual amount_realized on the c products coop’s financial statements reflect the c check payments to members as part of the cost_of_goods_sold of the cooperative and therefore only the final payment or patronage_dividend is reflected as part of the net_income the presentation on the tax_return is the same as the financial statements form 990-c and the new form 1120-c requires the cooperative to report per-unit retains paid in money in schedule a cost_of_goods_sold as will be discussed below this does not change the fact that the full amount of the c check and patronage_dividend are sec_1382 payments and may be deducted on the income_tax return and may be added back for purposes of computing the sec_199 deduction plr-114225-08 nonexempt subchapter_t cooperatives are permitted to exclude or deduct distributions to their patrons that qualify as patronage_dividends or per-unit retain allocations provided those 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 this subchapter 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 per-unit retain allocations purs may be made in money property or certificates per-unit retain allocations paid in money purpims 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 b 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 done 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 sec_1382 of the code provides that except as provided in sec_1382 the gross_income of any cooperative shall be determined without any adjustment as a reduction in gross_receipts an increase in cost_of_goods_sold or otherwise by reason of any allocation or distribution to a patron out of net_earnings or by reason of any amount_paid to a patron as per-unit retain allocations sec_1382 of the code provides in part that in determining the taxable_income of a cooperative there shall not be taken into account amounts paid during the payment period for the taxable_year as patronage_dividends to the extent paid in money qualified written notices of allocation or other_property with respect to patronage occurring during such taxable_year plr-114225-08 sec_1_1382-2 provides in part that there is allowed as a deduction from the gross_income of any cooperative to which part i of subchapter_t applies amounts paid to patrons during the payment period for the taxable_year as patronage_dividends with respect to patronage occurring during such taxable_year but only to the extent that such amounts are paid in money qualified written notices of allocation or other_property other than nonqualified written notices of allocation sec_1388 of the code defines the term nonqualified written notices of allocation as meaning a written_notice_of_allocation other than a qualified_written_notice_of_allocation or a qualified_check that is not cashed on or before the 90th day after the close of the payment period for the taxable_year for which the distribution of which it is part is paid sec_1382 of the code provides in part that in determining the taxable_income of a cooperative there shall not be taken into account amounts paid during the payment period for the taxable_year as per-unit retain allocations paid in money other_property or qualified certificates with respect to marketing occurring during such taxable_year sec_1382 of the code provides that for purposes of sec_1382 in the case of a pooling arrangement for marketing products the patronage shall be treated as occurring during the taxable_year the pool closes and the marketing of products shall be treated as occurring during any taxable years the pool is open though sec_1382 of the code is awkwardly drafted the flush language of sec_1382 clarifies what it means for an item not to be taken into account it states that for purposes of this title a patronage_dividend is treated as an item_of_gross_income and as a deduction therefrom and a per-unit_retain_allocation in money or qualified certificates are treated as a deduction in arriving at gross_income sec_1382 of the code provides in part that the payment period for any taxable_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 thus per-unit retain allocations paid in money or qualified certificates are deductions in arriving at gross_income if paid with respect to an open pool within the payment period for the taxable_year because patronage_dividends paid in money and qualified certificates are treated as deductions in arriving at gross_income form 990-c and new form 1120-c requires such dividends to be reported on schedule h as a deduction from gross_income because a per-unit retain allocations paid in money or qualified certificates are treated as a deduction in arriving at gross_income they are reported on schedule a of the form 990-c which represents the cooperative’s cost_of_goods_sold this does not change the fact that coop is allowed a full deduction under sec_1382 of the code for per-unit retains paid in money or qualified certificates plr-114225-08 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 product is sold the cost_of_goods_sold mechanism associated with inventory must be adjusted to reflect the deductions allowable under subchapter_t specifically cooperatives need to include the purs 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 purs the adjustments can be made to either the inventory or the line item deduction for the purs in other words if the purs 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 purs are not deducted on a deduction line in the tax_return the purs 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 purs once while also preserving the integrity of its sec_263a calculation under sec_199 of the code patrons that receive a qualified_payment from a specified agricultural and horticultural cooperatives are allowed a deduction for an amount allocable to their portion of the 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 requires the cooperative to be engaged in the manufacturing production growth or extracted mpge 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 agricultural and horticultural products the cooperative is treated as having 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 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 of its return provided that it does not create or increase a patronage tax loss but is required under plr-114225-08 sec_199 to reduce the deduction or exclusion it would otherwise claim under sec_1382 for per-unit retain allocations and patronage_dividends sec_1_199-6 provides no double counting 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 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 sec_1_199-6 provides that the final regulations are 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 the cooperative 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 he receives from the cooperative in his 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 d