t c memo united_states tax_court rose marie sunleaf petitioner v commissioner of internal revenue respondent docket no filed date timothy j krumm for petitioner michael w bitner for respondent memorandum findings_of_fact and opinion vasquez judge this case arises from a request for relief under sec_6015 f with respect to petitioner’s taxable_year the issues for decision are whether our review is limited to the administrative record as of the date respondent’ sec_1 unless otherwise indicated all section references are to the internal_revenue_code determination denying petitioner’s request for sec_6015 relief was issued and whether respondent abused his discretion in denying petitioner relief under sec_6015 for i procedural background findings_of_fact petitioner is the widow of roger w sunleaf mr sunleaf who died on date after mr sunleaf’s death petitioner discovered he had not been paying their joint federal income taxes or federal employment_taxes and they owed the internal_revenue_service irs dollar_figure of this amount approximately dollar_figure was from underpayments including interest and penalties of federal_income_tax for the years and petitioner requested sec_6015 relief petitioner submitted to the irs form_8857 request for innocent spouse relief dated date form questionnaire for requesting spouse dated date and an undated letter explaining her circumstances and the reasons she was entitled to relief pursuant to sec_6015 respondent denied petitioner sec_6015 relief in an date letter respondent’s workpapers showed that he denied sec_6015 relief for because petitioner’s claim was not timely respondent claimed the first collection activity with respect to the liability for was made on date and petitioner’s request for sec_6015 relief was untimely because it was made more than years from the first collection activity petitioner filed a form statement of disagreement on date in a letter dated date respondent informed petitioner that he was reconsidering petitioner’s request for sec_6015 relief for in a final_determination dated date respondent denied petitioner’s request for sec_6015 relief for on the ground among others that petitioner did not have reason to believe at the time the return was filed that the tax would be paid_by mr sunleaf petitioner petitioned this court on date requesting sec_6015 relief for at the time of filing her petition petitioner resided in iowa as of date the amount of the tax_liability in dispute was dollar_figure dollar_figure is the amount of the underpayment and dollar_figure is the amount of interest and penalties ii substantive background petitioner and mr sunleaf timely filed a joint income_tax return for mr sunleaf prepared the return which petitioner signed without prior review it was mr sunleaf’s practice to fill out the couple’s income_tax return and present it to petitioner for her signature a few minutes before the post office closed on the day the return was due this practice prevented petitioner from reviewing their joint income_tax return because she was rushed and pressured into signing the return petitioner was years old at the time of trial date she and mr sunleaf were married in and lived in montezuma iowa for approximately years at the time of trial the population of montezuma was approximately big_number petitioner graduated from finley hospital nursing school and worked as a nurse until when a back injury forced her to stop working she lost her certification as a nurse in mr sunleaf graduated from the university of iowa school of law in started working as an attorney in montezuma and worked as an attorney in montezuma for the duration of his life petitioner and mr sunleaf had a wonderful life together mr sunleaf worked in his law practice and petitioner took care of the family home petitioner and mr sunleaf had a joint checking account petitioner never saw the bank statements for this account and used the account only rarely when mr sunleaf gave petitioner a check to buy something for the house the joint account was managed by mr sunleaf and primarily used to pay for the expenses he handled during their marriage petitioner had a personal bank account she used to pay for christmas presents and later once she started to receive social_security_benefits to pay for groceries and prescription drugs the money in petitioner’s personal account came from gifts to petitioner from her family and from social_security_benefits the expenses for groceries and drugs usually used up petitioner’s social_security_benefits when she signed the joint income_tax return for petitioner was unaware of any financial problems she and mr sunleaf may have had petitioner was unaware of whether mr sunleaf ever borrowed any money mr sunleaf did not speak to petitioner about money and finances when the topic of taxes came up mr sunleaf told petitioner he would handle it and petitioner did not ask any questions about the joint tax returns shortly after mr sunleaf’s death his former secretary contacted the coexecutor of mr sunleaf’s estate petitioner’s niece about alerting petitioner to her poor financial condition mr sunleaf’s former secretary had worked for him for years and knew mr sunleaf was in trouble with the irs and with the family finances petitioner was unaware of the financial situation while mr sunleaf was alive because he swore his secretaries to secrecy and he handled nearly all of the family’s financial affairs when petitioner learned of the financial mess that mr sunleaf had caused she was shocked at the time of his death mr sunleaf’s office his desk floor chairs and conference table were piled with mail there were unopened envelopes from creditors the irs and banks mr sunleaf was able to keep petitioner unaware of the financial mess because all mail addressed to petitioner and mr sunleaf was delivered to the post office in montezuma instead of their home petitioner never picked up the mail at the post office rather mr sunleaf picked up the mail and brought home only magazines and personal letters the gross value of mr sunleaf’s estate was dollar_figure in the probate of mr sunleaf’s estate judgments liens and claims of approximately dollar_figure were filed which included amounts owed to the irs the amounts owed to the irs were the result of a combination of income and employment_taxes penalties and interest dating back to before mr sunleaf’s death petitioner was never aware any money was owed to the irs for reasons unknown to petitioner before his death mr sunleaf had transferred the titles to his office building a cadillac motor_vehicle a corvette motor_vehicle and an mg motor_vehicle to petitioner’s name at the time of mr sunleaf’s death the office building’s estimated fair_market_value was dollar_figure the cadillac’s estimated fair_market_value was dollar_figure the corvette’s estimated fair_market_value was unknown and the mg’s estimated fair_market_value was dollar_figure the laws of iowa provided that petitioner was already half-owner of petitioner’s and mr sunleaf’s family home and accordingly only half of the home was included in mr sunleaf’s estate the approximate value of half of the family home was dollar_figure with an approximate equity_interest of dollar_figure the estate of mr sunleaf is not closed petitioner is expected to receive nothing from mr sunleaf’s estate petitioner submitted a statement of financial condition and other information dated date which detailed petitioner’s financial condition after much of mr sunleaf’s estate had been settled in the course of liquidating mr sunleaf’s estate to pay the judgments liens and claims against the estate petitioner and the coexecutor of mr sunleaf’s estate made the following transactions sold mr sunleaf’s office building and used all the proceeds to pay the lender that had a mortgage on the building sold the corvette and used all the proceeds to pay the debts which were a lien on the title of the vehicle hired an attorney to attempt to get possession of the mg motor_vehicle because the storage provider alleges mr sunleaf did not pay him for storage and the storage provider is owed money sold petitioner’s and mr sunleaf’s home in montezuma iowa to pay debts half of the proceeds went to mr sunleaf’s estate and half went to petitioner the half that went to mr sunleaf’s estate was used to pay creditors of the estate and federal employment_taxes in order to get the irs to allow petitioner to sell the home petitioner agreed to have her share of the net_proceeds placed in an escrow account the amount in the escrow account approximately dollar_figure is significantly less than the federal tax_liens placed on that amount approximately dollar_figure petitioner will not receive anything from the escrow account petitioner purchased and moved into manufactured housing in date for dollar_figure there is an outstanding mortgage of dollar_figure on the manufactured_home petitioner pays dollar_figure per month for the mortgage and dollar_figure per month in lot rent petitioner’s niece took out a second mortgage on her home to pay petitioner’s downpayment of dollar_figure on the manufactured_home petitioner sold a piano that was a gift from her father when she was a cushman vehicle and a lawnmower and used the proceeds to purchase a used cadillac for dollar_figure to replace her old cadillac which had over big_number miles on it petitioner sold dollar_figure in miscellaneous personal items and furniture on the form petitioner listed the income and expenses as follows income expenses rent or mortgage dollar_figure temporarily reduced food annuity dollar_figure social_security dollar_figure total dollar_figure utilities telephone auto licensing auto insurance auto gas repairs medical