t c memo united_states tax_court philip h friedman and anna friedman petitioners v commissioner of internal revenue respondent docket no filed date jay j freireich for petitioners susan g lewis for respondent supplemental memorandum opinion gerber judge this case has been the subject of four prior opinions of this court the last of which held that anna this opinion supplements a previously released opinion friedman v commissioner tcmemo_1995_576 97_tc_606 concerning whether grossly_erroneous_items within the meaning of sec_6013 could have been contained on a refund claim form continued friedman petitioner was an innocent spouse within the meaning of sec_6013 the parties' current controversy involves their conflicting rule tax computations initially we found that petitioner was not entitled to innocent spouse relief with respect to two items concerning the capital_loss_carryover we found it was not a grossly erroneous item and that it did not meet the sec_6013 requirements the u s court_of_appeals for the second circuit affirmed that holding regarding losses from a computer leasing transaction we found the deductions of those losses to be grossly_erroneous_items however we also found that petitioner failed to meet the requirement that she did not know or have reason to know that the deductions would give rise to substantial understatements when she signed the returns sec_6013 the court_of_appeals reversed our finding on whether petitioner knew or had continued rather than on the form_1040 friedman v commissioner tcmemo_1992_89 concerning whether the testimony of an expert witness could be offered to show whether one of petitioners was a truthful witness friedman v commissioner tcmemo_1993_549 affd in part revd and remanded in part 53_f3d_523 2d cir which concerned whether anna friedman was an innocent spouse within the meaning of sec_6013 and friedman v commissioner tcmemo_1995_576 where we held that anna friedman was an innocent spouse with respect to a grossly erroneous item in accord with the judgment and remand of the court_of_appeals and made findings concerning whether it was equitable to hold her liable all section references are to the internal_revenue_code in effect for the taxable_period under consideration and all rule references are to this court's rules_of_practice and procedure unless otherwise indicated reason to know and remanded the matter for our consideration of whether it would be equitable to hold her liable with respect to the grossly erroneous leasing transaction deductions 53_f3d_523 2d cir affg in part and revg and remanding in part tcmemo_1993_549 this case involve sec_5 taxable years and the losses claimed for the leasing transaction occur in all years whereas the capital_loss item occurs in only one year the parties' computations agree with respect to the and tax years ie petitioner would be relieved of income_tax_liability and all additions to tax because the leasing loss was the sole adjustment with respect to petitioner reaches the same result as in the other years no liability and respondent computes a dollar_figure income_tax_liability and additions to tax in the amounts of dollar_figure3 and dollar_figure under sec_6653 and sec_6661 respectively this opinion addresses the parties' differing approaches to the rule computation for the sec_6653 addition_to_tax set forth in the notice_of_deficiency was dollar_figure without considering sec_6653 which provided for percent of the interest due on the underpayment at the time of assessment_date following the entry of decision based on tcmemo_1993_549 the addition_to_tax had increased to dollar_figure including the percent interest addition after proposed abatement for the portion not attributable to the capital_loss the sec_6653 and addition amounts to dollar_figure by way of background petitioners claimed but in substantial part did not use a dollar_figure net_short-term_capital_loss on their joint income_tax return accordingly petitioners claimed a dollar_figure short-term_capital_loss carryover from the tax_year on their tax_return respondent in the statutory_notice_of_deficiency for allowed dollar_figure of this loss carryover the balance of the loss was allowed for the taxable_year pursuant to an audit examination of the tax_year in friedman v commissioner tcmemo_1993_549 we held with respect to the capital_loss_carryover at the time petitioners filed their return the return had not been audited therefore when the return was filed with the capital_loss_carryover petitioners did not know that the carryover duplicated losses subsequently allowed in the later disallowance was purely mechanical and a natural result of an adjustment to a prior year's return the deduction was not frivolous or fraudulent therefore the deduction had a basis in fact or law and the deduction is not grossly erroneous under rule parties are required to submit computations pursuant to the court's determination of the issues showing the correct amount of the deficiency to be entered as the decision parties are not permitted to raise new issues or matters in connection with the rule_155_computations 287_us_308 the starting point for the computation is the statutory_notice_of_deficiency from which the parties compute the redetermined deficiency based upon matters agreed by the parties or ruled upon by the court 91_tc_265 affd 875_f2d_377 2d cir whitham v commissioner a memorandum opinion of this court dated date the starting point for each party's computation of the tax_liability here is the dollar_figure taxable_income per the notice_of_deficiency petitioner then proceeds to deduct the dollar_figure loss attributable to the grossly erroneous item which results in negative taxable_income of dollar_figure after considering the income per the notice_of_deficiency petitioner contends that the negative taxable_income obviates the possibility of the capital_loss item causing any taxable_income respondent computes her proposed tax_deficiency for petitioner in accord with the following pertinent instructions in sub sec_45 guidelines for applying innocent spouse provisions examination internal_revenue_manual cch if it is proposed to hold both spouses liable but not to the same extent in respect of the total deficiency two computations will be required first a computation of the total deficiency including any applicable penalties should be made without taking into consideration the innocent spouse provisions next a separate computation of the liability including penalties of the non-culpable spouse this computation will start with the total corrected taxable_income without regard to the innocent spouse provisions and will eliminate therefrom the adjustments for which relief is provided under such in addition to the dollar_figure claimed loss two self- operating mathematical items are also considered--a dollar_figure reduction for medical and a dollar_figure increase for contributions public law this latter computation arrives at the amount of the liability which is considered joint the difference between such joint liability and the total deficiency will constitute the separate liability of the culpable spouse it is noted that respondent's manual provisions have no binding effect on petitioner or the court see eg zimmerman v commissioner 71_tc_367 and cases cited therein affd without published opinion 614_f2d_1294 2d cir involving the lack of effect of a taxpayer's reliance upon a tax guide issued by the commissioner petitioner however agrees with respondent that the above-quoted manual provisions set forth how the computation should be made petitioner agrees with respondent that the first step is to begin with the notice_of_deficiency computation of the income_tax deficiency and additions to tax petitioner also agrees that the next step is to compute the separate liability of the so-called nonculpable or innocent spouse which according to the manual provisions is the portion of the liability that is considered joint and finally the difference between the joint liability and the total liability constitutes the individual liability of the so-called culpable spouse the core of petitioner's disagreement with respondent is the computation of the liability of the innocent spouse which is also the portion of the liability that is joint petitioner petitioner does not allege that respondent's mathematical continued directs us to a specific_portion of the manual provisions as follows this computation will start with the total corrected taxable_income without regard to the innocent spouse provisions and will eliminate therefrom the adjustments for which relief is provided under such public law petitioner contends that the elimination of the grossly erroneous leasing transaction is tantamount to permitting the deduction to the innocent spouse respondent treats the elimination language as disregarding the grossly erroneous leasing transaction so as not to charge petitioner the innocent spouse with income from the disallowance of the claimed loss respondent goes on to compute the effect of the disallowance of the short-term_capital_loss carryover which is not an item for which innocent spouse relief was granted in that manner respondent arrives at a portion of the tax_liability for which mr friedman the culpable spouse and mrs friedman the nonculpable spouse are both liable that joint liability is then subtracted from the liability determined in the notice_of_deficiency resulting in the portion of the liability for which only mr friedman the culpable spouse is liable we agree with respondent's approach and interpretation continued computation is in error petitioner's attack is one that concerns only theory or approach to understand the dynamics of the disagreement we must consider some of the items reported on the federal_income_tax return and the adjustments made to that return in the notice_of_deficiency the return contained three significant items of income dollar_figure of wages dollar_figure of capital_gain and dollar_figure of rents or royalities the capital_gain reported was a netted and reduced_amount composed of a net_long-term_capital_gain of dollar_figure reduced by the dollar_figure short-term_capital_loss carryover from and a dollar_figure long-term_capital_loss to arrive at dollar_figure percent of which dollar_figure was carried from schedule d to page of the return accordingly without considering the leasing transaction loss dollar_figure approximately dollar_figure of income was reported on page of the return respondent in the notice_of_deficiency allowed dollar_figure of the short-term_capital_loss carryover due to the fact that dollar_figure had been used for the year respondent's determination resulted in dollar_figure of capital_gain income instead of the dollar_figure reported or an increase of dollar_figure the dollar_figure increase is the number on which respondent based the rule computation of petitioner's dollar_figure income_tax_liability comparing the dollar_figure and the dollar_figure deficiency set forth in the notice_of_deficiency reveals the dichotomy between the portion of the the loss was reduced by dollar_figure of miscellaneous income for a net amount of dollar_figure income_tax_liability that is joint and the portion from which petitioner has been relieved sec_6013 for the tax years in issue is expressed in terms of relief from liability for tax to the extent such liability is attributable to such omission from gross_income of tax attributable to grossly_erroneous_items of one spouse the benefit of sec_6013 is provided in the form of relief from tax not by permitting the innocent spouse to have the benefit of a grossly erroneous deduction petitioner's relief from the grossly erroneous leasing transaction losses is accordingly limited to not subjecting her to tax_liability attributable to the disallowance of the loss petitioner was not an innocent spouse as to the short-term_capital_loss disallowance accordingly she would be liable along with mr friedman for the portion of the liability attributable to the disallowed portion of the short-term_capital_loss item the eliminate therefrom language of respondent's manual addresses relief from tax_liability attributable to a grossly erroneous item the manual language appears to be designed to deal with grossly_erroneous_items attributed to either omitted income or claim of a deduction the disallowance of which generates additional income if computation of the joint later versions of sec_6013 have the phrase substantial_understatement as a replacement for the phrase omission from gross_income liability results in zero joint liability then petitioner the innocent spouse would be the recipient of a windfall in the form of relief from the portion of the income_tax_liability attributable to the short-term_capital_loss disallowance--relief that was not intended by sec_6013 to reflect the foregoing decision will be entered in the amounts proposed in respondent's computation


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp 3-plr-118177-99 date date parent sub sub purchaser seller target date a date b date c date d e state x state y business z parent’s company official plr-118177-99 seller’s company official parent’s outside tax professional parent’s outside tax professional seller’s outside tax professional parent’s other authorized representatives this responds to your authorized representative’s letter dated date requesting on behalf of the taxpayers identified above an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election parent as common parent of the consolidated_group of which purchaser is a member and seller are requesting an extension to file a sec_338 election under sec_338 and sec_338 of the internal_revenue_code and sec_1_338_h_10_-1 of the income_tax regulations with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election effective on date a additional information was submitted in a letter dated date the material information is summarized below parent a state x corporation is the common parent of a consolidated_group that has a fiscal_year ending september and uses an accrual_method of accounting sub a wholly owned subsidiary of parent owns e percent percent or more of the outstanding_stock of sub sub owns all of the outstanding_stock of purchaser prior to and as of the date of the qualified_stock_purchase described below sub sub and purchaser were included in parent’s consolidated federal_income_tax return target was an s_corporation incorporated in state y prior to the qualified_stock_purchase seller owned all of the stock of target target’s tax_year was the calendar_year target was engaged primarily in business z purchaser acquired all of the outstanding_stock of target from seller for notes pursuant to a stock purchase agreement dated date b effective date a in a fully taxable transaction it is represented that parent and purchaser are not and were not at all times relevant related to seller within the meaning of sec_338 and purchaser’s acquisition of all of the outstanding_stock of target qualified as a qualified_stock_purchase as defined in sec_338 following the acquisition new target was included in parent’s consolidated_return purchaser and seller intended to file the election the election was due on date c but for various reasons it was not filed on date d which is after the due_date for plr-118177-99 the election parent seller parent’s company official seller’s company official parent’s outside tax professional parent’s outside tax professional and seller’s outside tax professional discovered that the election was not filed the period of limitations on assessment under sec_6501 has not expired for parent’s purchaser’s seller’s or target’s taxable_year in which the acquisition sale was consummated the taxable_year in which the election should have been filed or for any taxable_year s that would have been affected by the election had it been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election under sec_338 and the acquisition is a qualified_stock_purchase sec_1_338-1 provides that a sec_338 election is an election to apply sec_338 to target sec_338 specifies the requirements for making a sec_338 election sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of corporation is acquired by another corporation by purchase during the 12-month_acquisition_period sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined i in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or ii under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 other than paragraph thereof be attributed to the person acquiring such stock sec_338 permits the purchasing and selling corporations to elect jointly to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation the sale of stock included in the qualified_stock_purchase generally is ignored a sec_338 election may be made for target only if it is a member of a selling_consolidated_group a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 gain_or_loss on the deemed sale is included in the consolidated_return of the selling group unless the target_corporation is a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 provides that a sec_338 election may be made for the target_corporation if the purchasing_corporation makes a qualified_stock_purchase of the target_corporation stock sec_1_338_h_10_-1 and provide that if a sec_338 election is made for the target_corporation it is irrevocable and a sec_338 election is deemed made for the target_corporation sec_1_338_h_10_-1 provides that a sec_338 election is jointly made by a purchaser and the selling_consolidated_group or the selling affiliate or the s plr-118177-99 corporation shareholders on form_8023 in accordance with the instructions to the form the regulations further provide that the election must be made not later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs the instructions to form_8023 provide that a sec_338 election must be made jointly by the purchasing_corporation and the common parent of the selling_consolidated_group or selling affiliate or s_corporation shareholders the instructions provide that the form must be signed by a person authorized to act on behalf of each corporation and if made for an s_corporation it must be signed by each s_corporation shareholder who sells target stock in the qualified_stock_purchase the instructions further provide that the signatures dates and titles if applicable of those persons must be provided in a signature attachment and they provide specific details as to the preparation of the signature attachment and its attachment to form_8023 sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability of the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 c the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections 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 sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338_h_10_-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent and seller to file the election provided parent and seller show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent seller parent's company official parent's outside tax professional and parent’s other authorized representatives explain the circumstances that resulted in the failure to timely file the plr-118177-99 valid election the information also establishes that parent’s company official was responsible for the election that parent and seller relied on parent’s company official to timely make the election and that the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent and seller have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date_of_issuance of this letter for parent as the common parent of the consolidated_group of which purchaser is a member and seller to file the election with respect to the acquisition of target as described above the above extension of time is conditioned on the taxpayers' seller's parent's purchaser’s and target’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made talking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liability for the years involved a determination thereof will be made by the district director's office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers' liability is lower sec_301_9100-3 the above extension is also conditioned on i parent and seller signing the election and ii parent and seller treating the acquisition sale of target’s stock as a sec_338 transaction parent as agent for purchaser and seller must file the election in accordance with sec_1_338_h_10_-1 that is a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions to the form see announcement 1998_2_irb_38 a copy of this letter should be attached to the election form parent and seller must file or amend their returns as applicable for the year in which the transaction was consummated to report the transaction as a sec_338 transaction and to attach thereto a copy of this letter and a copy of the election along with the information required with the election form if they already reported the transaction as a sec_338 transaction they must amend their returns to attach a copy of the election the information requested therewith and a copy of this letter pursuant to sec_1_338_h_10_-1 target’s s election is not terminated accordingly target is not required to file an s_short_year return ie a year that ended the day before the acquisition nor a one day short return as a non-affiliated c_corporation we express no opinion as to whether the acquisition sale of target’s stock qualifies as a qualified_stock_purchase under sec_338 whether the acquisition sale of target’s stock qualifies for sec_338 treatment or if plr-118177-99 sec_338 is applicable as to the amount and character of gain_or_loss if any recognized by target and thus by seller on target’s deemed asset sale in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayers however the district_director s should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter is being sent to seller and to parent’s and seller's authorized representatives pursuant to the powers of attorney on file in this office sincerely yours assistant chief_counsel corporate by benita thigpen deputy assistant chief_counsel corporate


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-112176-10 date date legend taxpayer -------------------------------------------------------------------- -------------------------------------------------- state a region ------ ------------------------------------------------------------ dear -------------------- this is in response to a request for rulings dated date submitted by your authorized representative the rulings concern the interplay of the rules in subchapter_t of the internal_revenue_code concerning the taxation of cooperatives and their patrons and the calculation of the sec_199 deduction for certain cooperatives contained in sec_199 taxpayer is a farmers’ cooperative organized under the state a cooperative law taxpayer is a local grain marketing and farm supply cooperative taxpayer serves farmers through a network of ----owned and -- leased facilities located in region taxpayer markets grain for its farmer members and for other patrons during its fiscal_year ended ----------------------- taxpayer’s grain sales were approximately dollar_figure--------- million principal commodities marketed in ------- were corn dollar_figure-------million soybeans dollar_figure-------million wheat dollar_figure------million and oats dollar_figure-----million taxpayer also provides its members and other patrons with a broad range of supplies used in farming - including principally agronomy products fertilizer farm chemicals seed energy products diesel plr-112176-10 fuel gasoline etc feed and general farm supplies during ------- taxpayer’s farm supply sales totaled approximately dollar_figure--------million taxpayer’s voting members are producers ie farmers and farmers’ cooperatives who do business with taxpayer on ----------------------- taxpayer had approximately --------voting members in addition taxpayer had approximately ----- of what taxpayer calls nonvoting members - actually patrons as defined in sec_1_1388-1 of the income_tax regulations - who do not have voting rights but who along with voting members are entitled to share in patronage_dividends paid_by taxpayer hereinafter referred to as other participating patrons taxpayer does not pay patronage_dividends to nonmembers taxpayer is organized and operated on a cooperative basis state a has a special law for the incorporation of cooperative associations known as the state a cooperative law state a revised code ------------------- the state a cooperative law provides that associations organized under the act shall be corporations that are deemed nonprofit because they are not organized for the purpose of making a profit for themselves as such or for the purpose of making a profit for their members as such but for their members as patrons section -----------------the state a cooperative law provides that cooperative associations shall distribute their earnings on a patronage basis a an association may pay dividends annually on its capital stock all of its other net_income from business with or for members and other eligible patrons less reserves which shall be provided for in the bylaws or other written agreements shall be distributed to its members and other eligible patrons on the basis of patronage as provided in the bylaws or other written agreements section ----------------- taxpayer’s articles of incorporation provide that t he association is a cooperative association organized under chapter ----- ---of the state a revised code the ‘ state a cooperative law’ sec_3_2 they describe taxpayer’s purpose purpose the purpose of the association is to associate producers and others to provide them economic benefit through joint action in procuring supplies services and equipment and in marketing products they produce the primary purpose and general nature of its business is marketing grain and procuring crop and livestock production inputs and related_services supplies and equipment for its members and other persons sec_3_1 plr-112176-10 taxpayer is organized with capital stock it has one class of common_stock and two classes of preferred_stock a preferred and aa preferred sec_4 the common_stock is membership stock common_stock has a par_value of dollar_figure per share and is not entitled to receive dividends sec_4 and c each member owns one share of common_stock membership is limited to producers and farmers’ cooperatives sec_4 a for this purpose ‘producer’ means a person engaged in the production of agricultural products for the market including lessors of property used for the production of agricultural products for the market who receive as rent part of the agricultural product ‘cooperative’ means a producer-controlled entity that is operated on a cooperative basis sec_4 a the articles of incorporation provide that only members are entitled to vote and that each member has one vote voting the members shall be entitled to exercise all of the voting control of the association each member shall be entitled to one vote in any matter submitted to a vote of the members ownership of capital stock or other equity interests in the association shall not otherwise confer upon the holder any voting rights in the association sec_5 the preferred_stock has been issued over the years to provide capital for taxpayer and its predecessors for general purposes and for special projects the a preferred has a par_value of dollar_figure per shares and bears a non-cumulative dividend of not to exceed ----percent there are ----------shares outstanding the aa preferred is issuable in series currently there is only one outstanding series - serie sec_3 which has a par_value of dollar_figure per share and bears a non-cumulative dividend of not to exceed ---- percent there are ----------shares of aa preferred serie sec_3 outstanding the maximum annual dividend payable on preferred shares is dollar_figure----------- taxpayer is also authorized to issue capital credits which are used as written notices of allocation for patronage_dividend purposes capital credits provide a significant source of capital used to finance taxpayer’s business sec_4 at ------- ----------------------- the stated dollar amount of outstanding capital credits was dollar_figure---------------------------- taxpayer’s articles of incorporation provide that its net_earnings shall be distributed on a cooperative basis as provided in its bylaws patronage refunds the net margins savings of the association in excess of ‘association net margins’ as such term is described in the bylaws shall be distributed annually to the association’s plr-112176-10 patrons as patronage refunds on the basis of patronage transactions defined and provided for in the bylaws sec_4 taxpayer’s computation of patronage refunds begins with a determination of net margins from all of taxpayer’s business patronage and nonpatronage for the fiscal_year section then taxpayer is required to deduct i an amount equal to percent of net margins to be added to the capital reserve ii the amount declared by the board_of directors as dividends on the preferred_stock and iii an amount sufficient to pay taxpayer’s taxes section a and amounts held back are subtracted out of net margins from nonpatronage sources and only if nonpatronage net margins are not sufficient are they subtracted from net margins from patronage sources section a if earnings from nonpatronage sources exceed the amounts required to be retained then any excess nonpatronage earnings are set_aside in the capital reserve section a taxpayer refers to the amounts required to be retained for reserves dividends and taxes as the association net margins taxpayer’s bylaws then provide patronage refunds the balance of net margins after deduction of b the association net margins shall be the patrons net margins the patrons net margins belong to the patrons and shall be allocated to the patrons on the basis of their patronage transactions the amounts so allocated shall be patronage refunds due and distributable to the patrons as provided in these bylaws section b this section of the bylaws goes on to provide that taxpayer may pay patronage_dividends based upon allocation units patronage refunds may be allocated on the basis of patronage transactions and the net margins that result from the operations of divisions or departments of the association as the board deems fair to the patrons section b taxpayer allocates patronage_dividends upon the basis of two divisions - supplies and grain patrons net margins attributable to the supplies division are allocated among members purchasing supplies from taxpayer based on dollars of purchases patrons net margins attributable to the grain division are allocated among the members marketing grain through taxpayer based upon bushels taxpayer figures patronage_dividends separately for general grain marketing and direct marketing grain sales since the margins on direct marketing grain are significantly lower than the margins on other grain business section a of the bylaws authorizes taxpayer to pay patronage_dividends in cash capital stock or in capital credits or any combination thereof patronage_dividends are normally paid in a combination of cash and capital credits in the past plr-112176-10 the capital credits distributed by taxpayer as part of its patronage_dividends have been qualified written notices of allocation as defined in subchapter_t of the code one of taxpayer’s predecessors distributed nonqualified written notices of allocation some years ago and some of those notices remain outstanding in the event of dissolution article of taxpayer’s articles of incorporation provides that after creditors have been paid amounts remaining are to be distributed first to the holders of a preferred and each of the series of aa preferred in an amount equal to par_value and second to the holders of common_stock and capital credits in an amount equal to par_value or stated dollar value as the case may be any residual assets then remaining are then to be shared by the members on the basis of their respective aggregate patronage transactions over the previous ten years as shown by the records of the association this ruling relates to taxpayer’s grain marketing activities taxpayer operates --- --- grain facilities located across the territory it serves it purchases grain from its members at these facilities for marketing on a cooperative basis from many of the facilities grain can be shipped by truck or rail the storage capacity of taxpayer’s grain elevators is approximately ---------------bushels taxpayer also purchases some grain from its members and others for sale directly to several large customers the grain is delivered by members directly to the customers’ facilities taxpayer sells grain to livestock and poultry producers for feed to grain processors to be used to produce ethanol high-fructose corn sweetener and other products to soybean processors to be crushed and sold as soybean meal oil and other further refined products to wheat millers for milling and to others for resale both domestically and in the export market taxpayer’s grain business consists of buying grain from members and others handling and storing the grain at its elevators and then selling the grain to terminal grain elevators grain processors feed lots grain exporters and others the issue in this ruling relates to the characterization for purposes of subchapter_t of the code and sec_199 of payments referred to in this ruling as grain payments that taxpayer makes to members when it acquires their grain for marketing on a patronage basis for purposes of this ruling grain payments do not include any amounts paid to persons not entitled to share in patronage_dividends in ---- ------- approximately --------percent of the grain taxpayer marketed was acquired from persons not entitled to share in patronage_dividends for purposes of this ruling grain payments also do not include patronage_dividends paid to members with respect to grain marketed for them taxpayer does not operate on a pooling basis thus taxpayer’s grain marketing proceeds are not shared equally on the basis of patronage and distributed in the form of harvest advances and progress payments with a final settlement after the pool closes as they would be if taxpayer pooled commodity price risk does not automatically shift plr-112176-10 from taxpayer’s members to a pool at the time of harvest rather that risk remains with members until they sell their grain to taxpayer for marketing taxpayer pays each member a market price for his or her grain what that market price is depends upon where when and how a member chooses to sell his or her grain to taxpayer that market price is determined without regard to the actual net_proceeds realized by taxpayer from marketing the grain payments are made in cash by check or by direct deposit by ach and occur throughout the year as members sell grain to taxpayer for marketing and are paid pursuant to the terms of their grain contracts after purchasing grain from members taxpayer then markets each member’s grain along with the grain of all of its other members in the manner that it judges will produce the best return after year end when net_earnings for the year have been determined taxpayer pays a patronage_dividend to its members with respect to the grain they market through taxpayer grain farmers historically have retained the decision of when and how to sell their grain and to choose whether to sell their grain to a cooperative for marketing on a patronage basis or to a commercial grain company farmers have a variety of alternatives when they sell their grain to taxpayer the choices are similar to those offered farmers by commercial grain companies though commercial grain companies do not market grain on a patronage basis and do not pay patronage_dividends the basic choices available to a farmer selling grain to taxpayer for marketing on a cooperative basis are i to sell the grain for taxpayer’s current cash bid price ii to sell the grain to taxpayer using a forward_contract and iii to sell the grain to taxpayer using a deferred price or a deferred payment contract under each of these basic choices there are additional options available to farmers one way for a member to sell grain to taxpayer for marketing is to sell the grain to taxpayer and be paid the cash bid price many members sell grain to taxpayer on this basis typically a country elevator’s cash bid price for a commodity is the nearby futures price in a specified reference market where the commodity is actively_traded eg the chicago board_of trade or the minneapolis grain exchange plus or minus a fixed spread referred to as the basis set from time to time by the elevator based upon local market conditions thus the cash bid price at a country elevator reflects the condition of the overall market for grain the futures price and the condition of the local market for grain the basis an elevator’s cash bid price changes during the course of each day as the reference futures price fluctuates it also changes though not as often as the elevator adjusts the basis plr-112176-10 the bid prices are delivered prices at the particular elevator for grain of normal merchantable quality farmers are responsible for the costs of delivering the grain to the elevator grain is tested when it is delivered the grain price is subject_to adjustment if the grain is above or below normal quality standards provided the grain is still of acceptable quality taxpayer’s bid schedules show the cash price the futures price and the basis the cash price at any location at any time equals the futures price minus the basis at that particular location grain prices constantly fluctuate as a result of these market forces the bid price schedule at country elevators changes from hour to hour and day to day a member can deliver and sell grain to taxpayer at the cash bid price at the time of harvest delivering the grain directly from the field however it usually is not advantageous for farmers to sell then since prices often are lowest at harvest many farmers have the capacity to store grain on their farm and so can wait until later when they think that the cash bid price is right to deliver and sell their grain to taxpayer other farmers deliver grain to taxpayer for storage not for immediate sale the farmers retain ownership of the grain in the elevator and pay storage fees to taxpayer later when a farmer believes the cash bid price is right he or she can sell the grain to taxpayer for marketing on a cooperative basis a member has the option of entering into a forward_contract to sell his or her grain to taxpayer this is the most common way for members to sell their grain to taxpayer forward contracts call for delivery of a specified quantity and quality of grain at a specified location during a specified time period forward contracts can be entered into before the grain is planted while it is growing or after harvest while the grain is being stored on the farm or in an elevator forward contracts can be priced in a variety of ways many contracts provide for a fixed price sometimes referred to as a flat price farmers interested in entering into a forward_contract with taxpayer can determine the fixed price taxpayer is willing to pay at any time at any of its locations for delivery at various times in the future from taxpayer’s bid schedules for grain for future delivery or by contacting taxpayer typically a country elevator’s bid price for future delivery is determined in a manner similar to the way the cash bid price is determined however when the bid price is for future delivery it is based upon the nearby futures price for the time specified for delivery plus or minus the basis set by the country elevator for that delivery month the bid price for future delivery changes during the course of each day as the specified reference_price fluctuates it also changes as the country elevator adjusts its basis farmers also can enter into forward contracts where the pricing is left open for future determination plr-112176-10 for instance the contracts may fix the basis and leave the futures price open to be determined based upon the futures price at the time chosen by the farmer before a specified date in the future a farmer who believes that basis levels are strong but that futures prices could improve might use this kind of pricing alternatively the contracts may specify the futures price and leave the basis open to be determined based upon the elevator’s basis for delivery during the future month at the time chosen by the farmer before a specified date in the future this kind of pricing would be used if the futures price met the farmer’s objective but he or she felt the basis would improve a somewhat more complicated form of contract that is offered by some cooperatives guarantees farmers a minimum price for their grain but leaves farmers in a position to benefit if futures prices go up members have the option to deliver grain to taxpayer leaving the determination of the price partly or wholly open contracts of this sort are called by various names - deferred price contracts delayed price contracts credit-sale contracts etc under a delayed price contract ownership of the grain passes from the farmer to taxpayer at the time of delivery farmers are given the opportunity to wait until later to price the grain when the farmer chooses to price the contract the cooperative’s then current bid price is used to fill the open price term once the price is determined the member is paid the variety of options available to farmers for selling their grain to taxpayer and other grain companies provide farmers with a great deal of flexibility farmers can lock in prices for their crops even before they are planted or while they are growing at any time if they think that the price is right by using flat price forward contracts some farmers prefer to do so after they can estimate the costs of production to lock in a reasonable margin the simplest way to do this is to enter into a fixed price purchase contract if a farmer is happy with the futures price but not the basis the farmer can enter into a basis purchase contract if a farmer is happy with the basis but not the futures price the farmer can enter into a futures cash purchase contract if a farmer wants to lock in a minimum price but benefit in any strengthening of the futures price he can enter into a minimum price purchase contract if farmers think that the cash price is low at the time of harvest they can harvest and store their crops either on the farm if they have on-farm storage or at one of taxpayer’s elevators while waiting for the price to improve they can then sell that grain to taxpayer when they think the price is right at the current cash bid price alternatively farmers can deliver the crops to taxpayer at the time of harvest and enter plr-112176-10 into a delayed price purchase contract keeping the pricing open but not having to bear the costs of storage these choices are available to all members marketing their grain on a cooperative basis through taxpayer because of these choices two neighbors that market the same quantity and quality of a particular kind of grain through taxpayer during any year will receive different grain payments depending upon where when and how they sell their grain to taxpayer however they will each receive the same patronage_dividend for the fiscal_year ended ----------------------- taxpayer made grain payments to members of approximately dollar_figure----- million taxpayer’s patronage_dividends for that year totaled approximately dollar_figure-----million of which approximately dollar_figure-----million related to grain marketing the patronage_dividends were paid in cash and qualified written notices of allocation equity credits in the past taxpayer has treated grain payments made in cash to members as purchases for tax purposes and reported them on schedule a line of its form 1120-c taxpayer has not reported the grain payments made in cash as per-unit retain allocations paid in money and therefore has not reported them on schedule a line 4b of its form 1120-c taxpayer has reported the patronage_dividends paid to members in money and qualified written notices of allocation on schedule h line sec_3a and sec_3b of its form 1120-c because of this reporting grain payments paid in cash have entered into the determination for tax purposes of taxpayer’s cost_of_goods_sold for tax purposes as is customary in the grain business taxpayer values its grain inventories at year end at market for financial statement and tax purposes taxpayer did not add back grain payments in its sec_199 computations for prior years taxpayer has not passed any portion of its sec_199 deduction through to members in prior years recent developments have caused taxpayer to reconsider how it should treat its grain payments for purposes of its sec_199 computation taxpayer is seeking confirmation that grain payments to members can be classified as per-unit retain allocations paid in money taxpayer plans to treat grain payments as per-unit retain allocations paid in money for purposes of computing its sec_199 deduction taxpayer does not currently plan to make any change in the manner it accounts for inventories for tax purposes thus the timing of the deduction of its grain payments will not be changed taxpayer will make certain that it does not exclude or deduct grain payments twice on its tax_return or that it does not add back grain payments twice in its sec_199 computation plr-112176-10 taxpayer plans to disregard grain payments made to members and other patrons eligible to share in patronage_dividends for purposes of computing its qualified_production_activities_income and its taxable_income for purposes of sec_199 taxpayer also is considering passing through to members all or a portion of its sec_199 deduction based on the foregoing taxpayer requests the following rulings grain payments to members and other participating patrons constitute per-unit retain allocations paid in money within the meaning of sec_1382 of the code for purposes of computing its sec_199 domestic_production_activities_deduction taxpayer’s qualified_production_activities_income and taxable_income should pursuant to sec_199 of the code be computed without regard to any deduction for grain payments to members and other participating patrons nonexempt subchapter_t cooperatives are permitted to exclude or deduct distributions to patrons that qualify as per-unit retain allocations or patronage_dividends provided the distributions otherwise meet the requirements of subchapter_t of the code sec_1388 of the code defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of subchapter_t applies to a patron with respect to products marketed for him the amount of which is fixed without reference to net_earnings of the organization pursuant to an agreement between the organization and the patron per-unit retain allocations may be made in money property or certificates per- unit retain allocations paid in money and in property are excludable or deductible under sec_1382 of the code per-unit retain allocations paid in certificates are deductible under sec_1382 if the certificates are qualified if the certificates are nonqualified the cooperative is permitted a deduction under sec_1382 or a tax_benefit figured under sec_1383 when the certificates are later redeemed sec_1388 of the code provides that the term patronage_dividend means an amount_paid to a patron by a cooperative on the basis of the quantity or value of business done with or for such patron sec_1388 provides that a patronage_dividend is an amount_paid under an obligation that must have existed before the cooperative received the amount so paid sec_1388 provides that patronage_dividend means an amount_paid to a patron that is determined by reference to the net_earnings of the cooperative from business done with or for its patrons that section further provides that a patronage_dividend does not include any amount_paid to a patron to the extent that such amount is out of earnings other than from business done plr-112176-10 with or for patrons sec_1_1382-3 of the regulations states that income derived from sources other than patronage means incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association patronage_dividends may be paid in money property or written notices of allocation patronage_dividends paid in money and in property are excludable or deductible under sec_1382 of the code patronage_dividends paid in written notices of allocation are deductible under sec_1382 if the written notices of allocation are qualified if the notices are nonqualified the cooperative is permitted a deduction under sec_1382 or a tax_benefit figured under sec_1383 when the notices are later redeemed sec_1388 of the code provides that the term written_notice_of_allocation means any capital stock revolving fund certificate retain certificate certificate of indebtedness letter of advice or other written notice which discloses to the recipient the stated dollar amount allocated to him by the organization and the portion thereof if any which constitutes a patronage_dividend for cooperatives that use pooling revrul_67_333 1967_2_cb_299 provides that pool advances are treated as per-unit retain allocations and the final pool payment made after net_earnings