of the code and the regulations thereunder coop’s c checks qualify as per-unit retain allocations within the meaning of sec_1388 of the code because they were distributed with respect to c that coop markets for its patrons and by the fact that the patrons receive the payments based on the quantity of c delivered the c checks are determined without reference to the coop’s net_earnings the c checks were paid pursuant to a contract with the patrons establishing the necessary pre-existing agreement and obligation and the c checks were paid within the payment period of sec_1382 based on the foregoing we rule as requested that sec_199 of the code allows certain payments from the cooperative to its patrons to be added back for purposes of computing the sec_199 amount coop should include all net_proceeds payments or allocations including the c check and patronage_dividend in its computation of the sec_199 amount specifically the c check is considered a per-unit retain paid in money under sec_1382 plr-114225-08 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 cc


internal_revenue_service index nos department of the treasury washington d c person to contact teleohone number refer reply to cc dom fi p plr-101710-99 date may legend fund a fund b fund c fund d trust state x adviser accounting firm year year year year month month date date plr-101710-99 date date date date date this responds to a letter dated date the funds subsequent correspondence submitted on behalf of funds a and d sec_855 of the internal_revenue_code to treat dividends distributed after the close of a taxable yéar as having been paid during that taxable_year be considered timely filed pursuant to sec_301_9100-3 of the procedure and administration regulations c each fund requests that its election under and b facts trust is a state x business_trust registered as an open-end management investment_company under the investment_company act of trust's investment adviser is adviser u s c sec_80a-1 et geg as amended a series_fund of trust within the meaning of of the code each fund is sec_851 to be treated as a regulated_investment_company ric under subchapter_m of the code and has operated in a manner intended to qualify it accounting for tax and financial_accounting purposes and has a fund a was established in year fund b was june year-end fund c and fund d were both established established in year in year each fund uses the accrual_method of each fund has previously elected a ric as trust has an investment advisory and administration among other things adviser is agreement with adviser responsible for the timely filing of all tax returns for each for the tax_year ended date adviser intended to file or fund cause to be filed for each fund an extension request on form_7004 the due_date for filing each fund's federal_income_tax by date further each fund intended to make elections under return to treat certain dividends_paid after the close of sec_85s5 a taxable_year as having been paid during the taxable_year effective for its taxable_year that ended date its fund first hired accounting firm in month year for a representative of adviser and the the tax_year ended date accounting firm agreed that accounting firm would prepare tax plr-101710-99 the matter of extensions was not specifically staff of the accounting firm erroneously assumed that filings addressed extensions would be prepared by adviser erroneously assumed that extensions would be prepared by the accounting firm because of these faulty assumptions both adviser and the accounting firm failed to file any extension requests for the funds by date staff of adviser when the accounting firm realized that neither it nor adviser had prepared extension requests for the funds for the tax_year ended date the accounting firm filed each fund's year federal_income_tax return on date before the date due_date that would have applied to such filings had extensions been timely filed the accounting firm informed adviser in accordance with their intention to make the election under sec_855 for the taxable_year ended date fund b fund and fund d declared the amount of their annual dividends on date pursuant to a resolution of the board_of directors passed on date dividends were declared and paid to the shareholders of fund a by date fund b fund c and fund d in month year dividends were paid to the shareholders of law and analysis sec_855 of the code provides that if a ric - declares a dividend prior to the time prescribed by law for the filing of its return for a taxable_year including the period for any extension of time granted for filing such return and distributes the amount of such dividend to shareholders in the 12-month_period following the close of such taxable_year and not later than the date of the first regular dividend payment made after such declaration the amount so declared and distributed shall the company elects in such return in accordance with regulations prescribed by the secretary be considered as having been paid during such taxable_year except as provided in subsections b and d c to the extent sec_1_855-1 of the income_tax regulations sets forth the method of making the election and provides that the election must be made in the return filed by the ric for the taxable_year sec_301_9100-1 of the procedure and administration regulations provides in part discretion to grant a reasonable extension of time to make a that the commissioner has plr-101710-99 regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin 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 h and i g sec_301_9100-3 through c i set forth rules that the internal_revenue_service generally will use to determine whether under the facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b through iii for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 when a taxpayer applies of holding based upon the facts presented and representations made by each fund we hold that each fund has demonstrated good cause for the granting of relief under sec_301_9100-3 accordingly each fund will be treated as having made a timely election under sec_855 a of the code on its federal_income_tax return filed for the tax_year that ended date no opinion is expressed as to whether each fund's tax_liability is not lower in the aggregate for the year to which the election applies than each fund's tax_liability would have been if the election had been timely made taking into account the time_value_of_money returns involved the district director's office will determine each fund's tax_liabilities for the year involved district director's office determines that each fund's liability is lower effect that office will determine the federal_income_tax upon audit of the federal_income_tax if the this ruling is limited to the timeliness of each fund's this ruling does not relieve each fund from any election penalty that it may owe as federal_income_tax returns on time upon above no opinion is expressed or implied as excise or income_tax consequences regarding each fund particular no opinion is expressed or implied whether each fund a result of its failure_to_file its except as specifically ruled to any federal in plr-101710-99 -s- qualifies as a ric that is taxable under subchapter_m part the code of this ruling is directed only to the taxpayer who requested sec_6110 of the code provides that it may not be it used or cited as precedent sincerely yours kons b rsointe assistant chief_counsel financial institutions and products enclosures copy of this letter copy of sec_6110 purpose sec_2