insurance life_insurance clothing other vet household repairs real_estate_taxes home insurance church dollar_figure total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner’s income will decrease by dollar_figure to dollar_figure when the annuity providing her with income ends in or by the time of trial the amount petitioner pays in mortgage and rent for her mobile home space had increased to a total of dollar_figure however petitioner’s real_estate_taxes had decreased after her move to a mobile home and were dollar_figure annually instead of dollar_figure annually petitioner listed a combined monthly other expense of dollar_figure that included real_estate_taxes and reported the annual amount as dollar_figure this was a monthly real_estate tax expense of continued taking into account the increased amount of her mortgage and her lot rent and the decreased amount of her real_estate_taxes petitioner’s monthly expenses are dollar_figure this exceeds her present monthly income by dollar_figure and will exceed her projected decreased monthly income in or by dollar_figure i scope of review opinion respondent argues that when the court determines whether petitioner is entitled to sec_6015 relief for the court is limited to the administrative record and may not consider evidence introduced at trial that was not included in the administrative record we disagree in 130_tc_115 we recently addressed the aforementioned issue of the scope of our review in sec_6015 cases for the reasons stated in porter when the court determines whether a taxpayer is entitled to sec_6015 relief the court’s determination is made in a trial de novo and the court is not limited to the administrative record continued dollar_figure petitioner reported real_estate_taxes of dollar_figure on her mobile home are paid semiannually this equals a monthly expense of dollar_figure mortgage and lot rent dollar_figure plus food dollar_figure plus utilities dollar_figure plus telephone dollar_figure plus auto licensing dollar_figure plus auto insurance dollar_figure plus auto gas and repairs dollar_figure plus medical insurance dollar_figure plus life_insurance dollar_figure plus clothing dollar_figure plus other vet household repairs real_estate_taxes home insurance and church dollar_figure equals dollar_figure ie the court may consider evidence and matters at trial which were not part of the administrative record porter v commissioner supra ii sec_6015 relief sec_6015 allows relief to a requesting spouse if-- taking into account all the facts and circumstances it is inequitable to hold the individual liable the commissioner applies revproc_2003_61 sec_4 2003_2_cb_296 to determine whether a taxpayer has met the threshold requirements to submit a request for equitable relief revproc_2003_61 sec_4 c b pincite provides conditions under which the irs will ordinarily grant equitable relief from an underpayment of income_tax reported on a joint_return a eligibility revproc_2003_61 sec dollar_figure there are seven threshold conditions that all requesting spouses must meet in order for the commissioner to grant relief pursuant to sec_6015 respondent concedes that petitioner meets the requirements set forth in revproc_2003_61 sec_4 - revproc_2003_61 2003_2_cb_296 superseded revproc_2000_15 2000_1_cb_447 revproc_2003_61 supra applies to requests for relief filed on or after date or those pending on date for which no preliminary determination_letter has been issued as of that date id sec c b pincite on date petitioner filed for relief accordingly we apply revproc_2003_61 supra to this case b safe_harbor revproc_2003_61 sec dollar_figure revproc_2003_61 supra has a safe_harbor whereby the commissioner ordinarily will grant relief pursuant to sec_6015 safe_harbor stolkin v commissioner tcmemo_2008_ gonce v commissioner tcmemo_2007_328 billings v commissioner tcmemo_2007_234 revproc_2003_61 sec_4 titled circumstances under which the service ordinarily will grant equitable relief under sec_6015 with respect to underpayments on joint returns the safe_harbor allows relief to a requesting spouse if the requesting spouse meets three conditions see stolkin v commissioner supra revproc_2003_61 sec_4 first safe_harbor condition the first safe_harbor condition is on the date of the request for relief the requesting spouse is no longer married to or is legally_separated from the nonrequesting spouse or has not been a member of the same household as the nonrequesting spouse at any time during the relief that the commissioner ordinarily grants pursuant revproc_2003_61 sec_4 c b pincite is subject_to the limitation set forth in revproc_2003_61 sec_4 c b pincite if the service adjusts the joint_return to reflect an understatement of income_tax relief will be available only to the extent of the income_tax_liability shown on the joint_return prior to the service’s adjustment respondent did not address revproc_2003_61 sec_4 on brief in any event it does not appear that the tax reported on the return has undergone adjustment accordingly we deem respondent has waived any issue regarding revproc_2003_61 sec_4 see 92_tc_661 alioto v commissioner tcmemo_2008_185 12-month_period ending on the date of the request for relief revproc_2003_61 sec_4 a mr sunleaf died date and petitioner was widowed when she made her request for relief petitioner’s status of being a widow is tantamount to her being separated or divorced see rosenthal v commissioner tcmemo_2004_89 respondent has conceded that petitioner meets this condition and accordingly we conclude that petitioner satisfied the first safe_harbor condition second safe_harbor condition the second safe_harbor condition is on the date the requesting spouse signed the joint_return the requesting spouse had no knowledge or reason to know that the nonrequesting spouse would not pay the income_tax_liability the requesting spouse must establish that it was reasonable for the requesting spouse to believe that the nonrequesting spouse would pay the reported income_tax_liability if a requesting spouse would otherwise qualify for relief under this section except for the fact that the requesting spouse’s lack of knowledge or reason to know relates only to a portion of the unpaid income_tax_liability then the requesting spouse may receive relief to the extent that the income_tax_liability is attributable to that portion revproc_2003_61 sec_4 b this factor is satisfied if the taxpayer reasonably believed when the return was filed that the liability would be paid_by the taxpayer’s spouse see alioto v commissioner tcmemo_2008_185 revproc_2003_61 sec_4 b in alioto v commissioner tcmemo_2008_185 the continued respondent argues petitioner did not prove that when the return was signed she knew or had reason to believe mr sunleaf would pay the tax shown on their return for respondent argues that petitioner had constructive knowledge of the underpayment simply by signing the income_tax return and that petitioner had a duty_of inquiry with respect to the contents of the return petitioner credibly testified that she did not learn about the tax_liabilities until after mr sunleaf’s death in and that she was not aware of tax problems or any financial matters before then petitioner found notices from the irs regarding tax_liabilities unopened and stacked with other unopened mail at mr sunleaf’s office all mail which could have alerted petitioner to tax problems and financial trouble was delivered to a post office box and picked up by mr sunleaf petitioner received only the mail mr sunleaf brought home and he did not tell petitioner about their tax problems and financial trouble under the circumstances petitioner’s belief that mr sunleaf would pay the tax_liability was reasonable mr continued taxpayer was subject_to revproc_2000_15 supra and subject_to the safe_harbor in sec dollar_figure of that revenue_procedure revproc_2000_15 supra was superseded by revproc_2003_61 supra however revproc_2003_61 supra did not materially change the safe_harbor in revproc_2000_15 sec_4 accordingly the analysis in alioto is relevant sunleaf had handled the couple’s finances and taxes for approximately years from their marriage in until his death in petitioner and mr sunleaf had a wonderful life together and petitioner was completely unaware of tax problems and financial trouble when petitioner signed the tax_return there were no circumstances present that would have indicated that it was unreasonable for petitioner to believe mr sunleaf would pay the tax_liability due see stolkin v commissioner tcmemo_2008_211 where it was not reasonable for the taxpayer to think mr stolkin would pay the taxes due only months after filing for bankruptcy gonce v commissioner tcmemo_2007_328 where taxpayer knew mr gonce had always bought on credit and that she and mr gonce spent more than they made the taxpayer had not shown it was reasonable to rely on mr gonce to pay the taxes due for those years it is petitioner’s complete lack of knowledge regarding tax and financial matters that persuades us that petitioner’s belief that mr sunleaf would pay the tax_liability reported on their joint income_tax return was reasonable see stolkin v commissioner supra moreover we have consistently found that a requesting spouse’s knowledge of the couple’s financial difficulties deprives the requesting spouse of reason to believe that his or her ex-spouse will pay the tax_liability additionally mr sunleaf’s assurances that he would handle the taxes and finances strengthens the reasonableness of petitioner’s belief that mr sunleaf would pay the tax_liability due for in keitz v commissioner tcmemo_2004_74 we found the taxpayer’s belief that mr keitz would pay the tax_liability reasonable where mr keitz had constantly assured the taxpayer that their taxes would be paid similarly petitioner’s belief that mr sunleaf would pay the tax_liability is reasonable because of mr sunleaf’s assurances that he would handle it the combination of petitioner’s complete lack of knowledge of their tax and financial matters and mr sunleaf’s assurances to petitioner leads us to conclude that petitioner at the time she signed the return had no knowledge or reason to know that the taxes would not be paid rather petitioner reasonably believed when the return was filed that the liability would be paid_by mr sunleaf we reject respondent’s argument that petitioner has not proven that when the return was signed she knew or had reason to believe that mr sunleaf would pay the tax shown on their return for see alioto v commissioner supra van arsdalen v commissioner tcmemo_2007_48 wiest v commissioner tcmemo_2003_91 we reject respondent’s argument that petitioner possessed constructive knowledge in a similar factual scenario where a spouse had assumed responsibility for preparing and filing the return we concluded the fact that the taxpayer signed the return did not establish the constructive knowledge that is relevant in the case of a liability that is reported on a return but not paid wiest v commissioner supra if signing a joint_return that reports a liability is sufficient to establish actual or constructive knowledge of an underpayment then no taxpayer signing such a joint_return would ever lack knowledge or reason to know of the underpayment we reject respondent’s argument that petitioner failed to fulfill a duty_of inquiry because at the time petitioner signed the return she did not know or have reason to know that the tax due would not be paid see keitz v commissioner supra taxpayer did not know or have reason to know when the joint_return was signed that tax would be unpaid where taxpayer had no involvement in her husband’s business husband had their return prepared and husband constantly assured taxpayer that their taxes would be paid we conclude that petitioner has satisfied this condition third safe_harbor condition the third safe_harbor condition is the requesting spouse will suffer economic hardship if the service does not grant relief for purposes of this revenue_procedure the service will base its determination of whether the requesting spouse will suffer economic hardship on rules similar to those provided in sec_301_6343-1 revproc_2003_61 sec_4 c generally economic hardship exists if collection of the tax_liability will cause the taxpayer to be unable to pay reasonable basic living_expenses alioto v commissioner tcmemo_2008_ butner v commissioner tcmemo_2007_136 the ability to pay reasonable basic living_expenses is determined by considering the following nonexclusive factors the taxpayer’s age employment status and history ability to earn and number of dependents an amount reasonably necessary for food clothing housing medical_expenses transportation current tax_payments and expenses necessary to the taxpayer’s production_of_income the cost of living in the taxpayer’s geographic area the amount of property available to satisfy the taxpayer’s expenses any extraordinary circumstances ie special education expenses a medical catastrophe or a natural disaster and any other factor bearing on economic hardship sec_301_6343-1 proced admin regs see gonce v commissioner supra van arsdalen v commissioner supra these provisions envision consideration of a taxpayer’s retirement needs where appropriate van arsdalen v commissioner supra petitioner is years old she is disabled and is unable to work as a nurse unlike other taxpayers who have filed for relief and been able to earn money working or had the option of returning to the workforce petitioner has a disability that forecloses the option of her returning to work as a nurse see stolkin v commissioner tcmemo_2008_211 where taxpayer was receiving dollar_figure in monthly spousal support and dollar_figure per month in salary george v commissioner tcmemo_2004_261 where taxpayer had retired but had been considering a return to the workforce to resume her teaching career the court found that the taxpayer posited no reason why she could not be expected to earn income comparable to the salary in the last year she worked full- time keitz v commissioner tcmemo_2004_74 where taxpayer earned dollar_figure annually and received approximately dollar_figure per month in alimony and child_support because of petitioner’s inability to return to the workforce her case is distinguishable from those of stolkin george and keitz where this court found the requesting taxpayer would not suffer economic hardship if relief was not granted rather than having sufficient monthly income to meet her monthly expenses petitioner had monthly expenses that exceeded her monthly income at the time she initially filed for relief and even after significant lifestyle changes have continued to exceed her monthly income we are satisfied that the expenses petitioner listed are reasonable basic living_expenses similar to the taxpayer in alioto petitioner sold her home to use the proceeds to pay down her debt upon discovering the financial mess her deceased husband had concealed petitioner has moved to a different town sold her home and purchased a mobile home worth approximately percent of the value of her former home in an attempt to raise money to pay down the debts also like the taxpayer in alioto petitioner will not inherit anything from her husband’s estate further petitioner’s monthly income will decrease to approximately dollar_figure the amount of her monthly social_security_benefits when the annuity she inherited ends petitioner’s lack of disposable income distinguishes her request for relief from other requests where this court has found that no economic hardship would occur if the taxpayer was not awarded relief in both stolkin and keitz this court noted the amount of disposable income available to each requesting taxpayer before finding that neither taxpayer would suffer economic hardship if relief was not granted stolkin v commissioner supra the taxpayer had approximately dollar_figure per month in disposable income keitz v commissioner supra the taxpayer had approximately dollar_figure per month in disposable income despite expenses exceeding her income petitioner is managing to support herself each month the expenses listed do not suggest a lifestyle that is extravagant or lavish see stolkin v commissioner supra taxpayer’s monthly expenses included dollar_figure monthly lease payments on a bmw after careful consideration we conclude collection of the tax_liability will cause petitioner to be unable to pay reasonable basic living_expenses accordingly petitioner will suffer economic hardship if relief is denied and the third condition of the safe_harbor has been met iii conclusion petitioner satisfies the safe_harbor conditions in revproc_2003_61 sec_4 accordingly petitioner is entitled to sec_6015 relief to reflect the foregoing decision will be entered for petitioner


internal_revenue_service number release date index number 468b ------------------------- ------------------------------------------------------------ - ----------------------------------- ------------------------- ---------------------------------- 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 b06 plr-114222-17 date date legend business_entity defendant defendant owners state partnership a business litigation court plaintiffs date date date date date date date ------------------------------------------------------------------------------- ------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------- ---------------------------------------------------------------------------- -------------- 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---------------------- ------------------------ ---------------------- plr-114222-17 ------------------------------------------------------------------------------- ---------------------------------------------------------------- ------------------------------------------------------------------------------- ---------------------------------------------------------------- ------------------------------------------------------------------------------- ------------------------------------------------------ ---- ----------------- ----------------- trust trust trustee z dollar amount a dollar amount b dear ------------------- this letter responds to your letter dated date requesting certain rulings concerning the application of various sections of the internal_revenue_code and the income_tax regulations to defendant and partnership a taxpayers and trust you have requested the following rulings that trust will constitute a qualified_settlement_fund upon its establishment under sec_1_468b-1 taxpayers will be entitled to deduct the amounts transferred to trust under sec_162 sec_461 and sec_1_468b-3 in the years taxpayers transfer those amounts to trust facts defendant is a business_entity that is owned by owners defendant is a state limited_liability_company all of the interests in which are owned by partnership a defendant is treated as a disregarded_entity for federal_income_tax purposes partnership a is a state limited_partnership all of the interests in which are owned directly and indirectly by owners defendant and defendant are collectively referred to as defendants taxpayers share common ownership by owners taxpayers both have an annual_accounting_period ending on march and both maintain their accounting books on the basis of the accrual_method of accounting owners through the defendants operate the business on date the litigation was established in the court the litigation arose from the alleged effects of personal injuries purportedly suffered by plaintiffs in connection with their employment in the business and through which plaintiffs sought to hold defendants responsible for their alleged injuries under various theories of tort liability on date defendants and plaintiffs entered into a class action settlement agreement the settlement agreement which settlement agreement was approved by the court on date as amended on date and became effective on date plr-114222-17 the settlement agreement is intended to fully resolve discharge and settle all claims by qualifying members of the settlement class settlement class members related to the litigation against defendants in relevant part the settlement agreement requires defendants to pay certain cash settlement awards settlement awards to settlement class members defendants are jointly and severally liable for amounts to be paid to settlement class members under the settlement agreement the defendants’ obligation to make such payments extends over a period of z years from the effective date of the settlement transactions required under the settlement agreement under the settlement agreement defendants are required to establish trust trust will be used to fund the defendants’ monetary obligations under the settlement agreement including payment of settlement awards the court approved the agreement for trust on date the settlement agreement requires defendants over the z-year term of trust to make periodic contributions to trust the settlement agreement further requires that trust 1’s funds are to be invested conservatively in a manner designed to assure timely availability of funds protection of principal and avoidance of concentration of risk taxpayers intend that trust will be structured and operated in a manner so that it qualifies a qualified_settlement_fund under sec_1_468b-1 and are not seeking such a ruling with respect to trust under the settlement agreement defendants are also required to establish trust prior to date trust is intended to serve both as a funding source and as security for defendants’ obligations to pay settlement awards from trust specifically defendants are obligated to fund trust with sufficient amounts so that as of date trust will contain funds that in the reasonable belief of defendants and taking into account reasonably expected investment returns will be sufficient to satisfy defendants’ remaining anticipated payments of settlement awards as they come due over the remainder of the z-year term of the settlement agreement contributions to trust will be transferred to trust by trustee as needed to satisfy such payment obligations it is possible that some portion of defendants’ contributions to trust may be attributable to amounts recovered by defendants under existing liability insurance policies although the funds in trust are intended to serve in part as security for defendants’ funding obligations with respect to payment of settlement awards the settlement agreement makes clear that defendants’ obligations to meet their funding requirements are absolute and not limited to the amounts that eventually will be held in trust trust will be managed by trustee and will be subject_to the continuing jurisdiction of the court however the terms of trust will permit defendants to direct how the funds of trust are to be invested this investment discretion was granted to enable plr-114222-17 defendants to use their investment expertise to generate returns on the funds contributed to trust that are anticipated to exceed the returns that would be realized if the conservative investment guidelines of trust were applicable defendants anticipate that over the z-year term of the settlement they will be required to make payments to settlement class members and for administrative costs and expenses with a face value in excess of dollar amount a and a present_value as of date in excess of dollar amount b although defendants are not required to contribute funds to trust until date defendants intend to begin making contributions shortly following the date of this ruling in order to maximize investment returns on contributed funds and to build toward the amounts required to be held in trust as of date once funds are paid into trust defendants will not retain any control_over the amounts so deposited other than their discretion with respect to investment decisions defendants’ investment decisions will at all times be subject_to the supervision of the court and trustee the terms of trust will provide that defendants have no right to pledge or assign property of trust to a third party and creditors of defendants will have no rights or remedies with respect to the property held in trust trustee will be permitted to make withdrawals from trust for the purposes of transferring funds to trust to satisfy defendants’ monetary obligations under the settlement agreement to pay settlement awards and paying costs and expenses of defendants relating to trust with prior approval of the court trustee is also permitted to make withdrawals of funds from trust to return excess funds to defendants based on the trust investments having attained investment returns beyond the amount necessary to satisfy defendants’ remaining anticipated payment obligations under the settlement agreement return excess funds to defendants based on reductions to the remaining anticipated payment obligations of defendants and return remaining funds in trust to defendants upon completion of their payment obligations the settlement agreement requires the court to grant approval for these withdrawals unless there has been a material default on defendants’ payment obligations within the days prior to the request for withdrawal or there is a showing by clear_and_convincing evidence that the requested withdrawal would materially impair the settlement agreement representations taxpayers make the following representations with respect to trust trust will be established under state law plr-114222-17 trust will be established to resolve or satisfy one or more tort claims for settlement awards under the settlement agreement trust will be established pursuant to the court’s final approval order of the settlement agreement and will be subject_to the continuing jurisdiction of the court in the event that defendants contribute amounts to trust that were previously received as settlement of insurance claims and which amounts were excluded from gross_income of taxpayers when received taxpayers will comply with the provisions of sec_1_468b-3 and will not claim a deduction for the contribution of such amounts to trust in the event that defendants settle an insurance claim after they have contributed amounts to trust for which a deduction has been claimed by taxpayers taxpayers will comply with the provisions of sec_1_468b-3 and include in income the amounts received from the settlement of the insurance claim to the extent of the deduction defendants will not except as expressly otherwise set forth herein have refund or reversion rights in trust 2’s assets or income in the event that defendants receive a distribution of funds after they have contributed amounts to trust for which a deduction has been claimed by taxpayers taxpayers will comply with the provisions of sec_1_468b-3 and include in income amounts so received to the extent required by the tax_benefit_rule as provided in sec_111 requested ruling sec_1 trust 2’s status as a qualified_settlement_fund taxpayers’ first requested ruling is that trust upon its establishment will be a qualified_settlement_fund under sec_1_468b-1 for federal_income_tax purposes sec_468b provides in part that nothing in any provision of law shall be construed as providing that an escrow account settlement fund or similar fund is not ordinarily the service does not issue letter rulings regarding the tax consequences of a taxpayer who is not directly involved in the request if the requested letter_ruling would not address the tax_liability of the requester see section dollar_figure of revproc_2017_1 i r b although trust is not a party to this ruling_request the characterization of trust as a qualified_settlement_fund affects the timing of economic_performance with respect to assets transferred by taxpayers to trust and therefore affects the timing of taxpayers’ deductions for amounts transferred to the trust see taxpayers’ second requested ruling below plr-114222-17 subject_to current income_tax pursuant to the authority of sec_468b the secretary has published sec_1_468b-1 through 468b-5 regarding qualified settlement funds sec_1_468b-1 provides that a qualified_settlement_fund is a fund account or trust that satisfies the requirements of sec_1_468b-1 first sec_1_468b-1 requires that the fund account or trust is established pursuant to an order of or it is approved by the united_states any state including the district of columbia territory possession or political_subdivision thereof or any agency_or_instrumentality including a court of law of any of the foregoing and is subject_to the continued jurisdiction of that governmental authority second sec_1_468b-1 requires that the fund account or trust is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event or related series of events that has occurred and that has given rise to at least one claim asserting liability i under the comprehensive environmental response compensation and liability act of ii arising out of a tort breach of contract or violation of law or iii designated by the commissioner in a revenue_ruling or revenue_procedure third sec_1_468b-1 provides that the fund account or trust must be a_trust under applicable state law or its assets must be otherwise segregated from other assets of the transferor and related_persons based on the facts presented and the representations provided herein trust upon its establishment will be a qualified_settlement_fund for federal_income_tax purposes first trust will be approved by the court and the trust will be subject_to the continuing jurisdiction of the court see sec_1_468b-1 second trust will be established to resolve or satisfy tort claims brought against defendants for damages allegedly sustained by plaintiffs in connection with their participation in activities related to the defendants’ business defendants are obligated to fund trust with sufficient amounts so that as of date defendants can satisfy their remaining anticipated obligations regarding payment of settlement awards as they come due over the remainder of the z-year term of the settlement defendants’ contributions to trust will be transferred to trust by trustee as needed to satisfy such payment obligations see sec_1_468b-1 third_trust will be a_trust under state law see sec_1 468b- c thus the three requirements of sec_1_468b-1 will be satisfied taxpayers’ deductions for transfers to trust taxpayers’ second requested ruling is that taxpayers may deduct the amounts transferred to trust under sec_162 sec_461 and sec_1_468b-3 in the years taxpayers transfer those amounts to trust sec_162 provides the general_rule that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business see also sec_1_162-1 payments made in settlement of lawsuits are deductible under sec_162 if the acts which gave rise to the litigation were performed in the ordinary conduct of a taxpayer’s business see u s v plr-114222-17 gilmore 372_us_39 revrul_80_211 1980_2_cb_57 and the authorities cited therein sec_461 provides the general_rule that the amount of any deduction shall be taken for the taxable_year which is the proper taxable_year under the method_of_accounting used in computing taxable_income sec_1_461-1 provides that under an accrual_method of accounting a liability is incurred and generally is taken into account for federal_income_tax purposes in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_461 provides that in determining whether an amount has been incurred with respect to any item during any taxable_year the all_events_test shall not be treated as met any earlier than when economic_performance with respect to the item occurs sec_461 provides that the all_events_test is met with respect to any item if all events have occurred which determine the fact of the liability and the amount of such liability can be determined with reasonable accuracy sec_1_468b-3 provides that except as otherwise provided in that section for purposes of sec_461 economic_performance occurs with respect to a liability described in sec_1_468b-1 determined with regard to sec_1_468b-1 and g to the extent the transferor makes a transfer to a qualified_settlement_fund to resolve or satisfy the liability sec_1_468b-3 and b provide that economic_performance does not occur to the extent the transferor or a related_person has a right to a refund or reversion of a transfer if that right is exercisable currently and without the agreement of an unrelated_person that is independent or has an adverse_interest eg the court or agency that approved the fund or the fund claimants or money or property is transferred under conditions that allow its refund or reversion by reason of the occurrence of an event that is certain to occur such as the passage of time or if restrictions on its refund or reversion are illusory sec_1_468b-3 provides that no deduction is allowed to a transferor for a transfer to a qualified_settlement_fund to the extent the transferred amounts represent amounts received from the settlement of an insurance claim and are excludable from gross_income if the settlement of an insurance claim occurs after a transferor makes a transfer to a qualified_settlement_fund for which a deduction has been taken the transferor must include in income the amounts received from the settlement of the insurance claim to the extent of the deduction plr-114222-17 sec_1_468b-3 provides that a transferor must include in gross_income any distribution it receives from a qualified_settlement_fund sec_1_468b-3 provides that a distribution described in sec_1_468b-3 or f is excluded from the gross_income of a transferor to the extent provided by sec_111 regarding the recovery_of tax_benefit items based on the facts represented the amounts to be transferred to trust will be used to satisfy the defendants’ anticipated obligations regarding payment of settlement awards which are liabilities described in sec_1_468b-1 these liabilities arose as a result of taxpayers’ principal business activities thus such amounts will be deductible under sec_162 as ordinary and necessary business_expenses to the extent that the all events tests under sec_1_461-1 including economic_performance are met the amounts transferred to trust will be deductible in the taxable_year of the transfer with respect to taxpayers’ transfers of funds to trust taxpayers’ liability is fixed and determinable with reasonable accuracy and economic_performance will occur at the time the cash is transferred to trust furthermore with respect to economic_performance taxpayers will meet the requirements of sec_1 468b- c i a and b under the settlement agreement the defendants do not have a currently exercisable right to reversion of any funds contributed to trust the circumstances permitting reversion of trust funds to defendants are restricted and dependent upon events that are not certain to occur and are not illusory and in all cases are subject_to the approval of the court therefore we conclude that taxpayers may deduct under sec_162 the amount of cash they transfer to trust in the taxable_year or years of the transfers but only to the extent that i the transfers are made to resolve or satisfy a liability described in sec_1_468b-1 and ii the transferred amounts do not represent amounts received from the settlement of an insurance claim which is excludable from taxpayers’ gross_income procedural matters except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayers 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 representatives plr-114222-17 a copy of this letter must be attached to any federal_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 roy a hirschhorn branch chief branch office of associate chief_counsel income_tax accounting cc


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 psi b05 plr-103864-15 date date taxpayer ------------------------------------------------------------------------------ ---------------------------------------------------- b ----------------- dear ----------------- this is in response to a request for rulings dated date submitted by your authorized representatives taxpayer is a taxable wholesale_distributor of grocery products to individual retail grocery operators that operates on a cooperative basis subject_to subchapter_t of the internal_revenue_code taxpayer's business is almost exclusively done with its cooperative members in accordance with its bylaws taxpayer is annually obligated to distribute its patronage_earnings to its member patrons historically taxpayer has paid approximately ------- percent of its patronage_dividend in the form of cash with the remainder being paid in the form of a qualified written notices of allocation within the meaning of sec_1388 historically taxpayer purchased b for sale to its members as part of taxpayer's patronage business activities in ------- taxpayer filed a lawsuit against ---------- b producers and related parties for ------------------------------------------------------------------------ ------------- regarding taxpayer b purchases that occurred from ------- through ------- the litigation period during the litigation period taxpayer purchased approximately dollar_figure----- --------------------------------------------------------------------------------------------------------------------- million of b plr-103864-15 in ------- taxpayer entered into separate settlement agreements with individual defendants and groups of defendants in each settlement agreement the defendant paid or agreed to pay an agreed amount in settlement of any and all claims made in the litigation and any potential claims related to arising out of based upon or in any way concerning the facts matters occurrences allegations transactions conduct alleged or subject matter of the litigation in aggregate taxpayer received approximately dollar_figure------- million settlement proceeds in settlement of the lawsuit settlement proceeds do not exceed the amount of taxpayer’s claimed damages in fact in the case of some of the defendants the amount_paid in the settlement was reflective of the defendant's distressed financial condition sec_3 of article ix of taxpayer's bylaws provides that taxpayer is required to annually distribute as patronage_dividends an amount equal to taxpayer's net patronage sourced earnings although taxpayer's bylaws allow taxpayer to maintain and allocate among pools taxpayer historically has maintained all of its patronage business in a single patronage pool the bylaws provide that taxpayer is to distribute its patronage_dividend in proportion to the quantity of business done with such patron during such fiscal_year the gross receipt of the dollar_figure-------million settlement proceeds is a significant amount to taxpayer and its patrons although the litigation was funded by the overall membership the settlement proceeds are directly attributable to overpriced b the cost of which was borne directly by taxpayer’s patrons who purchased b over the ------------ year time period taxpayer's board determined that in order to fairly allocate the portion of its patronage_dividend attributable to the settlement proceeds a portion approximately ---- --------percent should be allocated in taxpayer's general patronage pool and the remainder approximately -------------percent should be allocated to taxpayer’s patrons who purchased b during the litigation period in addition with respect to the portion to be allocated to the b patrons taxpayer’s board believes that the allocation should take into account patronage of the b patrons over the applicable time period although taxpayer's historic bylaws allowed the utilization of various pools taxpayer's historic bylaws provided that any allocation of the patronage_dividend was to be based upon current_year quantity of business done the historic bylaws failed to authorize an allocation based upon either i the value of the business done with of for the patron or ii the quantity of business done for more than the current_year in order to grant taxpayer the flexibility to allocate the portion of taxpayer's patronage_dividend attributable to the settlement proceeds taxpayer amended its bylaws prior to the end of ------- to allow the board flexibility in the allocation of the patronage_dividend with respect to the b settlement proceeds and similar circumstances sec_3 of article ix of the bylaws was amended to add paragraph ii which provides as follows plr-103864-15 ii in the event the corporation realizes net_earnings from an extraordinary event or transaction with respect to which the patronage sourced earnings are attributable to the current_year and or prior years extraordinary event and a determination is made by the board_of directors to be appropriate under the particular circumstances the board_of directors may distribute the patronage with respect to the extraordinary event among the patrons based upon a the value of the business done by the respective patrons with the corporation value based as opposed to quantity based b distribute based on quantity based or c distribute based on a combination of quantity based and value based as the board determines appropriate the board_of directors may take into account applicable business conducted prior to the then current fiscal_year if appropriate as defined the patronage attributable to the settlement proceeds would constitute an extraordinary event under sec_3 of article ix of the bylaws taxpayer’s board would determine the appropriate portion to be allocated pursuant to such sec_3 as determined by taxpayer’s board the portion allocated under sec_3 would be based upon either the quantity or value of business done which would take into account the past patronage during the litigation period or a combination of the two under taxpayer's bylaws taxpayer only distributes patronage to its members although taxpayer's membership has generally remained fairly stable changes in membership have occurred from the beginning of the litigation period through the present to the extent that a portion of the settlement proceeds are attributable to former patrons for whom taxpayer has no obligation to distribute such amounts as patronage_dividends taxpayer intends to retain such amount and treat such amount as non-patronage income on the basis of the foregoing information taxpayer requests the following rulings the settlement proceeds constitute patronage sourced income pursuant to sec_1388 pursuant to sec_3 of article ix of its bylaws taxpayer may allocate among its members a portion of the patronage_dividends attributable to the settlement proceeds to the general pool based upon current_year patronage and the remainder to the members the b members that purchased b during the litigation period based either upon the value of the business done by the b members taking into account the business done during the litigation period or the quantity of the business plr-103864-15 done by the b members taking into account the quantity of business done during the litigation period taxpayer as a cooperative is obligated to annually pay patronage_dividends to its patrons on the business done with or for its members taxpayer pays the patronage_dividend through a combination of cash and qualified written notices of allocation which are currently deductible in determining taxpayer's taxable_income in accordance with sec_1382 the settlement proceeds constitute patronage_dividends because they are directly related to taxpayer’s patronage business activity with its patrons sec_1388 in relevant part provides that for purposes of this subchapter the term patronage_dividend means an amount_paid to a patron by an organization to which part i of subchapter_t applies on the basis of quantity or value of business done with or for such patron under an obligation of such organization to pay such amount which obligation existed before the organization received the amount so paid and which is determined by reference to the net_earnings of the organization from business done with or for its patrons the term does not include any amount_paid to a patron to the extent that a such amount is out of earnings other than from business done with or for patrons or b such amount is out of earnings from business done with or for other patrons to whom no amounts are paid or to whom smaller amounts are paid with respect to substantially identical transactions as to the initial requested ruling the focus of the analysis is whether the settlement proceeds are attributable to net_earnings of the organization from business done with or for its patrons neither the code nor the regulations promulgated thereunder defines business done with or for patrons however reg sec_1_1382-3 provides that the term income derived from sources other than patronage means incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association for example income derived from the lease of premises from investment in securities or from the sale_or_exchange of capital assets constitutes income derived from sources other than patronage in rev_rul 1969_2_cb_166 the service provided the following analysis of what it means for income to be patronage sourced 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 plr-103864-15 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 see also rev_rul 1974_1_cb_245 ruling that interest_income realized on loans made by the taxpayer was patronage source because the loans actually facilitated the accomplishment of taxpayer’s cooperative activities in that the loans enabled the taxpayer to obtain necessary supplies for its operations the settlement proceeds are with respect to damages incurred by taxpayer for excessive prices paid on b purchased by taxpayer and resold by taxpayer to its b members thus the settlement proceeds are attributable to the b purchases that taxpayer made in order to supply its patrons pursuant to sec_1388 and the rulings cited above the settlement proceeds directly relate to taxpayer’s purchase of products sold as part of its cooperative business and are not incidental income to taxpayer’s operation taxpayer's purchases of b to service its members led to taxpayer’s filing of the lawsuit and receipt of the settlement proceeds therefore the settlement proceeds constitute patronage sourced income that is directly related to and facilitative of taxpayer’s cooperative operation and not incidental to taxpayer’s cooperative operations taxpayer will only be allocating and paying a patronage_dividend to its current members thus if and to the extent that a portion of the settlement proceeds are attributable to the business done with or for former b members to whom no patronage_dividend will be paid such portion of the settlement proceeds will not be distributed to the b members instead taxpayer will report such amounts in its computation of its taxable_income under sec_3 of article ix of taxpayer's historic bylaws taxpayer is required to allocate and distribute as a patronage_dividend its income attributable to the settlement proceeds although taxpayer's historic bylaws allowed taxpayer to create multiple patronage pools taxpayer has historically only utilized one pool under taxpayer's historic bylaws all patronage_dividends are to be allocated among taxpayer's members based upon the quantity of business done by taxpayer's members in the most recent year sec_1388 provides that a patronage_dividend may be allocated and paid on the basis of quantity or value of business done with or for such patron taxpayer's historic bylaws limited taxpayer’s board to allocating taxpayer's patronage_dividend among its members based upon the relative quantity of business done by taxpayer with or for such members under the newly adopted provisions of sec_3 of article ix of the taxpayer bylaws the board is allowed to allocate the portion of taxpayer's patronage_dividend attributable to an extraordinary event either based upon value or plr-103864-15 based upon quantity or a combination of both in any of the three methods the board may take into account patronage activity that occurs prior to the most recent year in the context of the patronage_dividend attributable to the settlement proceeds the value of business done by a particular b member relates to the business that such member did with taxpayer during the litigation period as opposed to the business the b member did with taxpayer in the most recent year thus under an allocation based upon the value of business done the board will take into account the business transacted during the litigation period if the board determines to allocate the patronage based upon quantity the taxpayer board will take into account the b members' patronage during the litigation period such allocation is most consistent with the economic realization of the income attributable to the settlement proceeds the service has approved of taking into account past patronage in allocating a cooperative's patronage_dividend among its patrons in revrul_74_84 1974_1_cb_244 a cooperative recognized income from depreciation_recapture after confirming that such income as patronage sourced income the service approved the allocation of the patronage_dividend attributable to the depreciation_recapture over the period in which the depreciation was claimed thereby tracing the depreciation_recapture income to the years in which tax depreciation was claimed in excess of the economic depreciation accordingly taxpayer board's allocation of the patronage_dividend based upon the b members' patronage during the litigation period would be appropriate in accordance with sec_1388 in order for an amount putatively paid as a patronage_dividend to be deductible as a patronage_dividend the amount must be paid under a preexisting legal_obligation sec_1_1388-1 provides that for the purpose of subdivision ii of this subparagraph amounts paid_by a cooperative organization are paid under a valid enforceable written obligation if such payments are required by state law or are paid pursuant to provisions of the bylaws articles of incorporation or other written contract whereby the organization is obligated to make such payment the legal_obligation must exist at the time when the participating member patrons transact their business with the cooperative and not pursuant to an obligation created after the allocated amount was earned see pomeroy cooperative grain company v commissioner t c no date taxpayer's bylaws both before and after the recent amendment through the addition of sec_3 create a preexisting legal_obligation taxpayer is obligated to distribute to its patrons all of its net_earnings from the business done with or for its members this obligation has existed throughout taxpayer's operation as a cooperative thus taxpayer's legal_obligation has existed throughout the period that plr-103864-15 taxpayer realized and recognized the income attributable to the settlement proceeds taxpayer's preexisting legal_obligation is not altered by taxpayer board's discretion to utilize different pools in its allocation of its patronage_dividends among its members likewise the additional discretion granted to taxpayer’s board as to the method to allocate its patronage_dividend among its members pursuant to the newly adopted provisions of sec_3 of article ix of taxpayer's bylaws does not alter or affect taxpayer's preexisting legal_obligation - it simply allows taxpayer the discretion to allocate the patronage_dividend among the members under a different approved method under sec_1388 given the unusual circumstances involved with the nature of the income related to the settlement proceeds in that the settlement proceeds represent income attributable to improper overcharges imposed on taxpayer over a ------------ year time period that ended ------ years prior to the year of the receipt the exercise of the board's discretion in accordance with taxpayer's bylaws is the appropriate allocation of the patronage_dividend in addition the exercise of discretion does not undermine taxpayer's preexisting legal_obligation to pay its members the patronage_dividend it only allows taxpayer to allocate that patronage_dividend to the members that should receive such patronage_dividend the courts have recognized the key aspect of a cooperative its board and its membership in determining the appropriate allocation of patronage_dividends among the membership in 84_tc_600 taxpayer a subchapter_t agricultural_cooperative was allocated patronage_dividends from several cooperatives in which it was a member the dividends received related to fiscal years other than the fiscal_year in which taxpayer reported such income instead of determining that the dividend be allocated precisely in proportion to the patronage that generated them the taxpayer’s board_of directors employed an accounting_method that allocated all of the dividends based upon the patronage in the year in which the dividends were taxable to it the service contended that the taxpapyer should allocate its patronage to its members based upon the years to which the patronage_dividends received by kingfisher related the tax_court agreed with taxpayer stating that the allocation method chosen by its democratically elected board_of directors ratified annually and employed consistently for many years was equitable and reasonable kingfisher t c pincite noting that a board_of director’s weighing of the equity should be overturned by this court only when the exercise of that discretion appears to have been unreasonable the tax_court held that the government’s proposed reallocation was not superior to taxpayer's particularly when it appeared that taxpayer’s directors made a concerted effort to ensure that all members were treated fairly id pincite the proposed allocation by taxpayer's board under its recently adopted sec_3 of article ix of its bylaws represents the concerted effort of taxpayer’s board to ensure that all members are treated fairly the split of the settlement proceeds is necessary to be fair based upon the historic treatment of prior and significantly smaller plr-103864-15 settlement receipts and the fact that the overall membership provided support to the litigation and the fact that the b members disproportionately suffered from the price fixing that gave rise to the settlement proceeds based on the foregoing taxpayer may allocate the settlement proceeds pursuant to the recently adopted bylaw amendment and such allocation and distribution of funds constitute a deductible patronage_dividend under sec_1382 accordingly based solely on the foregoing we rule that the settlement proceeds constitute patronage sourced income pursuant to sec_1388 pursuant to sec_3 of article ix of its bylaws taxpayer may allocate among its members a portion of the patronage_dividends attributable to the settlement proceeds to the general pool based upon current_year patronage and the remainder to the b members that purchased b during the litigation period based either upon the value of the business done by the b members taking into account the business done during the litigation period or the quantity of the business done by the b members taking into account the quantity of business done during the litigation period no opinion is expressed or implied regarding the application of any other provision in the code or regulations this ruling is directed only to the taxpayer that requested it under sec_6110 of the code it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours nicole r cimino senior technician reviewer branch office of the associate chief_counsel passthroughs special industries-


internal_revenue_service number release date index number - in re - - department of the treasury washington dc person to contact - id no - telephone number --------------------- refer reply to cc corp b02 - plr-113131-03 date date ------------------ ---------------------- taxpayer state date ------------------- dear ------------ particular you requested rulings regarding sec_118 and sec_216 by letter dated date you withdrew your request for a ruling under sec_216 accordingly this letter addresses only whether the special_assessments described below qualify as contributions to capital under sec_118 this is in response to your request for rulings dated date in the facts submitted provide that taxpayer is a state non-stock non-profit membership corporation subject_to taxation under sec_277 taxpayer’s members have the right to vote for taxpayer’s board_of directors each member has one vote per lot the members are entitled to the liquidation proceeds only in the event the taxpayer liquidates the members own the taxpayer’s only equity taxpayer was formed to operate and maintain the common property of a community for its members membership is mandatory for all homeowners in the community membership is composed solely of the individuals who reside in and upon one of the thirty-eight mobile home lots in the community taxpayer was originally structured as a community where the members owned their homes but rented the land including the land on which the homes were placed and the infrastructure of the community from the developer under a long-term_lease members pay taxpayer a small monthly fee to cover community maintenance plr-113131-03 sometime before date the developer decided to sell the property on which the community was located before date taxpayer’s members voted unanimously to have the taxpayer purchase the land from the developer in order to fund the purchase on or about date taxpayer entered into a mortgage and purchased the land from the developer after the purchase the members ceased paying rent to the developer however in order to pay down the mortgage the membership unanimously agreed to pay a special assessment the special assessment to the taxpayer for the duration of the mortgage the members will pay the special assessment in addition to their annual membership dues the funds raised by the special assessment will be used exclusively for retiring the mortgage associated with the purchase of the developers land the taxpayer deducts the interest and the real_estate_taxes associated with the real_property purchased from the developer the members allocated to paying the mortgage principal the principal be considered a capital_contribution under sec_118 include any contributions to the capital of the taxpayer sec_118 provides that in a case of a corporation gross_income does not the taxpayer requests a ruling that the portion of the payments received from sec_1_118-1 provides in part that if a corporation requires additional funds the dominant factor in determining whether the amounts are contributions of for conducting its business and obtains such funds through voluntary pro_rata payments by its shareholders the amounts so received being credited to its surplus account or to a special account such amounts do not constitute income although there is no increase in the outstanding shares of stock of the corporation further the section provides that the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered capital or payment for goods or services is the motive or purpose and intent in making the contribution 308_f2d_634 9th cir revrul_75_371 1975_2_cb_52 and rul 1974_2_cb_38 the 106_tc_369 set forth a three factor test for determining the existence of an investment motive whether the fee is earmarked for application to a capital_expenditure whether the payers are the equity owners of the corporation and the payment increases the corporation's equity_capital and whether the members have the opportunity to profit from their investment in the corporation to the extent the payments for the special assessment are used to pay the principal portion of the mortgage the taxpayer satisfies the criteria identified by the court in board_of trade indicating that the payors had an investment motive first the third the members have the opportunity to profit from their investment when second the payments enhance the member’s collective interest in taxpayer plr-113131-03 principal portions of the special assessment are specifically allocated to paying for the purchase of the land a capital_asset the funds are used solely for the mortgage payments taxpayer will still collect additional funds to pay for its other expenses although each member's individual interest in taxpayer does not directly reflect the amount of the special assessment paid_by such member member equity is increased by the accumulation of principal additionally the taxpayer’s equity will increase to the extent the land appreciates as mentioned above in the event of dissolution of taxpayer after provision for creditors and payment of all costs and expenses of the dissolution members would be entitled to distribution of assets of taxpayer see board_of trade t c pincite rev_rul 1975_2_cb_52 they sell their residence to third parties the value of their residence will also reflect the value of their interest in taxpayer because membership in taxpayer transfers with the residence as taxpayer’s value increases as it builds equity through appreciation and the accumulation of principal the member’s equity_interest increases see board_of trade t c pincite rev_rul 1975_2_cb_52 rent prevents the payments from being classified as capital contributions in 452_f2d_1036 ct_cl the issue was whether the shareholder resident was entitled to deduct a pro_rata share of the cooperative's mortgage interest and real_estate_taxes pursuant to sec_216 in order to qualify for sec_216 treatment percent of the cooperative's income must have been from the rental of residences the shareholder residents in eckstein signed a proprietary lease entitling the shareholder resident to a specific apartment the lease provided that the shareholder resident would pay annual rent calculated as the shareholder resident’s share of the cooperatives’ cash requirements including mortgage interest and amortization payments eckstein pincite the lease also provided in part that the amount allocated for amortization payments or any other mortgage principal payments shall not be income to the cooperative we do not believe that the fact that the residents no longer are required to pay the taxpayer in eckstein the owner of a unit in the cooperative argued that the entire amount of the monthly payment should be included in the cooperative's income the court however agreed with the service that the portion of the rental payments allocated to pay down the mortgage principal constituted a capital_contribution and was not included in the cooperative's income in reaching this result the court in eckstein addressed the shareholder resident’s plr-113131-03 argument that the shareholders residents monthly rental payment constituted a bargain_purchase that prohibited capital_contribution treatment the court rejected this argument by stating that based on the legislative purpose and history of housing cooperatives the corporate entity should be ignored and the stockholders should be treated as if they were the owners for purposes of determining whether there was a bargain_purchase the court determined that the decisions in cases of other types of membership cooperatives or corporations were not relevant due to the special nature of the relationship between a housing cooperative and its shareholders under the tax statutes the same rationale should apply for purposes of determining whether a payment qualifies as a sec_118 nontaxable capital_contribution this is a unique situation similar to cooperatives because the members own their dwelling_unit but not the underlying real_estate instead the members own the land collectively through their ownership_interest in the taxpayer the fact that the taxpayer does not qualify as a cooperative for purposes of sec_216 does not change the nature of the relationship in eckstein the court applied the tax policy behind cooperatives even though as a result of the application the corporation did not qualify as a cooperative follows although the taxpayer in this case does not qualify as a cooperative we believe accordingly based on the facts above and the information provided we rule as the portion of the special assessment received from the members allocated to paying the principal will be considered a capital_contribution under sec_118 and therefore will be excluded from taxpayer's gross_income under sec_61 except as expressly provided herein no opinion is expressed or implied this ruling is directed only to the taxpayer requesting it sec_6110 of concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed regarding the application of sec_216 sec_277 or any other code provision the code provides that it may not be used or cited as precedent relevant letter is being sent to your taxpayer in accordance with the power_of_attorney on file with this office a copy of this a copy of this letter must be attached to any income_tax return to which it is the rulings contained in this letter are based upon information and plr-113131-03 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 allison g burns alison g burns acting assistant to the chief branch office of associate chief_counsel corporate plr-113131-03 cc ------------------------------------------------------------- ------------------------------------------------- -------------------------------- ------------------------------- ---------------------- ------------------------ --------------------------------


internal_revenue_service number release date index number ---------------------------- ----------------------- ---------------------------- --------------------------- - department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-107715-04 date may ---------------------- ------------------------- legend x --------------------------------------------------- date state dear -------------- x requesting a time extension under sec_301_9100-3 of the procedure and administration regulations for x to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes facts this letter responds to your letter dated date submitted on behalf of ------------------ according to the information submitted x was formed on date under state law x intended to elect to be treated as an association_taxable_as_a_corporation effective date however form_8832 entity classification election inadvertently was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with more than one owner can elect to be classified an association owner will be a partnership unless it elects otherwise sec_301_7701-3 provides that an eligible_entity with more than one plr-107715-04 sec_301_7701-3 allows an eligible_entity to elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 entity classification election with the service_center designated on that form sec_301_7701-3 provides that all such elections become effective on the date specified by the entity on form_8832 or on the date filed if no effective date is specified the specified effective date must not be earlier than days prior to the filing_date of form_8832 nor later than twelve months after the filing_date extensions of time to make regulatory elections under the rules of sec_301_9100-2 and sec_301_9100-3 under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register determine whether to grant a discretionary extension of time these standards indicate that the commissioner will grant relief when the taxpayer provides evidence proving to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of government sec_301_9100-1 gives the commissioner discretion to grant reasonable sec_301_9100-3 sets forth the standards which the commissioner uses to conclusion based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date a copy of this letter should be attached to the election concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter except as expressly provided herein no opinion is expressed or implied plr-107715-04 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely s heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures cc copy of this letter copy for sec_6110 purposes