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-140672-09 date date legend taxpayer --------------------------------------------------------------------- ------------------------------------------------------------------------ state a b area dear ------------ ------------------- ----------- ------------------------------------------------------------------------ --------- this is in response to a request for rulings dated date submitted by your authorized representative the rulings concern the interplay of the rules in subchapter_t of the internal_revenue_code concerning the taxation of cooperatives and their patrons and the calculation of the sec_199 deduction for certain cooperatives contained in sec_199 taxpayer is a farmers’ cooperative organized as a cooperative corporation under state a law taxpayer files its federal_income_tax return form 1120-c on the basis of a fiscal_year ending on ----------- taxpayer’s overall_method_of_accounting for federal_income_tax purposes is the accrual basis taxpayer is a nonexempt agricultural marketing_cooperative under subchapter_t of the code taxpayer is organized as a marketing association under the state a cooperative marketing act the act ------------------------------------------------------ section ----------provides plr-140672-09 associations organized or domesticated hereunder shall be deemed nonprofit inasmuch as they are not organized to make profits for themselves as such or for their members as such but only for their members as producers the articles of incorporation describe taxpayer’s purposes to engage in any activity involving or relating to the business of receiving grading processing drying packing storing financing marketing selling and or distribution on a cooperative basis of b or products or by- products derived therefrom of its members or conducive thereto and to engage in the handling of such b cooperatively either on an agency or a purchase and sale basis articles of incorporation article -- taxpayer’s members are some ------------------------b farmers located in area each member has a current marketing agreement with taxpayer each member also owns at least one share of taxpayer’s common_stock which is membership stock taxpayer’s articles of incorporation provide that the common_stock of this corporation may be purchased owned or held only by producers who shall patronize the corporation in accordance with uniform terms and conditions prescribed thereby and only such persons shall be regarded as eligible members of the corporation articles of incorporation article---- the common_stock has a par_value of dollar_figure-------per share articles of incorporation article --- no dividends are paid on the common_stock articles of incorporation article --- article vi of the articles of incorporation provides that e ach eligible holder of common_stock shall be entitled to only one vote in any meeting of the stockholders regardless of the number of shares of stock owned by him a significant portion of the ---------------b grown in the united_states today is grown by b growers under contract with one or more of the ---------------------------- --------- --------------------- taxpayer serves these and other b growers by providing an independent farmer-owned alternative to the large purchasers taxpayer markets b on a pooled basis for its members that b is delivered to taxpayer for marketing pursuant to the terms of the b marketing agreement the marketing agreement which each member enters into with taxpayer each year’s crop is pooled separately taxpayer purchases b from its members for marketing on a cooperative basis taxpayer then processes the b removing the --------------------------------and placing the -- --------------------------------------------------------------------------- the b in that form can be ----- plr-140672-09 ----------------------------------------------------------- taxpayer stores processed b at warehouses taxpayer sells b to a variety of customers section---of the marketing agreement authorizes taxpayer to contract in advance for the sale or all or part of the -------------------------- b the b it acquires from members sell the b to dealers manufacturers brokers or others at wholesale retail auction or otherwise before or after manufacturing or processing and within or outside this state contract for the marketing of such b or its by-products through any commission houses brokers or agents selected by the association upon consignment or otherwise fix a fair and reasonable price or prices at which such b or by-products may be sold and fix whatever terms and conditions it deems advisable taxpayer operates ---------------------------which receive b delivered by members pursuant to the marketing agreements to be marketed by taxpayer as part of the annual pool taxpayer currently is operating ---- ---------------------------strategically located across the territory it serves in addition taxpayer also purchases some b at the ---------------------------from nonmembers and from members outside of their marketing agreements these--------- purchases are not treated as member purchases nonmembers and members who sell b to taxpayer in -------purchase transactions are not eligible to share in patronage_dividends with respect to those transactions during ------- approximately --------------------------of b were purchased by taxpayer for marketing on a cooperative basis pursuant to the marketing agreements the ---------------------------handled an additional -------------------------of b acquired in -------- purchases from nonmembers and members the focus of this ruling is on payments made by taxpayer to members for their b pursuant to the marketing agreements these payments are referred to in this ruling as the b payments taxpayer occasionally purchases b in ------ purchase transactions from nonmembers who have not entered into marketing agreements and are not entitled to share in patronage_dividends taxpayer also occasionally purchases b in -------- purchase transactions from members outside of the marketing agreements as used in this ruling the term b payments does not include payments made to nonmembers or to members for b acquired in ------ purchases the term b payments also does not include any patronage_dividends that taxpayer pays to members with respect to their pool b plr-140672-09 section ----------of the state a cooperative marketing act specifically authorizes cooperative associations organized under that act to enter into marketing contracts with members a the association and its members may make and execute marketing contracts requiring the members to sell for any period of time not over years all or any specified part of their agricultural products or specified commodities exclusively to and through the association or any facilities to be created by the association the contract may provide that the association may sell or resell the products of its members with or without taking title thereto and pay over to its members the resale price after deducting all necessary selling overhead and other costs and expenses including dividends on preferred_stock not exceeding ten percent per annum and reserve for retiring the stock if any and other proper reserves and dividends not exceeding ten percent per annum upon common_stock taxpayer’s marketing agreements are annual agreements covering a single crop year and marketing season prior to the beginning of the year typically in ----------- --------------- or -------------- taxpayer sets a target for the number of pounds of b that it is willing and able to acquire from members in the upcoming year for marketing on a cooperative basis the target for --------is -------------------------- marketing agreement section -------- taxpayer then explains to members the marketing program for the upcoming year each grower interested in being part of the marketing program for the year is required to apply to be a part of the program by tendering a signed marketing agreement indicating the pounds of b the grower desires to deliver to taxpayer for the year’s pool marketing agreement section-- taxpayer sets a deadline for members to make such an application taxpayer accepts or rejects applications based upon financial limitations market conditions the applicant’s compliance with the provisions of previous marketing agreements and guidelines approved by its board_of directors after the deadline passes taxpayer totals the number of pounds covered by all accepted applications if the total exceeds the target then the number of pounds each grower is entitled to deliver may be subject_to adjustment so that the total pounds of ---- ------------------------ b will approximate the target marketing agreement section ----- taxpayer adjusts the poundage so that the total pounds in the marketing agreements totals approximately the target then d after the association has calculated any adjustment pursuant to c above it will return to grower a fully executed agreement setting forth in sec_1 the amount of his ------------------------ b poundage if grower does not wish to accept an agreement for the ------------------------ b poundage set forth in his agreement or wishes to reduce his------------------- plr-140672-09 ---------- b poundage he shall provide written notice to the association within ten days after receipt of his executed agreement marketing agreement section ------ the marketing agreement gives a member the right to deliver to the year’s pool the specified poundage of b as part of the marketing program for the year members are not legally obligated to market all those pounds through taxpayer however u nless grower delivers documented evidence satisfactory to the association of crop loss or disaster preventing grower’s compliance failure to deliver at least --- percent of the contract pounds is regarded as a breach of the marketing agreement marketing agreement section --------among other things section --------provides the following remedies for breach by a grower b if grower breaches any provision hereof i the association shall in addition to all remedies available at law or in equity be entitled to enforce the sanctions set forth herein including sanctions set forth in ---------------- or terminate this agreement and ii grower may lose his eligibility to obtain a marketing agreement for or have his ------------------------pounds reduced for breach of the marketing agreement is also a basis for terminating the membership of a member in taxpayer marketing agreement section -------- members agree to raise b in accordance with all applicable federal and state laws and regulations which relate to the production harvesting and sale of b marketing agreement section -------in addition members agree to comply with the rules and regulations relating to agricultural practices set forth in -----------------to the marketing agreement when b is harvested