department of the treasury internal_revenue_service te_ge - eo mandatory review commerce street mc 4920-dal dallas tx government entities division number release date legend org organization name uil xx date address address date date org address employer_identification_number person to contact identification_number contact telephone number in reply refer to te_ge review staff last day for filing a petition with tax_court december 20xx certified mail - return receipt requested dear this is a final adverse determination revoking your exempt status under sec_501 of the internal_revenue_code our adverse determination was made for the following reasons you have failed to produce documents to establish that you are operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 and that no part of your net_earnings inure to the benefit of private shareholders or individuals you failed to respond to repeated requests to allow the internal_revenue_service to examine your records regarding your receipts expenditures or activities and have failed to file information returns as required by sec_6001 sec_6033 and rev_rul cb based upon the above we are revoking your organization’s exemption from federal_income_tax under sec_501 of the internal_revenue_code retroactively to january 20xx contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax return form_1120 these returns should be filed with the appropriate internal revenue campus for the year ending december -20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office_of_the_taxpayer_advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax exempt status was determined by calling faxing or writing to internal_revenue_service taxpayer advocates office taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals process etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_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 we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely vickie l hansen acting director eo examinations tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service stop 4925stp e 7th st suite 1130b st paul mn 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 revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code 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 i 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 the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter catalog number 34809f form_886 a name of taxpayer schedule no or exhibit year petriod ended explanation of items department of the treasury - internal_revenue_service 20xx org legend org organization name xx date issue whether org organization qualifies for exemption under sec_501 of the internal_revenue_code facts the last return filed by the organization was for year ended december 19xx a search of the xyz state attorney general’s website on april 20xx indicates the organization no longer exists on april 20xx the irs sent a letter to the organization at the address of the last known officer the letter requested information on the organization's existence and asked the organization what it had done with its assets there has been no response to the letter the letter was not returned by the post office so it was received law rc sec_6001 provides that every person liable for any_tax imposed by the irc or for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_1_6033-1 provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_65 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status conclusion it is the irs’s position that the organization failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under sec_501 accordingly the organization's exempt status is revoked effective january 20xx form 886-a rev department of the treasury - internal_revenue_service page -1-


internal_revenue_service number release date index numbers --------------------------------------------- ------------------------------- -------------------------- --------------------------------- 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 b01 plr-146539-10 date date legend x ---------------------------------------------------- ----------------------------------------------------------- y ------------------------------------------- --------------------------------------------- date date country --------------------- ----------------------- -------- dear --------------------- this responds to a letter dated ----------------------- submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to have x classified as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed under laws of country on date on date y acquired x x intended to be treated as a disregarded_entity for federal tax purposes effective date however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes plr-146539-10 law and analysis 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 as provided in sec_301_7701-3 an eligible_entity with a single owner can elect to be classified as an association and thus a corporation under sec_301_7701-2 or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that unless it elects otherwise a foreign eligible_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 owner that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six 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 section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government plr-146539-10 conclusion based solely on the facts submitted and the representations made we conclude that the requirements of 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 make an election to be treated as a disregarded_entity for federal tax purposes effective date x shall make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent upon x and its owner filing within days of this letter any and all required federal_income_tax and information returns consistent with the requested relief being effective date these returns must include but are not limited to all required forms information_return of u s persons with respect to disregarded entities except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely s barbara j campbell senior technician reviewer branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc