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-157789-06 date date ---------------------------------------------------- --------- legend taxpayer --------------------------------------------------------------- state a city b sub dear ------------------ -------------------- ------------------------------------ this is in response to a request for a ruling dated date submitted on behalf of taxpayer by your authorized representative the ruling concerns the application of cooperative tax law to a transaction described below taxpayer was incorporated in ------ pursuant to the state a statutes taxpayer is a rural telephone company operated on a cooperative non-profit basis for the mutual benefit of its members taxpayer is located in city b and serves --------- access lines in this rural community taxpayer’s service territory is approximately --------- square miles effective for tax years beginning after ------- taxpayer was granted exemption under sec_501 of the internal_revenue_code taxpayer has failed tax exemption each year from --------through --------because in each year it has received less than percent of its income from members as required by the code plr-157789-06 while taxpayer’s primary business_purpose is to provide each of its approximately---------- members local exchange telephone carrier services it also provides long-distance wireless internet and digital television among others these services are provided though a subsidiary sub and its other subsidiaries under taxpayer’s amended articles of incorporation taxpayer is organized as a cooperative to provide telecommunications and other information services further taxpayer’s articles provide that it shall operate on a cooperative basis for the mutual benefit of its members with the net savings derived from transactions with members belonging to such members in proportion to their respective patronage and returned in the form of capital credits taxpayer’s bylaws provide that it shall at all times be operated on a cooperative not for profit basis for the mutual benefit of its member patrons on date the rural telephone bank rtb or bank was established by amendment to the rural electrification act re act as a source of supplemental financing for telecommunications companies and rural telephone cooperatives eligible to borrow under the re act’s telephone loan program a board_of directors was appointed to manage the operations of the bank and the employees of rural electrification administration now usda rural development utilities programs performed the bank’s day to day operations by establishing a capital structure which provided for a mixed federal and private ownership the bank was designed to assure rural telephone systems access to private sources of capital by establishing a supplemental credit mechanism to which borrower systems could turn for all or part of their future capital requirements the capital structure of the bank consists of three classes of stock class a class b and class c class a stock was issued by the bank in exchange for approximately dollar_figure million of capital provided by various taxpayers this provided the bank with its initial seed money to begin its lending operations the bank paid an annual dividend of two percent on class a stock class b stock was required to be purchased by recipients of rtb loans in an amount equal to five percent of the face value of the loan class b stock did not earn a cash dividend but bank borrowers acquired additional shares of class b stock through annual patronage refunds class c stock was acquired through the conversion of class b stock after repayment of the loans associated with the class b stock and earned a cash dividend at a rate determined by the board_of directors since the class b stock paid no cash plr-157789-06 dividends and could not be otherwise redeemed conversion was the only route available to borrowers that extinguished their loans class c stock was also available for purchase by bank borrowers and by organizations controlled by bank borrowers however such voluntary transactions were extremely rare because no borrower would want to invest in instruments that have no schedule of principal repayment in addition to providing for a mixed-ownership through the a b and c classes of stock the re act amendment also provided that the ownership control and operation of the bank be transferred to the class b and class c stockholders after a percent of the class a stock was retired known as privatization of the bank the retirement of class a stock began in fiscal_year in date the fiscal_year federal budget proposed the dissolution of the rtb the rtb’s board_of directors unanimously approved resolutions to liquidate and dissolve the bank on date after more than nine months of congressional negotiations the bill was signed into law on date authorizing the initiation of the liquidation and dissolution process stock_redemption agreements were sent to shareholders beginning on date for final consideration and ratification by borrowers’ boards of directors the dissolution process is expected to be largely completed by the end of fiscal_year taxpayer first borrowed money from the rtb in ------- and continues to have outstanding loans during this period the taxpayer purchased ------------- shares of rtb class b stock the rtb class b stock_dividends received by taxpayer over the years totaled dollar_figure--------------- making a total amount of class b stock owned of dollar_figure---------------- from the rtb on ------------------------ taxpayer’s board_of directors ratified the agreement on -------------------- the total amount of class b stock redeemed was dollar_figure--------------- taxpayer received the rtb liquidation funds on ----------------------- taxpayer does not expect any additional payments relating to the liquidation taxpayer received the proposed liquidation and stock_redemption agreements based on the foregoing taxpayer requests a ruling that the income realized by taxpayer by the liquidation payment for class b stock of the rtb constitutes patronage-sourced income which may be excluded from its gross_income when allocated to taxpayer’s patrons by a true patronage_dividend plr-157789-06 in the event a rural telephone cooperative such as taxpayer loses its tax-exempt status sec_501 of the code no longer applies until such time as the cooperative again satisfies the requirements for exemption during any taxable_period the rules applicable to the telephone cooperative depend on the reasons why it failed its exemption tests if exemption was lost because the company failed to operate on a cooperative basis then it will be taxed under the same rules applicable to for-profit corporations alternatively if the cooperative becomes taxable because it failed the so-called percent income test imposed by sec_501 then the organization will be taxed as a cooperative while the requirements of subchapter_c of the code regarding corporate_distributions and adjustments and other provisions are generally applicable to nonexempt cooperatives these entities are distinguished from other types of corporations by a specific body of tax law the scheme of taxation for nonexempt cooperatives was developed from the administrative pronouncements of the service and decision of the judiciary over a fifty-year period these rules for tax treatment of most nonexempt cooperatives and their patrons were finally codified with the enactment subchapter_t of the code as part of the revenue act of pub_l_no h_r with passage of subchapter_t the rules for deduction of patronage_dividends and the treatment of patronage_dividends in the hands of a cooperative’s patrons were defined however sec_1381 of the code states that subchapter_t is not applicable to organization engaged in furnishing electric energy or providing telephone service to persons in rural areas according to the senate_finance_committee report accompanying the act the intent of congress was that nonexempt rural electric and telephone cooperatives would continue to be treated as under present law in its report accompanying the legislation the senate_finance_committee described present law as follows under present law patronage_dividends paid_by taxable cooperatives result in a reduction in the cooperative’s taxable_income only if they are paid during the taxable_year in which the patronage occurred or within the period in the next year elapsing before the prior year’s income_tax return is required to be filed including any extensions of time granted s rep no 87th cong 1st sess under this earlier body of tax law applicable to nonexempt telephone cooperatives a cooperative may reduce its taxable_income by any qualifying patronage_dividends paid to their members patrons further under pre-1962 cooperative rules the term paid means paid in cash or paid_by notice of allocation see also revrul_83_135 1983_2_cb_149 a taxable cooperative not subject_to the provisions of subchapter_t of plr-157789-06 the code may exclude from gross_income the patronage_dividends paid or allocated to its patrons in accordance with its by-laws while subchapter_t does not control the taxation of nonexempt telephone cooperatives its foundations rest upon pre-1962 cooperative tax law as a result there are certain basic parallels between the tax treatment of nonexempt utility cooperatives and treatment of other cooperative organizations under subchapter_t therefore to extent that subchapter_t reflects cooperative taxation as it existed prior to it is in instructive resolving certain issues facing rural telephone cooperatives this is because congress stated that in enacting subchapter_t it was merely codifying the long common_law history of cooperative taxation with the exception of ensuring at least one annual level of tax at the cooperative or patron level see s rep no 87th cong 1st sess and arguably the case law post-enactment is merely a continuation and refinement of the pre-enactment common_law this is particularly true with respect to defining certain terms such as operating_on_a_cooperative_basis and patronage income perhaps the most succinct definition of the term cooperative for federal_income_tax purposes was provided by the u s tax_court in 44_tc_305 acq 1966_1_cb_3 the tax_court said under the cooperative association form or organization on the other hand the worker- members of the association supply their own capital at their own risk select their own management and supply their own direction for the enterprise through worker meetings conducted on a democratic basis and then themselves receive the fruits of their cooperative endeavors through allocations of the same among themselves as co-workers in proportion to the amounts of their active_participation in the cooperative undertaking the tax_court went on to describe three guiding principles at the core of economic cooperative theory as subordination of capital both as