and ready for delivery a member agrees to deliver his b to the designated -------------------------at his own expense marketing agreement section --------there prior to acceptance by taxpayer the b is inspected and graded marketing agreement section --------the grade of b affects its value and what taxpayer is obligated to pay for it taxpayer reserves the right to reject b that does not grade within a grade eligible for purchase ‘------------------------b’ as set forth on -------------------- -------------------------------------------------------------------------------------------------------------------- subject_to the -----------------caps as set forth on schedule a-2 marketing agreement section -------- section ------of the marketing agreement provides that plr-140672-09 b ------------------------ b purchased by the association shall be pooled by the association the association shall endeavor to resell such b in its original form or processed or manufactured or as by-products together with similar products or by-products delivered by other growers under similar agreements resale shall be at prices reasonably obtainable under market conditions as determined by the association in its discretion the marketing agreement provides for payment to members for their --------------- ----------b when such b is accepted at a ----------------------- marketing agreement section --------the payment amounts per pound of b are specified in --------------------of the marketing agreement the amount_paid depends upon the grade of the b as determined by the inspectors at the ---------------------------employing company grade standards the same payment schedule applies to all members delivering b to taxpayer under marketing agreements for a year the payment to members for their b is made by check at delivery these payments are the b payments that are the subject of this ruling taxpayer establishes what it will pay for b when marketing agreements are signed which is prior to the beginning of the marketing year its policy is to set that payment at as high a level as possible based on anticipated marketing conditions as a safety valve in the event that b prices do not act in the manner expected taxpayer reserves the right to adjust the prices prior to the time that growers begin to deliver the b in the ------ the marketing agreement provides f due to economic uncertainties and world market conditions the association reserves the right to address prices for ------------------------------b on -------------------------- at any time prior to the opening of the first --------------------- ------------- marketing agreement section ----- capitalization in original section --------of the marketing agreement provides for what is done with any net_earnings of a pool determined after subtracting amounts paid to members at the time of delivery a the association may handle the pooled b or products in different ways but the net_proceeds of each pool if any less the costs of transporting handling processing manufacturing selling storing marketing products or by-products and other activities and also reserves not to exceed of the gross resale price for general association purposes shall be divided pro_rata among the growers in proportion to their deliveries of the b in such pool the division or distribution shall be plr-140672-09 made in the amounts deemed advisable by the association’s board in its discretion until all the accounts of the season are completely settled final payments made under this provision out of net_earnings of a pool determined after the pool closes are patronage_dividends taxpayer began marketing b in the manner described above after the--------------- --------------------------------------------------------------------------------------------------------------------- -------------------------- since then none of the pools covered by marketing agreements ie the pools beginning in --------have yet closed so patronage_dividends have not been paid for those pools because the rules are clear no ruling is requested as to the treatment for sec_199 purposes of patronage_dividends that may be paid_by taxpayer operating in the manner described above taxpayer made payments of approximately dollar_figure-------------- to members for their b during its fiscal_year ended ----------- - ------- all of taxpayer’s b payments were made in cash by check and were paid in accordance with the --------marketing agreements in effect during the fiscal_year ended - ----------------------since no pools closed during the year no patronage_dividends were paid to members during the year taxpayer has treated b payments as purchases for tax purposes and reported them on schedule a line of its form 1120-c taxpayer has not reported b payments as per-unit retain allocations paid in money and therefore has not reported them on schedule a line 4b of its form 1120-c because of this reporting b payments have entered into the determination of taxpayer’s cost_of_goods_sold for tax purposes taxpayer does not sell all of the b received each year prior to year end and so some b received during the year is in inventory at year end taxpayer has done a sec_199 computation in prior years in that computation it has not added back b payments taxpayer has not passed any portion of its sec_199 deduction through to members in prior years taxpayer seeks to confirm that all b payments in cash to members should be classified as per-unit retain allocations paid in money and that they should be added back in its sec_199 computation nonexempt subchapter_t cooperatives are permitted to exclude or deduct distributions to their patrons that qualify as patronage_dividends or per-unit retain allocations provided those distributions otherwise meet the requirements of subchapter_t of the code plr-140672-09 sec_1388 of the code defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of this subchapter applies to a patron with respect to products marketed for him the amount of which is fixed without reference to net_earnings of the organization pursuant to an agreement between the organization and the patron per-unit retain allocations may be made in money property or certificates per- unit retain allocations paid in money and in property are excludable or deductible under sec_1382 of the code per-unit retain allocations paid in certificates are deductible under sec_1382 if the certificates are qualified if the certificates are nonqualified the cooperative is permitted a deduction under sec_1382 or a tax_benefit figured under sec_1383 when the certificates are later redeemed sec_1388 of the code provides that the term patronage_dividend means an amount_paid to a patron by a cooperative on the basis of the quantity or value of business done with or done for such patron sec_1388 provides that a patronage_dividend is an amount_paid under an obligation that must have existed before the cooperative received the amount so paid sec_1388 provides that patronage_dividend means an amount_paid to a patron that is determined by reference to the net_earnings of the cooperative from business done with or for its patrons that section further provides that a patronage_dividend does not include any amount_paid to a patron to the extent that such amount is out of earnings other than from business done with or for patrons sec_1_1382-3 of the income_tax regulations states that income derived from sources other than patronage means incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association patronage_dividends may be paid in money property or written notices of allocation patronage_dividends paid in money and in property are excludable or deductible under sec_1382 of the code patronage_dividends paid in written notices of allocation are deductible under sec_1382 if the written notices of allocation are qualified if the notices are nonqualified the cooperative is permitted a deduction under sec_1382 or a tax_benefit figured under sec_1383 when the notices are later redeemed sec_1388 of the code provides that the term written_notice_of_allocation means any capital stock revolving fund certificate retain certificate certificate of indebtedness letter of advice or other written notice which discloses to the recipient the stated dollar amount allocated to him by the organization and the portion thereof if any which constitutes a patronage_dividend for cooperatives that use pooling revrul_67_333 1967_2_cb_299 provides that pool advances are treated as per-unit retain allocations and the final pool payment made after net_earnings have been determined is treated as a patronage_dividend plr-140672-09 sec_199 of the code provides taxpayers with a deduction for income attributable to domestic_production activities for taxable years beginning in that deduction is equal to percent of the lesser_of the qualified_production_activities_income qpai or of the taxable_income determined without regard to the deduction of the taxpayer for the year under sec_199 of the code patrons that receive a qualified_payment from a specified agricultural or horticultural cooperative are allowed a deduction for an amount allocable to their portion of qpai of the organization received as a qualified patronage_dividend or per-unit_retain_allocation which is paid in qualified per-unit retain_certificates in particular sec_199 requires the cooperative to be engaged in the manufacturing production growth or extraction in whole or significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products under sec_199 in the case of a cooperative engaged in the marketing of agricultural and horticultural products the cooperative is treated as having manufactured produced grown or extracted mpge in whole or significant part any qualifying_production_property marketed by the cooperative that its patrons have mpge this is known in the industry as the cooperative attribution rule in addition sec_199 requires the cooperative to designate the patron’s portion of the income allocable to the qpai of the organization in a written notice mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the tax_year under sec_1_199-6 of the regulations for purposes of determining a cooperative’s sec_199 deduction the cooperative’s qpai and taxable_income are computed without taking into account any deduction allowable under sec_1382 or c of the code relating to patronage_dividends per-unit retain allocations and nonpatronage distributions an agricultural or horticultural cooperative is permitted to pass-through to its patrons all or any portion of its sec_199 deduction for the year provided it does so in the manner and within the time limits set by sec_199 of the code when a cooperative passes-through all or any portion of the sec_199 deduction the cooperative remains entitled to claim the entire sec_199 deduction on its return provided that it does not create or increase a patronage tax loss but is required under sec_199 to reduce the deduction or exclusion it would otherwise claim under sec_1382 for per-unit retain allocations and patronage_dividends sec_199 of the code provides that a cooperative passes through an amount of its sec_199 deduction by identifying such amount in a written notice mailed to such person during the payment period described in sec_1382 sec_1382 provides that the payment period for a year is the period beginning with the first day of such taxable_year and ending with the fifteenth day of the ninth month following the close of such year plr-140672-09 sec_1_199-6 of the regulations provide that in order for a patron to qualify for the sec_199 deduction sec_1_199-6 requires that the cooperative identify in a written notice the patron's portion of the sec_199 deduction that is attributable to the portion of the cooperative's qpai for which the cooperative is allowed a sec_199 deduction this written notice must be mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the taxable_year the cooperative may use the same written notice if any that it uses to notify patrons of their respective allocations of patronage_dividends or may use a separate timely written notice s to comply with this section the cooperative must report the amount of the patron's sec_199 deduction on form 1099-patr taxable_distributions received from cooperatives issued to the patron while a cooperative is permitted to disregard per-unit retain allocations and patronage_dividends in its sec_199 deduction sec_1_199-6 of the regulations provide that a qualified_payment received by a patron of a cooperative is not taken into account by the patron for purposes of sec_199 sec_1_199-6 of the regulations define the term qualified_payment to mean any amount of a patronage_dividend or per-unit_retain_allocation as described in sec_1385 or of the code received by the patron from a cooperative that is attributable to the portion of the cooperative’s qpai for which the cooperative is allowed a sec_199 deduction for this purpose patronage_dividends and per-unit retain allocations include any advances on patronage and per-unit retains paid in money during the taxable_year taxpayer is a specified agricultural or horticultural cooperative within the meaning of sec_199 of the code and sec_1_199-6 of the regulations taxpayer is an organization to which part i of subchapter_t applies it is engaged in the marketing of agricultural or horticultural products ie b as a specified agricultural or horticultural cooperative taxpayer is entitled to the benefit of sec_199 of the code and sec_1_199-6 of the regulations which permit such cooperatives to disregard deductions under sec_1382 and c for purposes of computing qpai and taxable_income for sec_199 purposes sec_1382 provides deductions for per-unit retain allocations paid in money property and qualified per-unit retain_certificates as well as for patronage_dividends paid in money property and qualified written notices of allocation it also provides for deductions when nonqualified per-unit retain_certificates and nonqualified written notices of allocation are redeemed members marketing their b through taxpayer are entitled to receive b payments when they deliver their b to a pool in accordance with taxpayer’s marketing agreements in addition when a pool closes and the pool has net_earnings above what are needed as reserves members with b in the pool are entitled to a final pool distribution plr-140672-09 taxpayer’s b payments meet the definition of per-unit retain allocations paid in money which are excludible or deductible under sec_1382 taxpayer’s b payments are paid in money by check so the paid in money requirement is met taxpayer’s b payments also meet all the requirements of the definition of per-unit_retain_allocation contained in sec_1388 which defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of this subchapter applies to a patron with respect to products marketed for him the amount of which is fixed without reference to the net_earnings of the organization pursuant to an agreement between the organization and the patron first taxpayer’s b payments are paid to b growers pursuant to the state a cooperative marketing act taxpayer’s articles of incorporation and bylaws and taxpayer’s marketing agreements and thus the pursuant to an agreement requirement is met second taxpayer’s b payments to a member are made with respect to products marketed for him namely the b delivered by the member for marketing by taxpayer third the amount of the b payments to each member is fixed without reference to the net_earnings of taxpayer since at the time the payments are made taxpayer’s actual net_earnings for the pool are neither known nor determinable when taxpayer’s net_earnings for a pool are determined after the pool closes if taxpayer has net_earnings which are not required as reserves b growers are entitled to an additional distribution this additional distribution is determined based upon taxpayer’s net_earnings and is treated as a patronage_dividend not as a per-unit_retain_allocation thus taxpayer’s b payments meet all the requirements specified in subchapter_t for per-unit retain allocations because all payments are in cash by check they qualify as per-unit retain allocations paid in money taxpayer has not reported its b payments in the manner that pooling cooperatives normally do it has treated them as purchases not as per-unit retain allocations paid in money or certificates that does not mean that taxpayer should be treated as a nonpooling cooperative taxpayer operates like pooling cooperatives do where each person contributing to a pool each year receives the same amount for his or her crop except for quality and other similar adjustments while there should be little doubt that taxpayer is pooling the b received from members each year whether or not taxpayer is pooling is a moot issue for purposes of this ruling since its b payments meet the definition of per-unit retain allocations paid in money in any event nothing in subchapter_t of the code limits the exclusion or deduction for per-unit retain allocations to cooperatives with pools plr-140672-09 sec_1_199-6 of the regulations provides that sec_1_199-6 is the exclusive method for the cooperative and its patrons to compute the amount of the sec_199 deduction the effect of these sections is that a cooperative such as taxpayer will compute the entire sec_199 deduction at the cooperative level and that none of the distributions whether patronage_dividends or per-unit retain allocations received from the cooperative will be eligible for sec_199 in the patron’s hands that is the patron may not count the qualified_payment received from the cooperative in the patron’s own sec_199 computation whether or not the cooperative keeps or passes through the sec_199 deduction accordingly the only way that a patron can claim a sec_199 deduction for a qualified_payment received from a cooperative is for the cooperative to pass-through the sec_199 amount in accordance with the provisions of sec_199 of the code and the regulations thereunder we note that to prevent a cooperative from deducting the per-unit retain allocations made in money or qualified certificates for the second time when the associated b is sold the cost_of_goods_sold mechanism associated with inventory must be adjusted to reflect the deductions allowable under subchapter_t of the code specifically cooperatives need to include the per-unit retain allocations in inventory cost for purposes of making inventory and sec_263a computations and then adjust the ending inventory and cost_of_goods_sold to prevent double deduction of the per-unit retain allocations the adjustments can be made to either the inventory or the line item deduction for the per-unit retain allocations in other words if the per-unit retain allocations are deducted on a deduction line in the cooperative's tax_return they should be removed entirely from the ending inventory and cost_of_goods_sold computed for the tax_year alternatively if the per-unit retain allocations are not deducted on a deduction line in the tax_return the per-unit retain allocations reflected in the ending inventory should be removed and included in the cost_of_goods_sold amount for that tax_year this procedure will allow the cooperative to deduct the per-unit retain allocations once while also preserving the integrity of its sec_263a calculation for reasons described above taxpayer’s b payments meet the definition of per- unit retain allocations paid in money such per-unit retains are to be reported in box of form 1099-patr taxable_distributions received from cooperatives taxpayer should be entitled to disregard such payments in determining the amount of its sec_199 deduction accordingly we rule as requested that taxpayer’s payments to members for b pursuant to the marketing agreement sec_1 constitute per-unit retain allocations paid in money within the meaning of sec_1382 of the code plr-140672-09 for purposes of computing its sec_199 domestic_production activitie sec_2 deduction taxpayer’s qualified_production_activities_income and taxable_income should pursuant to sec_199 of the code be computed without regard to any deduction for such payments to members for b pursuant to the marketing agreements no opinion is expressed or implied regarding the application of any other provision in the code or regulations this ruling is directed only to the taxpayer that requested it under sec_6110 of the code it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours paul f handleman paul f handleman chief branch office of the associate chief_counsel passthroughs special industries cc


department of the treasury internal_revenue_service te_ge eo examinations commerce street mc 4920dal dallas tx date uil taxpayer_identification_number person to contact identification_number contact telephone number tax_exempt_and_government_entities_division release number release date certified mail this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code our favorable determination_letter to you dated date is hereby revoked and you are no longer exempt under sec_501 of the code effective august 20xx you have failed to establish that you are operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 and that no part of your net_earnings inure to the benefit of private shareholders or individuals you failed to respond to repeated reasonable requests to allow the internal_revenue_service to examine your records regarding your receipts expenditures or activities as required by r c sec_6001 sec_6033 sec_1_6033-2 and revrul_59_95 1959_1_cb_627 dear contributions to your organization are no longer deductible under sec_170 you are required to file income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the tax_year ending july 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia must be filed before the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to these courts at the following addresses united_states tax_court second street nw washington d c united_states court of federal claims madison place nw washington d c united_states district_court for the district of columbia constitution avenue nw washington d c you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely margaret von lienen director eo examinations enclosure publication internal_revenue_service tax_exempt_and_government_entities_division exempt_organizations examinations department of the treasury date date taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we propose to revoke our recognition of your exempt status as an organization described in sec_501 of the internal_revenue_code the code we enclosed our report of examination explaining why we are proposing this action if you accept our proposal please sign and return the enclosed form_6018 consent to proposed action - sec_7428 unless you have already provided us a signed form_6018 we will issue a final revocation letter determining you are not an organization described in sec_501 after the issuance of the final revocation letter we will publish an announcement that you have been deleted from the cumulative list of organizations contributions to which are deductible under sec_170 of the code if you do not respond to this proposal we will similarly issue a final revocation letter failing to respond to this proposal may adversely impact your legal standing to seek a declaratory_judgment because you may be deemed to have failed to exhaust administrative remedies if you do not agree with our proposed revocation and wish to protest our proposed revocation to the appeals_office of the internal_revenue_service then you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision this written request is called a protest for your protest to be valid it needs to contain certain specific information which generally includes a statement of the facts the applicable law and arguments in support of your position for the specific information needed for a valid protest please refer to page of the enclosed publication the examination process and page of the enclosed publication how to appeal an irs decision on tax-exempt status if you do submit a valid protest then an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication and publication explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process please note that fast track mediation services referred to in publication generally do not apply after issuance of this letter you may also request that we refer this matter for technical_advice as explained in publication and an annual revenue_procedure please contact the individual identified on the first page of this letter if you are considering requesting technical_advice if we issue a determination_letter to you based on a technical_advice_memorandum issued by the eo rulings and agreements function then no further administrative appeal will be available to you within the irs on the matter if you receive a final revocation letter you will be required to file federal_income_tax returns for the tax period s shown above as well as for subsequent years you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service office_of_the_taxpayer_advocate if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely stephen a martin acting director eo examinations enclosures publication publication form_6018 report of examination schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number year period ended explanations of items issue does continue to qualify as tax exempt under internal_revenue_code sec_501 after failing to comply with the service’s request to conduct an examination to substantiate its form_990 return facts on december 19xx the organization was granted exemption from federal income taxes under internal_revenue_code irc sec_501 as described in sec_501 on october 19xx the organization was formed and incorporated in the state of on july 20xx the internal_revenue_service service initiated an examination of the organization's form_990 return of organization exempt from income_tax for the july 20xx tax_year a letter dated july 20xx was sent via certified mail to the organization arranging an appointment to begin the examination process by reviewing the organization's books_and_records that substantiate its filed return the letter indicated the examination would take place on july 20xx pincite 00am at the organization's facility the letter also stated to contact the examining revenue_agent to confirm the appointment and if the organization had any questions included with the letter were form_4564 information_document_request idr publication your rights as a taxpayer and a partially completed form_2848 power_of_attorney and declaration of representative telephone contact was made with the july 20xx letter delivery and would retrieve it from the local post office when verbally informed of the scheduled examination date through august 20xx and would contact the examining agent to reschedule the appointment upon reviewing the idr the organization’s president on july 20xx to discuss stated he did not receive the correspondence at the initial attempted indicated he was already scheduled to be out of town from july 20xx telephone contact was made with appointment notified on july 20xx to discuss scheduling the new indicated that he did not locate the correspondence the revenue_agent that the correspondence would be resent before ending the telephone call tentatively agreed to an updated examination appointment of august 20xx pincite 00am depending on the availability of the organization's accountant an updated letter dated july 20xx was sent to indicating the updated appointment date the correspondence also included an updated idr with the new examination date and publication on july 20xx the initial correspondence mailed to the organization on july 20xx was returned to the agent as unclaimed telephone contact was made with progress gathering the documents identified on the idr correspondence dated july 20xx and would talk with his accountant to confirm her availability because she possessed the requested documents to be reviewed on august 20xx to get an update on the organization’s indicated he received the form 886-a department of the treasury-internal revenue service catalog number 20810w publish no irs gov page _1 schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number year period ended explanations of items telephone contact to date to august 20xx due to a new unexpected scheduling conflict voice mail message was left indicating the request to move the appointment and to return the call was attempted on august 20xx to discuss moving the appointment was not available a telephone contact to date to august 20xx due to a new unexpected scheduling conflict voice mail message was left indicating the request to move the appointment and to return the call due to being unable to reach 20xx an updated idr and publication was mailed to the organization via certified mail was attempted on august 20xx to discuss moving the appointment was not available a via telephone an updated appointment letter dated august telephone contact to appointment date was attempted on august 20xx to confirm the august 20xx was not available a voice mail message was left to return the call the revenue_agent visited the organization’s facility which also serves as august 20xx to conduct the examination documents and he has not been able to get in touch with the organization’s accountant the revenue_agent reiterated to potential examination consequences that may result from the organization’s lack of documents including the issuance of a summons the issuance of an inadequate records notice and the potential loss of its tax-exempt status the service’s need to conduct the examination and notified him of indicated he did not have the requested residence on prior to leaving the organization’s facility due to the lack of documents the revenue_agent and rescheduled the examination appointment for september 20xx pincite 00am an appointment confirmation letter updated idr and publication was mailed to the organization on august 20xx telephone contact to organization’s progress gathering the documents identified on the idr voice mail message was left to return the call was attempted on september 20xx to get an update on the was not available a telephone contact to the availability of the organization’s documents identified on the idr voice mail message was left to return the call was attempted on september 20xx to confirm the appointment and was not available a the revenue_agent visited the organization's facility on september 20xx to conduct the examination was not present at the organization’s facility at the scheduled appointment time the revenue_agent waited approximately - minutes after the scheduled appointment time for to arrive never showed up for the examination appointment in addition because did not show up for the appointment a prepared summons also could not be issued on september 20xx the correspondence mailed to the organization on august 20xx was returned to the agent as unclaimed on september 20xx a letter was sent to the organization via certified mail identifying the revenue agent’s previous attempts to conduct the examination solicited a response from the organization to schedule a new appointment and indicated potential consequences in the event the organization failed to contact the revenue_agent within fourteen days department of the treasury-internal revenue service form 886-a catalog number 20810w publish no irs gov page schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number year period ended explanations of items a voicemail was received from indicating the missed appointment and that he prepared and mailed a letter on september 20xx to the revenue_agent regarding his difficulties in reaching the organization’s accountant on september 20xx left on sunday september 20xx september 20xx voicemail was also received on september the letter indicated in 20xx the letter acknowledged the missed revenue agent’s visit and asked if the agent has heard from the organization’s accountant was attempted on september 20xx to discuss the voicemail and the was not available a voice mail message was left to return the call the revenue_agent a telephone call to letter also accessed the united_states postal service usps tracking website to get an update on the correspondence mailed september 20xx according to the tracking information the usps attempted delivery on september 20xx because an authorized recipient was not available a notice was left by the usps indicating the delivery attempt and the post office location that the addressed recipient can pick up the correspondence the correspondence mailed to the organization on september 20xx was returned to the revenue_agent on november 20xx as unclaimed law internal_revenue_code irc sec_501 states that an organization described in subsection c shall be exempt from taxation sec_501 exempts from taxation corporations organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which does not participate in or intervene in any political campaign on behalf of or in opposition to any candidate for public_office sec_6001 states that every person or entity liable for any_tax shall keep such records render such statements make such returns and comply with such rules and regulations as the internal_revenue_service service may from time to time prescribe the service may also require any person or entity to make such returns render such statements or keep such records sufficient to show whether or not such person or entity is liable for tax sec_1_6001-1 states that every organization exempt from tax under sec_501 must keep such permanent books accounts or records as are sufficient to establish the amount of gross_income deductions credits or other materials required to be shown by such person in any return of such tax such organization shall also keep such books_and_records as are required to substantiate the information required by sec_6033 sec_1_6001-1 states that the books_or_records shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number year period ended explanations of items sec_6033 states that organizations_exempt_from_taxation under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purpose of carrying out the internal revenue laws as the service may prescribe and shall keep such records render under oath such statements make such other returns and comply with such rules and regulations as the service may from time to time prescribe sec_1_6033-2 states that every organization which is exempt from tax shall submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into its exempt status sec_7602 states that for the purpose of ascertaining the correctness of any return determining the liability of any person for any internal revenue tax or collecting any such liability the service is authorized - to examine any books papers records or other data which may be relevant or material to such inquiry to summon the person liable for tax or required to perform the act or any officer_or_employee of such person or any person having possession custody or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act to appear before the service at a time and place named in the summons to produce such books papers records or other data and to give such testimony under oath as may be relevant or material to such inquiry and to take such testimony of the person concerned under oath as may be relevant or material to such inquiry revrul_59_95 concerns an organization previously held exempt from federal_income_tax was requested to produce a financial statement as of the end of the year and a statement of its operations during such year however its records were so incomplete that it was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provision of sec_6033 and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of an exempt status taxpayer’s position has not responded to telephone calls or certified mail the organization has not provided a position government’s position the exempt status of the should be revoked because it fails to meet the requirements of sec_6033 and sec_1_6033-2 the organization failed form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date name of taxpayer tax identification_number year period ended explanations of items to provide the information required by the internal_revenue_service for the purpose of inquiring into its tax exempt status furthermore as referenced by revrul_59_95 an organization_exempt_from_taxation under sec_501 that fails to submit such additional information required by the service for the purpose of inquiring into its exempt status may result in the termination of its exempt status the service has repeatedly asked the organization to submit necessary information to inquire into its tax exempt status the organization has failed to provide the requested information multiple telephone contacts were attempted by the service to schedule and conduct an examination of the necessary information to substantiate its filed form_990 return for the july 20xx tax_year multiple written requests were also made for the organization to schedule the examination and submit necessary information correspondence dated july 20xx and agreed to an august 20xx appointment for the service to visit its facility and begin conducting the examination however to conduct the examination after agreeing to a rescheduled appointment for september 20xx the organization’s president acknowledged receipt of failed to provide any documents and the organization failed to show up for the second appointment has not returned numerous phone calls from august 20xx through september 20xx regarding the service's inquiry into the organization’s tax exempt status failed to provide the necessary information for a scheduled appointment and failed to show up for another appointment the organization’s actions signify that it may not have the necessary documentation to substantiate its form_990 return and its adherence to the applicable internal_revenue_code sections regarding its tax exempt status the organization failed to meet the record keeping requirements per the cited regulations that allow the service to inquire into its tax exempt status the lack of any meaningful response to the service’s requests for information demonstrates that the organization has not met its obligations and responsibilities to maintain the necessary records to satisfy the service’s request to substantiate its form_990 return a closing conference was not held because the organization has repeatedly failed to respond to requests for information and attempts at communication conclusion no longer qualifies as tax exempt under internal_revenue_code sec_501 as described in sec_501 revocation of the tax exempt status of date of august 20xx is proposed with an effective form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service


t c memo united_states tax_court karen mcmanus petitioner v commissioner of internal revenue respondent docket no filed date philip a putman for petitioner monica gingras for respondent memorandum findings_of_fact and opinion haines judge respondent determined a deficiency in petitioner’s federal_income_tax for of dollar_figure as well as additions to tax under sec_6651 of dollar_figure and sec_6654 of dollar_figure unless otherwise indicated all section references are to continued the issues for decision are whether petitioner received dollar_figure of unreported income in as respondent determined and whether petitioner is liable for additions to tax under sec_6651 and sec_6654 findings_of_fact petitioner resided in la habra california when she filed the petition petitioner failed to file a federal_income_tax return and failed to pay federal income taxes for the tax_year on the basis of third-party information on date respondent issued a notice_of_deficiency to petitioner for the tax_year setting forth unreported non-employee income of dollar_figure petitioner timely filed a petition with the court on date disputing that she received unreported nonemployee income in trial was held on this matter on date although petitioner did not appear her counsel did petitioner’s counsel did not introduce witnesses nor provide documentary_evidence to support petitioner’s position however petitioner’s counsel did cross-examine respondent’s sole witness during trial respondent called one witness pam wong a tax compliance officer employed by respondent ms wong’s testimony was based solely upon her memory of reviewing petitioner’ sec_1 continued the internal_revenue_code as amended amounts are rounded to the nearest dollar internal_revenue_service administrative file but the administrative file was not introduced into evidence according to the version of events presented by respondent at trial ms wong had no involvement in or knowledge of this case outside of reviewing petitioner’s administrative file for the purpose of testifying on the basis of this review ms wong testified respondent began investigating petitioner when heath associates reported it paid petitioner non-employee compensation of dollar_figure in and no corresponding return was filed by petitioner in to determine whether petitioner filed a return under another name respondent sent petitioner an initial contact letter to which petitioner failed to respond ms wong further testified respondent prepared a substitute for return and sent a 30-day_letter and a no-response report to petitioner to which she did not respond next respondent issued a statutory_notice_of_deficiency for tax_year to petitioner based upon the compensation paid to her by heath associates during cross-examination as well as direct ms wong’s responses appeared evasive it was also readily apparent she was unfamiliar with the case and unprepared to provide any insight outside of what she could recall from reading the file furthermore respondent did not provide documentary_evidence to support ms wong’s testimony or to show compensation was paid to petitioner by heath associates at one point during cross- examination ms wong admitted she had no documentary_evidence to support her statements finally respondent informed the court he was unable to obtain the third-party records from heath associates because the company had ceased to exist thus any evidence concerning moneys paid_by heath associates to petitioner was based solely upon the notice_of_deficiency and the memory and credibility of ms wong opinion petitioner asserts she is not liable for the deficiency and the additions to tax respondent determined because respondent failed to meet the burden of producing evidence that petitioner earned unreported income of dollar_figure in respondent failed to meet the burden of producing evidence that petitioner is liable for additions to tax the court_of_appeals for the ninth circuit has determined that in order for the presumption of correctness to attach to the deficiency determination in unreported income cases the commissioner must establish some evidentiary foundation connecting the taxpayer with the income-producing activity 596_f2d_358 9th cir revg 67_tc_672 or demonstrate the taxpayer received unreported income 680_f2d_1268 9th cir malfatti v commissioner tcmemo_2005_19 a deficiency determination which is not supported by some evidentiary foundation is arbitrary and erroneous weimerskirch v commissioner supra pincite under such circumstances the commissioner has the burden of coming forward with evidence to establish the existence and amount of any deficiency 73_tc_394 respondent incorrectly relies upon 181_f3d_1002 9th cir affg tcmemo_1997_97 for the proposition that a revenue agent’s testimony based upon a review of a taxpayer’s administrative file and a copy of the taxpayer’s notice_of_deficiency identifying the third-party payor satisfy the needed evidentiary foundation demonstrating that the taxpayer received unreported income in hardy v commissioner supra pincite the court_of_appeals for the ninth circuit found the commissioner was relieved from producing third-party income statements to prove a taxpayer’s receipt of income because the taxpayer stipulated the commissioner received the statements therefore the evidentiary foundation requirement was satisfied when the commissioner introduced worksheets showing tax owed on the basis of third- party information and bank statements in combination with the parties’ stipulating the commissioner’s receipt of the third-party information id petitioner did not stipulate respondent’s receipt of third-party information from heath associates in addition the respondent was unable to provide any documentary_evidence from heath associates establishing that income of any amount was paid to petitioner outside of ms wong’s unconvincing testimony respondent presented no evidence proving petitioner received any income in although the court_of_appeals for the ninth circuit has not defined some evidentiary foundation this court finds that the notice_of_deficiency and the revenue agent’s testimony based upon review of the administrative file for the purpose of testifying without simultaneously providing the administrative file to the court is an insufficient foundation respondent failed to provide adequate evidence linking petitioner with the receipt of income from heath associates therefore the court concludes petitioner is not liable for a deficiency of dollar_figure for on the basis of the foregoing petitioner is not liable for additions to tax under sec_6651 and sec_6654 the court in reaching its holding has considered all arguments made and concludes that any arguments not mentioned above are moot irrelevant or without merit to reflect the foregoing decision will be entered for petitioner


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 b01 plr-108753-08 date date legend legend x country d dear ------------- ------------------------------------------- ----------------------- ------------ ------------------ this letter responds to the letter dated date and related correspondence written on behalf of x requesting an extension of time under ' and ' of the procedure and administration regulations to file an entity classification election facts the information submitted states that x was formed under the laws of country on d x represents x was a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes as of d the election however was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under ' b or an eligible_entity can plr-108753-08 elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under ' b by filing form_8832 entity classification election with the appropriate service_center under ' c iii this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of and and therefore it is granted an extension of time of sixty days from the date of this letter to file a form_8832 to elect to be treated as a disregarded_entity for federal tax purposes effective d a copy of this letter should be attached to the election a copy is enclosed for that purpose plr-108753-08 except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the code 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 mailed to your authorized representative sincerely curt g wilson curt g wilson deputy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes


id office uilc cca_2010092911260164 -------------- 6662a number release date from ----------------- sent wednesday date am to ------------------- cc ------------------ subject 6662a penalty applicability to excise_tax you asked whether the sec_6662a penalty applies to excises taxes we have taken the position that it does not sec_6662a imposes a percent accuracy-related_penalty on reportable_transaction understatements while sec_6662a is silent as to which type of tax understatement the penalty applies subsection b defines the term reportable_transaction_understatement that definition is limited to understatements involving taxable_income a reportable_transaction_understatement is the sum of the product of i the amount of the increase in taxable_income which results from the difference between proper tax treatment of an item to which sec_6662a applies and the taxpayer's treatment of such item and ii the highest_rate of tax imposed by sec_1 sec_11 for corporations plus the amount of the decrease in the aggregate amount of credits determined under subtitle a which results from a difference between the taxpayer's treatment of an item to which sec_6662a applies and the proper tax treatment of the item subsection b goes on to state that any reduction of the excess of deductions allowed for the taxable_year over gross_income for such year and any reduction in the amount of capital losses which would without regard to sec_1211 be allowed for such year shall be treated as an increase in taxable_income id in summary the amount of the reportable_transaction_understatement is calculated by adding the product of the increase in taxable_income which includes the excess of deductions allowed over gross_income and reduction of capital losses and the highest_rate of income_tax to the amount of the decrease in subtitle a income_tax credits sec_6662a an excise_tax adjustment does not increase taxable_income or decrease the amount of credits under subtitle a without an increase in taxable_income or decrease in subtitle a credits resulting from the proper treatment of an excise_tax there cannot be a reportable_transaction_understatement as defined by the statute there is no reference to excise_taxes at all in the definition of a reportable_transaction_understatement we also note that the statute prescribes rates to determine the amount of the understatement ie sec_1 and sec_11 that are income_tax rates not excise_tax rates or amounts to determine a reportable_transaction_understatement amount by reference to some amount of excise_tax and without reference to the definition of the term reportable_transaction_understatement would be to disregard part of the statute altogether that approach would not be a proper form of statutory interpretation if you would like to discuss this issue further we can schedule a teleconference to address any concerns you may have -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------


internal_revenue_service number release date ----------------------------------- ------------------------------------ ---------------------------- --------------------------------------- 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-115480-14 date date legend x --------------------------------------------------------------------------------------------- ------------------------------ state --------------------- shareholder --------------------------------------------------------------------------------------------- -------------------------- d1 ---------------------- dear ---------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts x was incorporated under state law on d1 x’s shareholder shareholder intended for x to be an s_corporation effective d1 however a form_2553 election by a small_business_corporation was not filed timely law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation plr-115480-14 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_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 small_business_corporation makes an election under sec_1362 for any taxable_year and the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then the election is treated as made for the following taxable_year sec_1362 provides that if 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 the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the 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 x has established reasonable_cause for failing to make an s_corporation_election thus we conclude that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 within days following the date of this letter containing an effective date of d1 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 x is otherwise eligible to be 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 a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-115480-14 the ruling contained in this letter is 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 ruling_request it is subject_to verification on examination sincerely richard t probst senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------- --------------------------------------- ----------------------------------- ----------------------------- -------------------------- in re ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------------- telephone number --------------------- refer reply to cc intl br5 plr-106573-05 date date company year y aa bb cc d e f dear ------------- legend ------------------------------------- ---------------------- ------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------- ----- ------------------------- ----------------------- plr-106573-05 this is in response to your letter dated date in which you request a ruling granting company consent for a change in its spot_rate_convention for payables and receivables that are denominated in nonfunctional_currency and relate to goods and services bought and sold in the ordinary course of business under sec_1 d company also requests a ruling that a proposed new average exchange rate used to translate accrued interest_income and expense under sec_1 b ii c is an acceptable average exchange rate under sec_1 b iii facts company a domestic_corporation is filing this ruling on behalf of itself and all of its affiliates that maintain their books_and_records on company’s systems company was incorporated in year y the business segments of company are aa company has bb products and cc services company has operations in d countries company’s businesses enter into approximately e nonfunctional_currency transactions totaling over dollar_figuref for purposes of accruing income and deductions in a nonfunctional_currency company uses a single exchange rate for currency throughout each calendar month which is referred to as the -------------------------------------------- the ------- must be determined prior to the beginning of the month in order to permit timely updating of automated accounting systems in order to increase the accuracy of company’s exchange rate company plans to change the exchange rate convention that it uses to accrue nonfunctional_currency items of income and expense for financial_accounting purposes company is requesting permission to change the exchange rate it uses to accrue nonfunctional_currency items of income and expense for u s tax purposes to match the method that company plans to use for financial_accounting purposes currently company calculates the ------- by using a 30-day trailing rate which is the average of daily spot rates from all business days from the 15th day of the second preceding prior month to the 15th day of the first preceding prior month the current rate under the proposed method company will calculate the ------- using the average of the spot_rate and the 30-day forward rate of the next-to-last thursday of the preceding fiscal month the proposed rate for purposes of calculating the proposed rate the spot_rate will be obtained from market information and data service eg reuters and the 30-day forward rate will be determined in the following manner if there is a liquid forward market for the currency the 30-day forward rate will be obtained from the market information and data service plr-106573-05 if the currency has poor liquidity in the forward market the 30-day forward rate will be determined by using the 30-day interest rate for that currency and the u s dollar which will come from the market information and data service and if a currency is pegged to the u s dollar the 30-day forward rate is equal to the pegged rate law analysis sec_1_988-1 provides that if consistent with the taxpayer’s financial_accounting a taxpayer may utilize a spot_rate_convention determined at intervals of one quarter year or less for purposes of computing exchange gain_or_loss with respect to payables and receivables denominated in a nonfunctional_currency that are incurred in the ordinary course of business with respect to the acquisition or sale_of_goods or the obtaining or performance of services sec_1_988-1 further provides that the use of a spot_rate_convention cannot be changed without the consent of the commissioner sec_1_988-2 provides rules regarding the translation of nonfunctional_currency interest_income or expense received or paid with respect to a debt_instrument described in sec_1_988-1 and sec_1_988-1 for which all payments are denominated in or determined with reference to a single nonfunctional_currency sec_1_988-2 sec_1_988-2 provides that with respect to an instrument described in sec_1_988-2 interest_income or expense that is required to be accrued prior to receipt or payment eg under sec_1272 sec_1281 or sec_163 or because the taxpayer uses an accrual_method of accounting shall be translated at the average rate or other rate specified in sec_1_988-2 for the interest_accrual_period or with respect to an interest_accrual_period that spans two taxable years at the average rate or other rate specified in sec_1 b iii b for the partial period within the taxable_year sec_1_988-2 provides that for purposes of sec_1 b the average rate for an accrual_period or partial period shall be a simple average of the spot exchange rates for each business_day of such period or other average exchange rate for the period reasonably derived and consistently applied by the taxpayer sec_1_988-2 provides that for taxable years beginning after march a taxpayer may elect to translate interest_income and expense at the spot_rate on the last day of the interest_accrual_period and in the case of a partial accrual_period the spot_rate on the last day of the taxable_year sec_1_988-2 further provides that a method so elected must be applied consistently to all debt plr-106573-05 instruments from year to year and cannot be changed without the consent of the commissioner the proposed rate which will be calculated using published rate information will be used by company for both financial_accounting purposes and u s tax purposes provided the requested rulings are granted based solely on the facts and representations submitted company may change its spot_rate_convention under sec_1_988-1 to the proposed rate as described above and use of the proposed rate to determine an average rate for an accrual_period or partial period will be considered as reasonably derived for purposes of sec_1_988-2 this letter is directed only to the taxpayer who requested 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 representatives below sincerely ________________________ jeffrey l dorfman chief branch associate chief_counsel international cc


department of the treasury mwasuineton d c 2zool1 contact person identification_number telephone number fax number tb bl date qed cee employer_identification_number - d i d i - d l o l x b i n n u h dear sir or madam this is in reply to your request for rulings with respect to the federal_income_tax consequences of the pledge by a to b of an option to purchase a’s common_stock the option and subsequent transfer to and exercise by an unrelated sec_501 organization under sec_170 sec_511 sec_4940 sec_4941 and sec_4942 of the internal_revenue_code_of_1986 facts ais a for-profit corporation a's common_stock is publicly held and listed on the national association of securities dealers automatic quotation nasdaq stock exchange a is the common parent of an affiliated_group_of_corporations filing consolidated federal_income_tax returns a together with its affiliates including joint ventures operates hospitals and related health care entities bis a delaware non-stock non-profit corporation that is exempt from federal_income_tax under sec_501 a of the code and is an organization described in sec_501 c of the code the service has recognized b as a private_foundation as defined in sec_509 of the code a is a substantial_contributor to b and as such is a disqualified_person with respect to b pursuant to sec_4946 of the code b makes gifts to charitable organizations selected by its directors it is anticipated that the majority of the gifts will be made to charitable organizations that are located in the communities in which a's hospitals are located and that are dedicated to improving those communities and to fostering community activities as of date a pledged the option to b which provides b with an option to purchase big_number shares of a's common_stock at a par_value of x_per share the common_stock at an option_price of y per share representing the closing price of a share of common_stock on the nasdaq stock exchange on the date the pledge was made the option is subject_to the condition that a and b receive the rulings requested the option is exercisable in whole or in part at any time and from time to time during the period commencing on the date when the last of the rulings from the service is received and ending on date b may transfer and assign the option or any portion thereof onty to one or more unrelated charitable organizations described in sec_170 and sec_501 of the code the transferee s may not transfer or assign the option or any portion thereof without the written consent of a it is expected that b will transfer the option to one or more unrelated charitable organizations and that the unrelated charitable_organization transferee s will pay to b a price for the option equal to the difference between the fair_market_value of the common_stock subject_to the option on the date of the transfer and the exercise price of the option less an agreed upon discount these terms will be negotiated at arm's-length it is further expected that the unrelated charitable_organization transferee s will thereafter exercise the option before its expiration the business_purpose of the pledge of the option is to further the charitable purposes of b and other charitable organizations rulings requested the following are the requested rulings the pledge of the option by a to b does not constitute an act of self-dealing between a private_foundation and a disqualified_person under the provisions of sec_4941 of the code the exercise of the option by an unrelated charitable_organization to whom the option will be transferred will not constitute an act of self dealing between b and a disqualified_person under sec_4941 of the code after a transfer of the option by b to an unrelated charitable_organization a will be entitled to a charitable_contribution_deduction under sec_170 of the code upon the exercise of the option in an amount equal to the difference between the exercise price and the fair_market_value of the common_stock on the date of exercise subject_to the limitations on the amount of a charitable_contribution_deduction of a corporation under sec_170 of the code the option will be excluded from the assets taken into account in computing the amount of the minimum_investment_return of b for purposes of determining the tax on failure to distribute income under sec_4942 of the code b's proceeds from the sale of the option to an unrelated organization exempt under sec_501 of the code are excluded from the computation of b's net_investment_income under sec_4940 of the code gain on b's sale of the option to unrelated sec_501 organizations will not be subject_to the tax on unrelated_business_taxable_income imposed by sec_511 of the code law and analysi sec_1 the pledge of the option by a to b does not constitute an act of self-dealing between a private_foundation and a disqualified_person under the provisions of sec_4941 of the code sec_4941 of the code imposes a tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 b of the code provides that the term self-dealing includes any lending of money or other extension of credit between a private_foundation and a disqualified_person however sec_53 d -2 c of the income_tax regulations exempts the pledge of the option by providing that emphasis added the making of a promise pledge or similar arrangement to a private_foundation by a disqualified_person whether evidenced by an oral or written_agreement a promissory note or other instrument of indebtedness to the extent motivated by charitable intent and unsupported by consideration is not an extension of credit within the meaning of this paragraph before the date of maturity the pledge of the option was given without any consideration to further the charitable purposes of b and other unrelated charitable organizations therefore the pledge of the option by a to b does not constitute self-dealing the exercise of the option by an unrelated charitable_organization to whom the option will be transferred will not constitute an act of self-dealing between b and a disqualified_person under sec_4941 of the code the transferee of the option must be an unrelated charitable_organization described in sec_170 and sec_501 of the code for purposes of sec_4941 of the code the term disqualified_person does not include any organization which is described in sec_501 of the code sec_53_4946-1 of the regulations the term self-dealing does not include a transaction between a private_foundation and a disqualified_person where the disqualified person's status arises only as a result of the transaction sec_53 d -1 a of sb the regulations the transferee unrelated charity will not be controlled by b as control is defined in sec_53 d - b of the regulations therefore the exercise of the option by the unrelated charitable_organization transferee will not constitute an act of self-dealing between a and b after a transfer of the option by b to an unrelated charitable_organization a will be entitled to a charitable_contribution_deduction under sec_170 of the code upon the exercise of the option in an amount equal to the difference between the exercise price and the fair_market_value of the common_stock on the date of exercise subject_to the limitations on the amount of a charitable_contribution_deduction of a corporation under sec_170 of the code sec_170 of the code provides subject_to certain limitations a deduction for contributions and gifts to or for_the_use_of organizations described in sec_170 of the code payment of which is made within the taxable_year sec_1 170a-i a of the regulations provides a deduction for any charitable_contribution actually paid during the taxable_year irrespective of the date on which the contribution is pledged revrul_68_174 1968_1_cb_81 concludes that a debenture bond or a promissory note issued and delivered by the obligor to a charitable_organization represents a mere promise to pay at a future date and is nota payment for purposes of deducting a contribution under sec_170 of the code sec_170 of the code provides that the total deduction allowed a corporation cannot exceed ten percent of the corporation's taxable_income computed without regard to certain deductions sec_1 170a- i c of the regulations provides that if a contribution is made in property other than money the amount of the contribution is the fair_market_value of the property at the time of the contribution the fair_market_value is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts revrul_75_348 c b holds that a corporation that pledges to sell shares of common_stock at a specified price to an educational_organization is entitled to a charitable_contribution_deduction in the taxable_year the pledge is exercised for the excess of the fair_market_value of the shares on the date of the exercise over the exercise price and no gain will be recognized when the pledge is exercised revrul_82_197 1982_1_cb_72 concludes that an individual who grants an option on real_property to a charitable_organization is allowed a charitable deduction for the year in which the organization exercises the option in the amount of the excess of the fair_market_value of the property on the date the option was exercised over the exercise price accordingly a will be entitled to a deduction in an amount equal to the difference between the exercise price and the fair_market_value of the common_stock subject_to the option on the date of the exercise of the option subject_to the limitations of sec_170 of the code b11 the option will be excluded from the assets taken into account in computing the amount of the minimum_investment_return of b for purposes of determining the tax on failure to distribute income under sec_4942 of the code sec_4942 of the code imposes a tax on the undistributed_income_of_a_private_foundation the undistributed_income is defined in part as the amount by which qualified distributions are less than a minimum_investment_return of five percent of the aggregate fair_market_value of all assets of the foundation other than specifically excluded assets sec_53 4942a-2 c iv of the regulations provides that any pledge to the foundation of money or property whether or not the pledge may be legally enforced is not to be included in determining the minimum_investment_return accordingly the option is excludable from the assets taken into account in computing the amount of the minimum_investment_return of b for purposes of determining the tax on failure to distribute income under sec_4942 of the cade b's proceeds from the sale of the option to an unrelated organization exempt under sec_501 of the code are excluded from the computation of b's net_investment_income under sec_4940 of the code sec_4940 of the code imposes a tax on the net_investment_income of tax exempt private_foundations net_investment_income is gross_investment_income and capital_gains less attributable expenses sec_4940 of the code for this purpose capital_gains includes only gains and losses from the sale_or_other_disposition of property used for the production of interest dividends rents and royalties and property used for the production of unrelated_business_income under sec_511 of the code unless the gain was taxed under such section sec_4940 of the code sec_53_4940-1 of the regulations provides among other things that property will be treated as held for investment purposes even if immediately disposed of if it is property of a type which generally produces interest dividends rents royalties or capital_gains through appreciation in zemurry foundation v united_states 755_f2d_404 5th cir the fifth circuit held that gain from the sale of timberland was not subject_to the tax imposed on net_investment_income under sec_4940 of the code it held that the regulation could not subject_to the tax capital_gains derived from the property of the type that generally produced income through appreciation and not from interest dividends rents or royalties stock_options are not property susceptible to use to produce interest dividends rents or royalties accordingly b's proceeds from the sale of the option to an unrelated organization exempt under sec_501 of the code are excluded from the computation of b's net_investment_income under sec_4940 of the code gain on b's sale of the option to unrelated sec_501 organizations will not be subject_to the tax on unrelated_business_taxable_income impose by sec_511 a of the code sec_511 a of the code imposes a tax on unrelated_business_taxable_income earned by sec_501 organizations under sec_512 of the code the term unrelated_business_taxable_income means gross_income derived from any unrelated_trade_or_business regularly carried on by it less directly connected deductions as modified by sec_512 of the code an unrelated_trade_or_business is among other things the conduct of a business which is not substantially related aside from the need to raise money or make profit to the organization's exempt_purpose sec_512 of the code provides that all gains or losses from the sale exchange or other_disposition of property are excluded from the computation of unrelated_business_taxable_income other than property that is a stock_in_trade or inventory or b held_for_sale to customers in the ordinary course of a trade_or_business b will not hold the option either as stock_in_trade inventory or for sale in the ordinary course of business thus the gain on the sale of the option will be excluded from the computation of unrelated_business_taxable_income accordingly gain on b's sale of the option to unrelated organizations described in sec_501 of the code will not be subject_to the tax on unrelated_business_taxable_income imposed by sec_511 of the code therefore we rule has follows ruling sec_1 the pledge of the option by a to b does not constitute an act of self-dealing between a private_foundation and a disqualified_person under the provisions of sec_4941 of the code the exercise of the option by an unrelated charitable_organization to whom the option will be transferred will not constitute an act of self dealing between b anda disqualified_person under sec_4941 of the code after a transfer of the option by b to an unrelated charitable_organization a will be entitled to a charitable_contribution_deduction under sec_170 of the code upon the exercise of the option in an amount equal to the difference between the exercise price and the fair_market_value of the common_stock on the date of exercise subject_to the limitations on the amount of a charitable_contribution_deduction of a corporation under sec_170 of the code the option will be excluded from the assets taken into account in computing the amount of the minimum_investment_return of b for purposes of determining the tax on failure to distribute income under sec_4942 of the code a b's proceeds from the sale of the option to an unrelated organization exempt under sec_501 of the code are excluded from the computation of b's net_investment_income under sec_4940 of the code gain on b's sale of the option to unrelated sec_501 organizations will not be subject_to the tax on unrelated_business_taxable_income imposed by sec_511 of the code this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent the rulings in this letter only apply the specifically indicated sections of the code and regulations to the facts that you have represented in this letter we do not rule on the applicability of any other sections of the code and regulations to your case because this letter could heip resolve any future questions about your income_tax responsibility please keep a copy of this ruling in your permanent records sincerely yours gtgneri marvin prisdiander marvin friedlander chief exempt_organizations technical branch


number release date date date uil taxpayer_identification_number num form_990 tax_year s ended legend o name of organization a address of organization num employer id num date effective date o a person to contact id number contact numbers ------------------------------------------------------------------------ telephone ----------------- -------------- ------- certified mail dear ----- this is a final_determination regarding your exempt status under sec_501 of the internal_revenue_code code because you have not established that you are observing the conditions required to continue exempt status recognition of your exemption from federal_income_tax as an organization described in sec_501 is retroactively revoked to date -------------------------------- our determination was made for the reason that you have failed to produce documents records or other information to establish that you are operated exclusively for one or more exempt purposes set forth in sec_501 or that you were not operated for the benefit of private interests or that a part of your net_earnings did not inure to the benefit of private individuals contributions made to your organization are not deductible under sec_170 of the code furthermore you are required to file federal_income_tax returns on form_1120 for all open years if you decide to contest this determination in court a petition for declaratory_judgment proceeding in the united_states tax_court the united_states court of claims or the united_states district_court for the district of columbia must be filed within days from the date this determination was mailed to you the enclosed publication provides information about filing suit in these courts if you have any questions please contact the contact person at the telephone number shown in the heading of this letter thank you for your cooperation sincerely r c johnson director eo examinations enclosure publication