regards control_over the cooperative undertaking and as regards the ownership of the pecuniary benefits arising therefrom democratic control by the worker-members themselves and the vesting in and allocation among the worker-members of all fruits and increases arising from their cooperative endeavor ie the excess of operating revenues over the costs incurred in generating those revenues in proportion to the worker-members’ active_participation in the cooperative endeavor t c pincite the mechanism by which telephone cooperative achieve operation at cost is the patronage_dividend or capital credit since the payment of patronage_dividends and plr-157789-06 operation at cost is so critical to achieving cooperative status as defined by puget sound it is important to analyze this issue rural telephone cooperatives perform a final accounting at year-end to determine the net margin derived from their members’ patronage during the course of the year then the excess over cost collected from members is returned to them by a capital credit allocation based on each member’s patronage those capital credits are typically paid_by allocations of capital credit certificates or notices of allocation rather than in cash the capital credits retained form the foundation for the organization’s equity_capital a true patronage_dividend that may be excluded from the income of a rural it must be made subject_to a preexisting legal_obligation telephone cooperative must meet the three tests set forth in farmers cooperative co v birmingham f_supp n d ia and 31_tc_674 acq aod 1959_2_cb_6 those tests are the margins allocated must be derived from the profits generated from patrons’ dealings with the cooperative the allocation must be made on the basis of patronage and although the code does not provide specific guidance as to what constitutes patronage-sourced income for a nonexempt telephone cooperative regulations and rulings address the issues for cooperatives governed by subchapter_t of the code while not directly applicable to taxable utility cooperatives per se arguably they reflect the correct analysis with respect patronage income of cooperatives subject_to pre-1962 law the senate committee report accompanying the cooperative provisions in the revenue act of indicated that the congress intended to tax ordinary ie non- farmer cooperatives for non-operating income not derived from patronage as for example in the case of interest or rental income even if distributed to patrons on a pro_rata basis s rep no 82d cong 1st sess in response to that guidance of congress the service promulgated regulations distinguishing nonpatronage income from that which is patronage derived sec_1388 of the code specifies that a patronage_dividend must be determined by reference to the net_earnings of the organization from business done with or for its patrons that section further provides that the term patronage_dividend does plr-157789-06 not include any amount_paid to a patron to the extent that such amount is out earnings other than from business done with or for patrons further it does not include earnings from business done with or for other customers to whom no amounts are paid or to whom smaller amounts are paid with respect to substantially identical transactions in revrul_69_576 1969_2_cb_166 a nonexempt farmers’ cooperative borrowed money from a bank for cooperatives itself a cooperative to finance the acquisition of agricultural supplies for resale to its members the bank for cooperatives allocated and paid interest from its net_earnings to the nonexempt farmers’ cooperative which it in turn allocated to its members states in determining whether the allocation was from patronage sources the ruling the classification of an item_of_income as from either patronage or nonpatronage sources is dependent on the relationship of the activity generating the income to the marketing purchasing or service activities of the cooperative if the income is produced by a transaction which actually facilitates the accomplishment of the cooperative's marketing purchasing or service activities the income is from patronage sources however if the transaction producing the income does not actually facilitate the accomplishment of these activities but merely enhances the overall profitability of the cooperative being merely incidental to the association's cooperative operation the income is from nonpatronage sources revrul_69_576 pincite sec_1_1382-3 of the income_tax regulations defines income from the ruling concluded that in as much as the income received by the nonexempt_cooperative from the bank for cooperatives resulted from a transaction that financed the acquisition of agricultural supplies which were sold to its members thereby directly facilitating the accomplishment of the cooperative’s marketing purchasing or service activities the income was patronage sourced sources other than patronage nonpatronage income to mean incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association such as income derived from lease of premises from investment in securities or from the sale_or_exchange of capital assets cl_ct the court held that interest on demand deposits in farm credit banks or on loans to brokerage funds received by st louis bank for cooperatives was patronage sourced income the court stated that a particular item_of_income is patronage sourced when the transactions involved are directly related to the marketing purchasing or service activities of the cooperative association f 2d pincite in st louis bank for cooperatives v united_states ct_cl f 2d plr-157789-06 in twin county grocers inc v united_states cl_ct a nonexempt_cooperative was denied deductions for patronage_dividends for interest on a certificate of deposit bought from a nonpatron bank because the dividend income was not patronage sourced the court held that the relation of income activity to the cooperative’s business was too tenuous courts have ruled in several instances that income from corporations organized by cooperatives to conduct activities related to the cooperative business is patronage sourced in farmland industries v commissioner 78_tcm_846 acq aod citing 765_f2d_1102 675_f2d_988 8th cir 88_tc_238 87_tc_435 the taxpayer a cooperative organized for the purpose of providing petroleum products to its patrons sought to have the proceeds from the disposition of its stock in three subsidiaries classified as patronage-sourced income in reaching its decision the court stated that its task was to determine whether each of the gains and losses at issue was realized in a transaction that was directly related to the cooperative enterprise or in one which generated incidental income that contributed to the overall profitability of the cooperative but did not actually facilitate the accomplishment of the cooperative s marketing purchasing or servicing activities on behalf of its patrons t c m pincite in land o’lakes inc supra the court held that dividends received by the nonexempt_cooperative from the st paul bank for cooperatives was patronage derived and could be allocated to land o’lakes patrons as deductible patronage_dividends the court noted that the taxpayer was required to acquire and hold the stock to obtain a loan the proceeds of which were used to finance cooperative activities on favorable terms finding that the subject transaction was not significantly distinguishable from the transaction in revrul_69_576 in the instant case taxpayer borrowed from the congressionally established rtb pursuant to the re act’s purposes as a result it was required to purchase the class b stock and pursuant to the bank’s regulations have that class b stock converted to class c stock when its loans were repaid these loans and stock acquisitions were directly related to taxpayer’s cooperative purpose in providing telephone service to rural customers its member patrons further in light of the fact that the federal government has caused the dissolution of the rtb the redemption of taxpayer’s class b stock in liquidation of the rtb also can be seen as directly related to taxpayer’s cooperative purposes accordingly based solely on the foregoing we rule that plr-157789-06 the income realized by taxpayer by the liquidation payment for the class b stock of the rtb constitutes patronage-sourced income which may be excluded from its gross_income when allocated to taxpayer’s patrons by a true patronage_dividend however to the extent if any that taxpayer conducted telecommunications or related business with nonmembers or on a noncooperative basis it is required to make an allocation of the income between patronage and nonpatronage sources based on the proportion of business conducted with members and nonmembers and between its cooperative and noncooperative activities 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 senior technician reviewer branch office of the associate chief_counsel passthroughs special industries


internal_revenue_service number release date index number ------------------------- --------------------------- ----------------------------- ------------------------------------------ -------------- legend 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 intl b04 plr-116415-07 date july ---------------------------- ------------------------------------------ --------------------------------------------- taxpayer --------------------------- ---------------------------------------------------------- entity -------------------------------------------------- ----------------------------------------- entity ------------------------------------------------- ----------------------------------------- entity ------------------------------------------ entity ---------------------------------------------------------- entity -------------------------------------------------- ----------------------------------------- entity --------------------------------------------------------------------------------------------- ------------------------------------------------- ----------------------------------------- entity ------------------------------------------------------------------- -------------------------------------------------------- --------------------------------------------- ---------------------------- --------------- ------------------------------------------------ ------------------------------------------------------------- -------------------------------------------------------------- plr-116415-07 ---------------------------------------------------------------------------------- -------------------------------------- entity ----------------------------------------------------------------------------------------------- ------------------------------------------- ----------------------------------------- entity -------------------------------------- ---------------------------------------------------------- entity ---------------------------------------------------------- entity ------------------------------------------------- ----------------------------------------- entity ------------------------------------------------- ----------------------------------------- entity ------------------------------------------- entity -------------------------------------------------- entity ---------------------------------------------------------- entity ---------------------------------------------------------------------------------------------------- ------------------------------------------ country a ----------------- country b -------------- country c ---------------- country d --------------------- country e ----------- --------------------------------------------- --------------------------------- ------------------------------ -------------------- ------- ------- ------- ------------- --------------- --------------- --------------- ---------------- ---------------- ------------------ plr-116415-07 year x year y year z date date date date date date date date date q dear -------------- this replies to a letter dated date requesting an extension of time pursuant to sec_301_9100-1 and -3 to furnish to the applicable entities or their successors and the internal_revenue_service the statements and notices required by sec_1_897-2 sec_1_897-2 sec_1_1445-2 and sec_1_1445-5 these statements and notices are related to internal restructuring transactions occurring in year x year y and year z involving the transfer of interests in domestic corporations the rulings contained in this letter are predicated upon facts and representations submitted by you and accompanied by penalty of perjury statements executed by appropriate parties this office has not verified any of the above material submitted in support of the request for rulings verification of the factual information representations and other data may be required as a part of the audit process factual background ------------------ ---------- ------ plr-116415-07 taxpayer is a country d corporation and directly or indirectly owned the corporations involved in the transactions described below during year x year y and year z during those years the following transactions occurred transaction on date of year x entity a country e subsidiary of taxpayer sold its entire_interest of q in entity a domestic_corporation to entity entity was classified as a disregarded_entity of entity for federal tax purposes entity was a foreign_partnership for federal tax purposes entity did not provide a statement to entity or notice to the internal_revenue_service pursuant to sec_1_897-2 and h in addition entity did not provide a statement to entity pursuant to sec_1_1445-2 entity subsequently merged into entity entity is no longer in existence and through reorganizations is now part of entity transaction on date of year x entity converted under country c law from an entity classified as a per_se_corporation for federal tax purposes to an entity classified as an eligible_entity for federal tax purposes entity also changed its name and made an election under sec_301_7701-3 to be treated as an entity disregarded from its owner entity for federal tax purposes at the time of the election entity owned all the stock of entity a domestic_corporation pursuant to sec_301 g iii entity 7’s election to be disregarded resulted in a deemed liquidation of entity into entity entity did not provide a notice to entity or the internal_revenue_service as required by sec_1_897-2 and h and b iii transaction on date of year x entity a country a corporation converted under country a law to an entity classified as a per_se_corporation for purposes of sec_301_7701-2 in a transaction intended to qualify under sec_368 on date entity owned the stock of entity a domestic_corporation entity did not provide a statement to entity or notice to the internal_revenue_service as required by sec_1_897-2 and h and c transaction on date of year x entity was treated for federal tax purposes as a disregarded_entity of entity a country d partnership entity contributed assets that included stock of entity a domestic_corporation to entity a country a corporation in exchange for voting and nonvoting_stock and cash the partners of entity were two foreign_corporations within taxpayer’s then existing group the notice and statements required by sec_1_897-2 and h and c were not filed entity no longer exists and through reorganizations is now part of entity entity and one former partner of entity are now disregarded entities of entity the other former partner is now entity transaction on date of year x entity a domestic_corporation statutorily merged into entity a domestic_corporation and predecessor to entity entity plr-116415-07 subsequently changed its name to entity prior to the merger entity a country a corporation was the sole shareholder of entity and entity entity received entity stock and the right to deferred cash payments in exchange for its entity stock entity did not provide a statement to entity or the internal_revenue_service as required by sec_1_897-2 and h entity is now part of entity transaction on date of year y entity a country a corporation made a distribution of the stock of entity and entity both domestic corporations to its sole shareholder entity a country a corporation entity and entity did not file the statements or notices required by sec_1_897-2 and h and b iii entity is now known as entity entity was liquidated into entity subsequent to the transaction transaction on date of year y entity a country a corporation changed its place of incorporation from country a to country b and changed its name to entity at the time of reincorporation and name change entity owned all the stock of entity and entity both domestic corporations entity and entity did not file the statements or notices required by sec_1_897-2 and h and c entity was liquidated into entity subsequent to the transaction transaction on date of year z entity a country b corporation distributed all the stock of entity and entity both domestic corporations to its sole shareholder entity a country d corporation entity and entity did not file the statements or notices required by sec_1_897-2 and h and b iii entity was liquidated into entity subsequent to the transaction transaction on date or year z entity a country d corporation sold all the stock of entity a domestic_corporation to entity a country d corporation at the time of the transaction entity was an indirect subsidiary of entity entity did not file the statements or notices required by sec_1_897-2 and h entity was liquidated into entity subsequent to the transaction discussion sec_301_9100-1 provides that the commissioner has discretion to grant 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_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement an election includes an application_for relief in respect of tax plr-116415-07 sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides 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 that the grant of relief will not prejudice the interests of the government rulings based on the facts and circumstances of this case we conclude that the standards of sec_301_9100-3 have been satisfied accordingly we provide the following rulings for transaction entity as successor to entity and entity as successor to entity are granted extensions of time until days from the date of this letter_ruling to satisfy the statement notice and withholding requirements of sec_1_897-2 sec_1_897-2 and sec_1_1445-2 for transaction entity is granted an extension of time until days from the date of this letter_ruling to satisfy the statement notice and withholding requirements of sec_1_897-2 sec_1_897-2 and sec_1_1445-5 for transaction entity is granted an extension of time until days from the date of this letter_ruling to satisfy the statement notice and withholding requirements of sec_1_897-2 sec_1_897-2 and sec_1_1445-2 for transaction entity as successor to entity entity and entity are granted extensions of time until days from the date of this letter_ruling to satisfy the statement notice and withholding requirements of sec_1_897-2 sec_1 h and c for transaction entity as successor to entity is granted an extension of time until days from the date of this letter_ruling to satisfy the statement notice and withholding requirements of sec_1_897-2 and sec_1_897-2 for transaction entity and entity are granted extensions of time until days from the date of this letter_ruling to satisfy the statement notice and withholding requirements of sec_1_897-2 sec_1_897-2 and sec_1_1445-5 for transaction entity and entity are granted extensions of time until days from the date of this letter_ruling to satisfy the statement notice and withholding requirements of sec_1_897-2 sec_1_897-2 and sec_1_1445-2 for transaction entity and entity as successor to entity are granted extensions of time until days from the date of this letter_ruling to satisfy the plr-116415-07 statement notice and withholding requirements of sec_1_897-2 sec_1 h and b iii for transaction entity as successor to entity is granted an extension of time until days from the date of this letter_ruling to satisfy the statement and notice requirements of sec_1_897-2 and sec_1_897-2 the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file a notice of nonrecognition with respect to the transactions described above no opinion is expressed as to the application of any other section of the code or regulations to the facts presented specifically no opinion is expressed as to whether any of the transactions qualifies for nonrecognition treatment a copy of this ruling letter should be attached with the statements and the notices mailed to the irs this ruling is directed to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely ________________ david bailey assistant to the branch chief associate chief_counsel international branch


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division number release date date date uil contact person identification_number contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions you should follow the instructions in notice if you agree with our deletions you do not need to take any further action if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service at if you have any questions about your letter cg catalog number or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely lois g lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter letter cg catalog number department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person identification_number contact number fax number employer_identification_number vil legend b individual c individual d business f individual g individual n business o state p city q date r date s dollar amount t date u number v number dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below letter cg catalog number 47628k issue do you qualify for exemption from federal_income_tax under sec_501 of the internal_revenue_code no for the reasons stated below alternate issue do you qualify for exemption from federal_income_tax under sec_501 of the internal_revenue_code no for the reasons stated below facts you were incorporated in o on q you were organized as a mutual benefit corporation primarily for social and educational_purposes more specifically you limited your purposes as follows a b c d e to establish maintain and conduct a club for the social enjoyment pleasure and recreation of the members to encourage and promote interest in understanding the importance of the civil liberties enjoyed by all americans regardless of their creed ethnic religious or social heritage to further the education of its members regarding the historical background of the development and growth of civil liberties in the united_states to perpetuate the above purposes in the event of dissolution by distributing any and all assets to a successor organization or public charity to promote participation of its members in the processes of local state and federal legislative bodies you explained that members of the general_public often refer to you as n restaurant you further explained that n was a restaurant owned and operated by d a for profit owned in part by b and c n ceased to exist on r two days after you were formed you utilize the facility previously occupied by n you have entered into a lease agreement with d for_the_use_of the that facility and are obligated to pay rent to d in the amount of s dollars per month you are governed by two board members b and c b your president executed the lease agreement with d on your behalf and then subsequently executed an addendum letter cg catalog number 47628k to the lease agreement on behalf of d the addendum to the lease agreement with d on your behalf and executed both the lease and addendum thereto on behalf of d c your vice-president and treasurer executed you explained in your application and responses submitted to our requests for additional information that you conduct the following activities a you operate a dining room seven days a week from a m to p m at n where you sell various food items anyone paying your one dollar annual membership fee may purchase food at your restaurant from may until september the dining room is also open on the fourth friday of the month from p m to p m b you distribute newsletters to your members that include stories and anecdotes which are intended to educate your members about american history and their civil liberties c you make your dining room available to local not-for-profit groups twice a month without charge in addition the non-for-profit groups are not obligated to purchase food from your dining room further you donate ten percent of the income received on the night your facility is utilized by a not-for-profit group to the featured not-for-profit group d you conduct monthly meetings regarding civil liberties including lectures from local political candidates and college professors you have two classes of membership namely equity membership and social membership you defined equity membership as one who has contributed cash or other_property to the club other than dues or periodic assessments and have sic the right to elect the board_of directors you further explained that b and c are equity members in addition you explained that upon dissolution your assets would be first used to pay off any liabilities of the club and then to pay back the amount of contributions paid in by equity members remaining assets are then to be distributed to the membership at large you defined a social member as one who is current with annual dues and any other assessment and is entitled to participate in the social activities o f the club you explained that one becomes a member by paying one dollar annually in return the member receives a membership card membership is open to anyone at least eighteen years of age and interested in learning about civil liberties you encourage membership in by distributing copies of your newsletters membership is terminated when a member letter cg catalog number 47628k fails pay required annual dues you further explained that the number of your members changes daily your facility is v people at last count on t you had u members the maximum capacity of the newsletters submitted with your application indicated that you have been issued four citations from the city of p o for violations of a city ordinance which banned smoking in restaurants your response to our questions regarding the status of these citations was as follows the issues have been completely resolved the city of p rescinded or withdrew the citations the main issues involving the smoking ban ordinance were its coverage application and enforcement since then the city of p has banned smoking from all bars private clubs and businesses your newsletters include various quotes from early americans but primarily have information regarding your menu and the operation of your dining room and even solicit suggestions for new menu items your newsletters state that local officials encouraged groups supporting the smoking ban in your community to come to your club without joining as amember they instruct your members to be on the lookout for non- members who support the smoking ban and have not joined your club you stated that these persons would be trespassing and are not welcome at your club your newsletters also advertise the location of your club as n restaurant you are supported primarily by income received through the operation of your dining room you report this income in your application as income from unrelated business activities and have reported this income on tax form 990-t your expenses are mainly operational including salaries to f and g the daughter and son-in-law of b and c your equity members a review of past years also shows expenses for food and drink supplies employee wages advertising taxes and utilities comprising the majority of expenditures sec_501 law sec_1_501_c_7_-1 provides as follows a the exemption provided by sec_501 applies only to clubs which are organized and operated exclusively for pleasure recreation and other nonprofitable purposes but does not apply to any club if any part of its net_earnings inures to the benefit of any private shareholder in general this exemption extends to social and recreation clubs which are supported solely by membership fees dues and assessments however a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities letter cg catalog number 47628k b a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under sec_501 uscs sec_501 solicitation by advertisement or otherwise for public patronage of its facilities is prima facie evidence that the club is engaging in business and is not being operated exclusively for pleasure recreation or social purposes however an incidental sale of property will not deprive a club of its exemption revrul_58_588 1958_2_cb_265 held that a social_club that sells an unlimited number of memberships to so-called members who have no voice in the management of the club and whose only rights are to use the club’s facilities upon payment of specified fees is not a tax-exempt social_club within the meaning of sec_501 of the internal_revenue_code income from the members was in reality income from the general_public the organization described in revrul_58_588 1958_2_cb_265 had two classes of membership namely active and associate members the active members controlled all business decisions of the organization and some of the active members were employees of the organization the ruling held that the organization was operated in the personal_interest of a few individuals that social features are not a material purpose of the club but are subordinate and merely incidental to the active furtherance of a predominant purpose to engage in the business of selling services for profit to an unlimited number of individuals termed associate members that associate membership is not a true membership but is merely a guise under which virtually unlimited numbers of individuals may utilize the club facilities and that income from associate members is in reality income from transactions with the general_public revrul_58_589 1958_2_cb_266 sets forth the criteria for determining whether an organization qualifies for tax-exempt status per internal_revenue_code sec_501 this revenue_ruling clearly states that an organization that makes its social and recreational facilities available for use by the general_public is engaged in a business and is not exempt under internal_revenue_code sec_501 further solicitation by advertisement of public patronage of a social club’s facilities will have an adverse effect on its tax exempt status commingling of the members must play a material part in the life of the organization in addition this ruling provides that a revrul_69_635 c b held that an organization was not exempt under sec_501 of the internal_revenue_code because the organization was designed to provide services to its members and there was no significant commingling of members letter cg catalog number 47628k public law provides that organizations exempt under sec_501 may receive up to percent of their gross_receipts including investment_income from sources outside of their membership without losing their tax-exempt status it is also intended that within this 35-percent amount not more than percent of the gross_receipts should be derived from the use of a social club's facilities or services by the general_public in chattanooga automobile club v commissioner warren automobile club inc v commissioner 182_f2d_551 6th cir the united_states court_of_appeals 6th circuit held that to be exempt under the act of congress a club must have been organized and operated exclusively for pleasure recreation and other non-profitable purposes the court further specified that the words other non-profitable purposes must be construed as coming within the same classification as pleasure and recreation in addition there must be at least some sort of commingling of members to constitute a club the court held that the two automobile clubs petitioning the court were not exempt under sec_101 of the internal_revenue_code_of_1939 as a social_club because the members of these clubs did not commingle in 181_f2d_402 3rd cir the united_states court of appeal sec_3rd circuit defined the word club to include some type of mingling of people together as well as a common object in this case the court held that the keystone automobile club was not exempt under sec_101 of the code for a number of reasons one of which was because they saw no evidence of the commingling of members sec_501 law sec_1_501_c_4_-1 provides in pertinent part as follows a civic organizations-- in general a civic_league_or_organization may be exempt as an organization described in sec_501 uscs sec_501 if-- i it is not organized or operated for profit and ii it is operated exclusively for the promotion of social welfare promotion of social welfare-- i in general an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements a social_welfare_organization letter cg catalog number 47628k _ will qualify for exemption as a charitable_organization if charitable set forth in paragraph d of sec_1_501_c_3_-1 and is not an action_organization as set forth in paragraph c of sec_1_501_c_3_-1 it falls within the definition of ii political or social activities the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public_office nor is an organization operated primarily for the promotion of social welfare if its primary activity is operating a social_club for the benefit pleasure or recreation of its members or is carrying on a business with the general_public in a manner similar to organizations which are operated for profit revrul_68_46 1968_1_cb_260 a war_veterans'_organization did not qualify for exemption from federal_income_tax under sec_501 because it was primarily engaged in renting a commercial building and operating a public banquet and meeting hall having bar and dining facilities application of c law not operated for pleasure recreation or other non-profit purpose an organization cannot be recognized as exempt under sec_501 unless it shows that it is both organized and operated substantially for pleasure recreation or other nonprofitable purpose although your articles of incorporation indicate that you are organized for the purposes prescribed by sec_501 of the code your activities indicate that you are not substantially operated for these purposes rather you are formed primarily to operate a restaurant your primary activity is operating a dining room where anyone paying your one dollar annual membership dues can purchase food in the original financial data submitted with your application you included receipts from your dining room as unrelated_business_income and previously filed unrelated_business_income_tax returns for this income acknowledging that this income was not derived from an exempt activity further you were formed two days before n restaurant dissolved you are operated by the same people who owned n restaurant and these former owners are your equity members your newsletters advertise the location on your club as n restaurant in addition your newsletter describes your menu hours of operation and solicits menu suggestions from your patrons your newsletters further communicate information about citations issued to you by the city of p for violating a smoking ban and you encouraged your members to be on the lookout for people patronizing your dining room who may support the smoking ban you explained that the smoking ban citations have been resolved because the smoking ban now applies to all bars private clubs and businesses you explained that your initial issue with the smoking ban was its coverage based on these facts it appears that you have been formed to circumnavigate or avoid compliance with the original smoking ban ordinance issued by the city of p letter cg catalog number 47628k you explained that you solicit new members and thus patrons of your dining room by distributing copies of your newsletter according to sec_1_501_c_7_-1 and revrul_58_589 soliciting public patronage by advertisement or other means is prima facie evidence that a club is engaging in business and is not operated exclusively for pleasure recreation or social purposes because you solicit an unlimited number of members for your dining room by distributing newsletters you are not operated exclusively for pleasure recreation or social purposes regulation c -1 further provides that a club which engages in business such as making its social and recreational facilities available to the general_public or by selling real_estate timber or other products is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under sec_501 uscs sec_501 because you sell food to the general_public through your issuance of unlimited memberships you are not organized exclusively for pleasure recreation and other nonprofitable purposes as required by sec_1_501_c_7_-1 and sec_501 of the code transacting business with the general_public lack membership requirements similar to the organization described in revrul_58_588 you sell an unlimited amount of memberships demonstrated by the fact that your membership changes daily although you explained that potential members should be eighteen and have an interest in civil liberties anyone who pays your one dollar annual membership may join your club although your facility has the capacity to accommodate only v persons at a time you continue to add members daily at your last count your members exceeded people also similar to the organization described in revrul_58_588 you have two classes of members your two equity members make all of your decisions in addition like the organization described in revrul_58_588 you employ family members of the two equity members your social members do not exercise any control_over you and do not have a voice in the management of the club since the board_of directors is selected by the two equity members the only rights accorded social members are the rights to purchase food in the dining room and to participate in the few social activities you conduct because your members do not exercise control_over you you do not have a valid membership and are only conducting business with the general_public private interests of your equity members and their family as previously described you were formed two days prior to the dissolution of n and are operated by the former owners of n equity members b and c who make all of your business decisions upon your dissolution your assets after payment of debts will be used to pay back contributions made to you by your equity members further your letter cg catalog number 47628k equity members entered into a lease agreement in which they signed as both lessors and lessees your equity members are receiving lease payments as owners of the facility in addition you pay salaries to the equity members’ son and daughter-in-law all the financial transactions are decided by your equity members there is no oversight or outside control to ensure that these transactions are made at arms length or in your best interest as opposed to the best interest of your equity members accordingly you are operated for the personal interests of your equity members sec_501 of the code provides that no part of net_earnings shall inure to the benefit of any private shareholder since your income inures to your equity members and their family via return_of_capital contributions lease payments and salaries you do not qualify for exemption under sec_501 of the code lack of social activities or commingling among your members organizations failing to meet this commingling requirement have to be operated for the purposes described in sec_501 of the code an organization must have an established membership of individuals who meet to make personal contacts and promote fellowship the commingling of the members must play a material part in the life of a tax exempt social_club as required by revrul_58_589 and supra been denied exemption chattanooga automobile club v commissioner warren automobile club inc v commissioner supra and keystone automobile club v commissioner supra at last count you had u members yet your facility can only accommodate v people this is direct evidence that members cannot be regularly comingling as your facility cannot physically accommodate their being in the same location there is no common interest among your members and your social activities are only incidental to your overall activities you conduct social activities only once a month while your dining room remains open seven days a week have a facility to accommodate all of your members and your social meetings are a relatively small part of your total activities commingling is not a material part of the life of your club primarily providing services by operating a dining room you are providing services and do not have significant commingling among your members like the organization described in revrul_69_635 supra you are because you do not you receive more than thirty-five percent of your income from outside a valid membership because your transactions with social members are actually transactions with the general_public for the reasons described above you do not receive at least of your income from members as required by public law further you have reported all of the income from your dining room as unrelated_business_income rather than income from members accordingly you do not meet the income requirements for organizations exempt under sec_501 of the code letter cg catalog number 47628k application of c law you are not operated primarily for the promotion of social welfare and otherwise fail to qualify under sec_501 of the code although you distribute newsletters and hold monthly lectures you operate your dining room seven days a week the operation of your dining room is clearly your primary activity similar to the organization described in revrul_68_46 above thus while your newsletter and civil liberty lectures may qualify as promoting social welfare under sec_501 of the code you do not qualify for recognition of exemption under sec_501 of the code because your primary activity is not promoting social welfare but rather operating a dining room sec_1_501_c_4_-1 provides that organizations carrying on a business with the general_public in a manner similar to organizations which are operated for profit are not operated primarily for the promotion of social welfare as described in the c application of law section above your primary activity is transacting business with the general_public by selling food in your dining room accordingly you do not qualify for recognition of exemption from federal_income_tax under section further the net_earnings of organizations qualifying for exemption from federal_income_tax under sec_501 of the code must be devoted exclusively to charitable educational or recreational purposes you explained that upon your dissolution your remaining assets will be distributed to your equity members after your liabilities are satisfied thus your net_earnings are not devoted exclusively to charitable educational or recreational purposes as required by sec_501 of the code and you do not qualify for recognition of exemption from federal_income_tax under sec_501 of the code conclusion based on the information provided we conclude that you are not operated for pleasure recreation or other nonprofitable purposes described in sec_501 of the internal_revenue_code any such activities that you engage in are merely incidental to the furtherance of your purpose of selling food to the general_public further you are organized for the private benefit of your equity members and do not meet the membership income and commingling requirements for organizations qualifying for exemption from federal_income_tax under sec_501 of the code accordingly you do not qualify for recognition of exemption under sec_501 of the internal_revenue_code in addition we conclude that you are not primarily operated for the promotion of social welfare as described in sec_501 of the code your primary activity is to engage in the business of selling food to the general_public accordingly you do not letter cg catalog number 47628k qualify for recognition of exemption under sec_501 of the internal_revenue_code you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if that information affects our determination if your statement does not provide a basis to reconsider our determination we will forward your case to our appeals_office you can find more information about the role of the appeals_office in publication exempt_organization appeal procedures for unagreed issues types of information that should be included in your appeal can be found on page of publication under the heading regional_office appeal’ these items include a n o r n o d the organization’s name address and employer_identification_number a statement that the organization wants to appeal the determination the date and symbols on the determination_letter a statement of facts supporting the organization’s position in any contested factual issue a statement outlining the law or other authority the organization is relying on and a statement as to whether a hearing is desired the statement of facts item must be declared true under penalties of perjury this may be done by adding to the appeal the following signed declaration under penalties of perjury declare that have examined the statement of facts presented in this appeal and in any accompanying schedules and statements and to the best of my knowledge and belief they are true correct and complete your appeal will be considered incomplete without this statement lf an organization’s representative submits the appeal a substitute declaration must be included stating that the representative prepared the appeal and accompanying documents and whether the representative knows personally that the statements of facts contained in the appeal and accompanying documents are true and correct an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you during the appeal process to be represented during the appeal process you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already letter cg catalog number 47628k done so for more information about representation see publication practice_before_the_irs and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications if you do not intend to protest this determination you do not need to take any further action determination_letter to you that letter will provide information about filing tax returns and other matters if we do not hear from you within days we will issue a final adverse please send your protest statement form_2848 and any supporting documents to the applicable address mail to deliver to internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you may also fax your statement using the fax number shown in the heading of this letter letter to confirm that he or she received your fax if you fax your statement please call the person identified in the heading of this if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois lerner director exempt_organizations enclosure publication letter cg catalog number 47628k


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-123078-08 date date internal_revenue_service number release date index number ---------------------- ----------------------------------- -------------------------------- --------------------------------- legend legend x ----------------------- --------------------------------------------------- date state --------------------- ------------- dear ----------------- this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated on date under the laws of state x intended to elect to be an s_corporation for federal tax purposes effective date however x failed to timely file a form_2553 election by a small_business_corporation law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made plr-123078-08 sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year conclusion based solely on the facts and representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective date accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 effective date along with a copy of this letter with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for date 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 specifically no opinion is expressed or implied concerning whether x otherwise qualifies as an s_corporation for federal tax purposes 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 the taxpayer's authorized representative sincerely audrey w ellis audrey w ellis senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


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 ita b03 plr-106156-11 date date ty ------- ty ------- legend taxpayer ----------------------------------------------------------------- parent ------ -------------------------------------------------- subsidiary ------ ---------------------------------------------------- fund group -------------------------------- owning funds ---------------------------------------------------------------------------- ------------------------------------------------------- year ------- extended due_date --------------------------- discovery date ------------------------- dear -------------------- this is in response to your letter dated date in your letter you requested an extension of time to file the forms necessary to make a consent_dividend election under sec_565 of the internal_revenue_code for the tax_year ending december year the request is based on sec_301_9100-1 and sec_301_9100-3 of the procedure and administrative regulations facts taxpayer a corporation is a regulated_investment_company owned by parent subsidiary and the owning funds in parent’s fund group parent administers the various funds in the fund group parent and subsidiary hold shares of each of the funds in the fund group in separate_accounts established for the purpose of funding variable_annuity contracts and variable life_insurance policies investors in parent and subsidiary may select one of the funds in the fund group including taxpayer as an investment option for a variable_annuity contract or life_insurance_policy taxpayer must plr-106156-11 make minimum distributions each tax_year to continue to be subject_to tax as a regulated_investment_company for future tax years parent prepared taxpayer’s form 1120-ric u s income_tax return for regulated_investment_companies for the tax_year ending december year and filed it before the extended due_date before filing taxpayer’s form 1120-ric the board_of directors approved taxpayer’s issuance of consent dividends to parent subsidiary and the owning funds to satisfy the taxpayer’s year distribution_requirements parent’s employees had no prior experience issuing consent dividends after consulting outside accountants and lawyers parent’s employees prepared an internal memorandum outlining the process of how funds in the fund group should issue consent dividends and the tax consequences of issuing them the memorandum stated that parent needed to file a form_973 corporation claim for deduction for consent dividends with each form 1120-ric of each fund in the fund group but the memorandum did not mention the additional regulatory requirement that parent file a form_972 consent of shareholder to include specific amount in gross_income with each fund’s return for each consent_dividend paid to a different shareholder of taxpayer time passed between when parent’s employees prepared the memorandum and when they began preparing the forms 1120-ric for each fund in the fund group when parent prepared form 1120-ric on behalf of taxpayer parent’s employees followed the memorandum’s instructions thus taxpayer’s return included an executed form_973 with the filing but not any executed form sec_972 the form sec_972 were not attached even though parent’s employees possessed two executed originals of form_972 one authorizing the inclusion of consent dividends in parent’s gross_income and the other authorizing the inclusion of consent dividends in subsidiary’s gross_income parent’s employees never obtained executed form sec_972 authorizing the inclusion of consent dividends in the gross_income of the various owning funds because they were inexperienced in issuing consent dividends they believed the law did not require them to obtain form sec_972 for the owning funds because the gross_income would flow through to parent and subsidiary for whom they had obtained executed form sec_972 taxpayer’s shareholders parent subsidiary and the various owning funds each included the appropriate amount of consent_dividend income in their respective gross incomes on parent’s consolidated_income_tax_return for year after the extended due_date but before the discovery date parent’s auditor discovered that no form sec_972 had been attached to taxpayer’s form 1120-ric to taxpayer’s knowledge the irs was not aware of the omission of the form_972 and has not contacted parent about the year consent_dividend election nor has it notified parent that taxpayer’s year form 1120-ric is under examination law and analysis plr-106156-11 sec_852 provides that a regulated_investment_company may claim a deduction for dividends_paid as defined in sec_561 in computing its investment_company_taxable_income sec_852 provides that a regulated_investment_company may claim a deduction for dividends_paid as defined in sec_561 in computing its net capital_gains determined with reference to capital_gain dividends only sec_561 provides that the deduction for dividends_paid includes consent dividends for the taxable_year as determined under sec_565 sec_565 of the code provides that if any person owns consent_stock as defined in sec_565 in a corporation on the last day of the taxable_year of such corporation and such person agrees in a consent filed with the return of such corporation in accordance with the regulations to treat as a dividend the amount specified in such consent the amount so specified shall except as provided in sec_565 constitute a consent_dividend for purposes of sec_561 relating to the deduction for dividends_paid consent_stock which is the type of stock with respect to which consent dividends are allowed sec_565 includes what is generally known as common_stock and participating preferred_stock the participation rights of which are unlimited sec_1_565-6 of the income_tax regulations sec_1_565-1 provides that the dividends_paid deduction as defined in sec_561 includes the consent dividends for the taxable_year a consent_dividend is a hypothetical distribution as distinguished from an actual distribution made by certain corporations to any person who owns consent_stock on the last day of the taxable_year of such corporation and who agrees to treat the hypothetical distribution as an actual dividend subject_to specified limitations by filing a consent at the time and in the manner specified in sec_1_565-1 sec_1_565-1 provides that a consent may be filed no later than the due_date of the corporation's income_tax return for the taxable_year for which the dividends_paid deduction is claimed with such return and not later than the due_date the corporation must file form sec_972 for each consenting shareholder and a return on form_973 showing by classes the stock outstanding on the first and last days of the taxable_year the dividend rights of such stock distributions made during the taxable years to shareholders and give all other information required by the form under revrul_78_296 1978_2_cb_183 the due_date for purposes of sec_1_565-1 includes the extended due_date of a return filed pursuant to an extension of time to file sec_301_9100-1 through of the procedure and administration regulations provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides plr-106156-11 extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling procedure notice or announcement published in the internal_revenue_bulletin 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 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 sec_301_9100-3 provides extensions of time to make a regulatory election under code sections other than those for which sec_301_9100-2 expressly permits automatic extensions requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations 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 sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer -- i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer -- i seeks to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking into account sec_1_6664-2 and the new position requires or permits a regulatory election for which relief is requested plr-106156-11 ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief taxpayer in this case requested relief before the failure to make the regulatory election was discovered by the service and thus under sec_301_9100-3 the taxpayer will be deemed to have acted reasonably and in good_faith taxpayer has also represented that none of the circumstances listed in sec_301_9100-3 apply sec_301_9100-3 provides in part 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 taxable years affected by the election 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 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under these criteria the interests of the government are not prejudiced in this case taxpayer has represented that granting relief would not result in a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the election had been timely made taking into account the time_value_of_money furthermore the taxable_year in which the regulatory election should have been made and any taxable years that would have been affected had it been timely made are not closed by the period of assessment conclusion taxpayer's election is a regulatory election as defined under sec_301_9100-1 because the due_date of the election is prescribed in the regulations under sec_1_565-1 in the present situation the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been satisfied the information and representations made by taxpayer establish that taxpayer acted reasonably and in good_faith furthermore granting an extension will not prejudice the interests of the government taxpayer represented that it will not have a lower tax_liability in the aggregate for all taxable years affected by the election if given permission to make the election than taxpayer would have if the election were made by the original deadline for making the election taxpayer also represented that the period of assessment for year plr-106156-11 will not be closed before receipt of a ruling accordingly taxpayer is granted an extension of time for making the election to issue consent dividends until days following the date of this ruling the election should be made by filing the forms necessary to make the sec_565 consent_dividend election for year and by including a copy of this ruling with an amended_return for year this ruling is limited to the timeliness of the consent_dividend election taxpayer wishes to make for year this ruling’s application is limited to the facts representations code sections and regulations cited herein except as expressly provided herein no opinion is expressed or implied concerning the federal_income_tax consequences of any aspect of any transaction or item discussed or referenced in this ruling 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter 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 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely robert casey acting branch chief branch income_tax accounting cc


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 plr-139012-08 date date legend ------------------------------------- ----------------------- ---------------- ------------------------ company state d1 dear ------------ we received your letter dated date and subsequent correspondence submitted on behalf of company requesting a ruling under sec_1362 of the internal_revenue_code this letter responds to that request facts company was incorporated on d1 under state law company's shareholders intended for company to be an s_corporation effective d1 however company's form_2553 election by a small_business_corporation was not timely filed thus company requests a ruling that it will be recognized as an s_corporation effective d1 law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year - a at any time during the preceding plr-139012-08 taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat such an election as timely made for the taxable_year and sec_1362 shall not apply conclusion based on the facts submitted and representations made we conclude that company has established reasonable_cause for failing to make an s_corporation_election thus we conclude that company is eligible for relief under sec_1362 accordingly if company makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 effective d1 within days following the date of this letter the election shall be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether company is otherwise eligible to be an s_corporation for federal tax purposes this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s leslie h finlow senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes cc


internal_revenue_service number release date index no department of the treasury p o box ben franklin station washington dc person to contact telephone number refer reply to cc dom p si plr-105102-99 date re legend trust grandparent grandparent son trust a beneficiary trustee date date date x corporation charity a dear this is in response to your letter dated february in which you requested a ruling regarding the application of the generation-skipping_transfer gst tax provisions of chapter of the internal_revenue_code specifically you requested a ruling that the exempt status of trust a for gst tax purposes would not be affected by the following i the trustee’s consent to corporation’s s election on behalf of trust a ii the trustee’s execution of an electing_small_business_trust election on behalf of trust a and iii the trustee’s execution of the shareholder agreement on behalf of trust a according to your submission on date grandparent transferred x to trust an irrevocable_trust pursuant to article of trust trust was immediately divided into four separate trusts of equal value for the benefit of grandparent 1's four children including son article a of the trust agreement provides that the trustee shall pay to each beneficiary for whom a_trust is named and his or her descendants or any one or more of them such part plr-105102-99 or all of the income and principal of the trust even though exhausting the trust at such time or times and in such equal or unequal proportions among them as the trustee shall decide considering the needs best interests and welfare of such beneficiary and his or her descendants in that order and as a group any undistributed_income of a_trust shall be accumulated and from time to time added to principal article c provides that if a beneficiary for whom a_trust is named dies before the complete distribution of that trust then on the death of such beneficiary the principal of that trust shall be distributed to or for the benefit of such of the beneficiary’s descendants then living or thereafter born in such proportions and subject_to such trusts powers and conditions as such beneficiary may provide and appoint by will specifically referring to this power to appoint pursuant to article d any part of a_trust not effectively disposed of by any other provisions shall be divided and allocated on the death of the beneficiary for whom such trust is named per stirpes among the then living descendants of such beneficiary if any if there are no living descendants of the beneficiary the portion of the trust not effectively disposed of will be divided and allocated per stirpes among the then living descendants of the nearest lineal ancestor of the beneficiary who also is a descendant of grandparent and of whom one or more descendants then are living or if none per stirpes among the then living descendants of grandparent each share allocated to a beneficiary for whom a_trust is named shall be added to that trust and each share allocated to any other beneficiary shall be retained in trust as a separate trust named for him or her and disposed of as provided in article of trust article e of the trust agreement states that notwithstanding any other provisions in the trust agreement no property shall be retained in a_trust created under trust or pursuant to the exercise of any power_of_appointment under trust for more than twenty-one years after the death of the last to die of the descendants of grandparent who were living on date each trust if any still retained in trust at the end of that period shall be distributed immediately to the beneficiary for whom the trust is named article provides that any part of the trust property or any separate trust not effectively disposed of by article shall be distributed to charity a son died on date without having exercised his limited testamentary_power_of_appointment over the property held in trust for his benefit accordingly the corpus of son’s trust was distributed equally to three trusts established for the benefit plr-105102-99 of son’s descendants including trust a for the benefit of beneficiary and his descendants the primary asset of trust a is stock in corporation a c_corporation the corporation’s board_of directors proposes to elect to treat corporation as a small_business_corporation an s_corporation trustee proposes to consent to the s election in order to convert corporation to an s_corporation each of its shareholders must be eligible to hold s_corporation stock as of the first day of the year for which the election is to take effect trustee proposes to make an election under sec_1361 to treat trust a as an electing_small_business_trust so that it will qualify as an eligible s_corporation shareholder in an effort to ensure the continuing qualification of corporation as an s_corporation trustee intends to enter into a shareholder agreement with corporation and corporation’s other shareholders to protect the s election under the sec_3 of the proposed shareholder agreement no shareholder may transfer and no person may acquire the legal or beneficial_ownership of any share if such transfer or acquisition would cause the s status of the corporation to terminate specifically no transfer may be made to any person that is not eligible to be a shareholder of an s_corporation under the applicable provisions of the code as in effect at the time of the purported transfer in addition no shareholder may affirmatively transfer shares to a person if the transfer would cause the corporation to exceed the maximum number of persons who are allowable s_corporation shareholders sec_3 of the proposed shareholder agreement provides that no shareholder shall make any transfer of shares to any trust having multiple beneficiaries or amend any trust that owns shares to increase the number of beneficiaries unless all such beneficiaries are persons eligible to be transferees pursuant to sec_3 and immediately after such transfer or amendment the number of shareholders the corporation is deemed to have for purposes of sec_1361 would not exceed the maximum number of persons who are allowable s_corporation shareholders pursuant to that section notwithstanding any other provision of the shareholder agreement the shareholders and the corporation acknowledge and agree in sec_3 that none of the following shall be prohibited by the terms of the shareholder agreement i the addition of a_trust beneficiary due to the birth of an additional descendant of grandparent ii the exercise of a power_of_appointment granted to a beneficiary pursuant to the terms of any irrevocable_trust that is in existence on the date of the agreement and that owns shares iii the transfer of shares to plr-105102-99 any person in whose favor a power_of_appointment described in ii above is exercised or iv the distribution of shares to a a beneficiary of any irrevocable_trust that is in existence on the date of the agreement and that owns shares pursuant to the terms thereof or b to the beneficiary of any trust created pursuant to the exercise of a power_of_appointment described in ii above even if such addition exercise or distribution shall cause the termination of the corporation’s s election sec_3 provides that prior to any transfer or other_disposition of shares if the corporation in its discretion so requires an opinion of counsel to the corporation must first be received by the corporation the cost of which shall be borne by the shareholder whose shares are to be transferred or disposed of that the transferee is i eligible to be a shareholder of an s_corporation in accordance with the applicable_requirements of the code or ii that the transfer otherwise is allowable pursuant to the provisions of the shareholder agreement in addition to the other requirements of sec_3 of the shareholder agreement sec_3 provides that no transfer of shares including without limitation transfers pursuant to sec_3 shall be permitted and no purported transfer shall be effective until a permitted transferee has executed a supplemental signature page to the shareholder agreement all parties agree that upon execution and acceptance of a supplemental signature page the shareholder agreement shall be amended and the transferee shall have the rights and obligations of a shareholder under the agreement sec_3 of the shareholder agreement provides that shareholders possessing of the total voting power of all outstanding shares may at any time and from time to time agree in writing to authorize or ratify any transfer of shares which would otherwise not be permitted by the shareholder agreement in which event the transfer shall be deemed for all purposes to comply with the shareholder agreement notwithstanding any other provision of the agreement under sec_3 if a transfer of shares is required to be made pursuant to sec_3 iii or iv to a transferee who is not already a shareholder and who has not previously executed or currently refuses to execute a supplemental signature page to the shareholder agreement a non- consenting transferee certain procedures will apply the shareholders may allow the transfer of shares to the non- consenting transferee pursuant to the procedure set forth in sec_3 otherwise the shares that otherwise would be transferred to the non-consenting transferee shall instead be redeemed by the corporation for a price equal to the fair_market_value of the shares as of the valuation_date plr-105102-99 pursuant to sec_5 of the proposed shareholder agreement any purported transfer in violation of the shareholder agreement shall not affect the beneficial or legal ownership of shares section of the agreement states that subject_to any limitations on dividends or other distributions imposed by statute the corporation shall make pro_rata dividend distributions of money based on ownership of shares to pay the federal state and local income_tax on the income and gain of the corporation net of any_tax benefits produced for the shareholders by the corporation’s losses deductions and credits for the current_year and for each prior year during which the corporation’s s election was in effect that passes through to the shareholders under the applicable provisions of the code in respect of each taxable_year or portion thereof of the corporation for which its s election is in effect section of the proposed shareholder agreement provides that the corporation shall a not issue more than one class of shares b use its best efforts to avoid a termination of its s election and c in the event of a termination of the s election use its best efforts to distribute to each shareholder such shareholder’s net share of the corporation’s undistributed_taxable_income for all taxable years for which the s election was in effect to the extent permitted by law and consistent with the obligations of the corporation to creditors agreements to which the corporation is a party and other business considerations within the period when such a distribution will be considered a non-dividend distribution under sec_1371 section of the proposed shareholder agreement states that if the corporation’s status as an s_corporation is terminated inadvertently and the corporation wishes to obtain a ruling under sec_1362 each shareholder agrees to make any adjustments required pursuant to sec_1362 and approved by the corporation’s board_of directors a shareholder’s obligation to make such adjustments shall continue after the shareholder has ceased to own shares in the corporation and after the shareholder agreement has terminated except as directed by the shareholder agreement the existing trustee will continue to serve in the same manner as it previously served in addition trust a will continue to be administered in accordance with the terms and conditions set forth in trust sec_2601 imposes a tax on every generation-skipping_transfer sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that the gst tax applies to any generation-skipping_transfer made after date sec_26_2601-1 provides an exception to this rule for plr-105102-99 any distributions from a_trust that was irrevocable on date however this exception does not apply to a pro_rata portion of any generation-skipping_transfer under an irrevocable_trust where additions were made to the trust after date in addition a modification to a_trust that results in a change in the quality value or timing of any beneficial_interest provided for under the trust instrument will cause the trust to lose its exempt status sec_26_2601-1 provides that except as provided under sec_26_2601-1 where any portion of a_trust remains in the trust after the post-date release exercise or lapse of a power_of_appointment over that portion of the trust and the release exercise or lapse is treated to any extent as a taxable transfer under chapter or chapter the value of the entire portion of the trust subject_to the power that was released exercised or lapsed is treated as if that portion had been withdrawn and immediately retransferred to the trust at the time of the release exercise or lapse sec_26_2601-1 provides a special rule for certain powers of appointment this section provides that the release exercise or lapse of a power_of_appointment other than a general_power_of_appointment as defined in sec_2041 will not be treated as an addition to a_trust if- such power_of_appointment was created in an irrevocable_trust that is not subject_to chapter under sec_26_2601-1 and in the case of an exercise such power_of_appointment is not exercised in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date of creation of the trust extending beyond any life in being at the date of creation of the trust plus a period of years sec_2041 provides that the term general_power_of_appointment means a power that is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate in the present case it has been represented that trust a was irrevocable on date and that there have been no additions constructive or otherwise to trust a after that date based on the representations made and the facts submitted we conclude that there is no change in the quality value or timing of any beneficial_interest in trust a resulting from the following i the trustee’s consent to corporation’s proposed s election ii the trustee’s election to treat trust a as an electing_small_business_trust and iii the trustee’s execution plr-105102-99 of the proposed shareholder agreement therefore items i - iii above will not cause trust a to lose its exempt status with respect to the gst tax provided that there are no additions constructive or otherwise to trust a after date distributions from trust a to skip persons will not be subject_to the gst tax except as specifically ruled herein we express no opinion as to the consequences of this transaction under the cited provisions of the code or under any other provisions of the code specifically we express no opinion on whether trust a will qualify as an electing_small_business_trust within the meaning of sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely assistant chief_counsel passthroughs and special industries by george masnik chief branch enclosure copy for sec_6110 purposes