have been determined is treated as a patronage_dividend under sec_199 of the code patrons that receive a qualified_payment from a specified agricultural or horticultural cooperative are allowed a deduction for an amount allocable to their portion of 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 plr-112176-10 an agricultural or horticultural cooperative is permitted to pass-through to its patrons all or any portion of its sec_199 deduction for the year provided it does so in the manner and within the time limits set by sec_199 of the code when a cooperative passes-through all or any portion of the sec_199 deduction the cooperative remains entitled to claim the entire sec_199 deduction on its return but is required under sec_199 to reduce the deduction or exclusion it would otherwise claim under sec_1382 for per-unit retain allocations and patronage_dividends sec_199 of the code provides that a cooperative passes through an amount of its sec_199 deduction by identifying such amount in a written notice mailed to such person during the payment period described in sec_1382 sec_1382 provides that the payment period for a year is the period beginning with the first day of such taxable_year and ending with the fifteenth day of the ninth month following the close of such year sec_1_199-6 of the regulations provides that in order for a patron to qualify for the sec_199 deduction sec_1_199-6 requires that the cooperative identify in a written notice the patron's portion of the sec_199 deduction that is attributable to the portion of the cooperative's qpai for which the cooperative is allowed a sec_199 deduction this written notice must be mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the taxable_year the cooperative may use the same written notice if any that it uses to notify patrons of their respective allocations of patronage_dividends or may use a separate timely written notice s to comply with this section the cooperative must report the amount of the patron's sec_199 deduction on form 1099-patr taxable_distributions received from cooperatives issued to the patron while a cooperative is permitted to disregard per-unit retain allocations and patronage_dividends in its sec_199 deduction sec_1_199-6 of the regulations provide that a qualified_payment received by a patron of a cooperative is not taken into account by the patron for purposes of sec_199 sec_1_199-6 of the regulations defines the term qualified_payment to mean any amount of a patronage_dividend or per-unit_retain_allocation as described in sec_1385 or of the code received by the patron from a cooperative that is attributable to the portion of the cooperative’s qpai for which the cooperative is allowed a sec_199 deduction for this purpose patronage_dividends and per-unit retain allocations include any advances on patronage and per-unit retains paid in money during the taxable_year taxpayer is a specified agricultural or horticultural cooperative within the meaning of sec_199 of the code and sec_1_199-6 of the regulations it is an organization to which part i of subchapter_t applies ie it is a nonexempt_cooperative to which subchapter_t applies it is engaged in the marketing of plr-112176-10 agricultural or horticultural products ie grain which it markets and various farm supplies which it sells to its members as a specified agricultural or horticultural cooperative taxpayer is entitled to the benefit of sec_199 of the code and sec_1_199-6 of the regulations which permit such cooperatives to disregard deductions under sec_1382 and c for purposes of computing qpai and taxable_income for purposes of sec_199 sec_1382 provides deductions for per-unit retain allocations paid in money property and qualified per-unit retain_certificates as well as for patronage_dividends paid in money property and qualified written notices of allocation it also provides for deductions when nonqualified per-unit retain_certificates and nonqualified written notices of allocation are redeemed as a specified agricultural or horticultural cooperative taxpayer is entitled to the benefit of sec_199 and sec_1_199-6 which permit such cooperatives to disregard deductions under sec_1382 and c for purposes of computing qpai and taxable_income for purposes of sec_199 sec_1382 provides deductions for per-unit retain allocations paid in money property and qualified per-unit retain_certificates as well as for patronage_dividends paid in money property and qualified written notices of allocation it also provides for deductions when nonqualified per-unit retain_certificates and nonqualified written notices of allocation are redeemed taxpayer does not operate on a pooling basis taxpayer purchases grain from patrons and markets the grain the amount that each patron receives when he or she sells grain to taxpayer for marketing depends upon where how and when the patron chooses to sell that grain to taxpayer patrons have a number of options for determining how and when sales are made as stated above two neighbors delivering the same amount of grain to taxpayer during any year will be paid different amounts for that grain depending upon where when and how they sell the grain to taxpayer however all patrons share in taxpayer’s net_earnings from marketing operations in proportion to the quantity of grains they market through taxpayer those net_earnings are distributed after the end of each year in the form of patronage_dividends paid in cash and qualified written notices of allocation revolving fund credits the question presented in this ruling is whether the grain payments made by taxpayer to patrons for grain qualify as per-unit retain allocations paid in money within the meaning of sec_1388 of the code under sec_199 of the code and sec_1_199-6 of the regulations the answer to this question determines who gets to include the grain payments in the sec_199 computation if the grain payments to patrons are per-unit retain allocations paid in money then they should be added-back in taxpayer’s sec_199 computation and not included in the patrons’ sec_199 computations if the grain payments to plr-112176-10 patrons are not per-unit retain allocations paid in money then they should not be added-back in taxpayer’s sec_199 computation but should be included in the patrons’ sec_199 computations these results are the same whether taxpayer decides to keep or to pass-through all or a portion of its sec_199 deduction marketing cooperatives like taxpayer have never thought of their grain payments as per-unit retain allocations paid in money however taxpayer’s grain payments appear to meet the definition of per-unit retain allocations paid in money which are excludible or deductible under sec_1382 of the code the grain payments are made in cash so the paid in money requirement is met taxpayer’s grain payments also meet all the requirements of the definition of per-unit_retain_allocation contained in sec_1388 of the code which defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of this subchapter applies to a patron with respect to products marketed for him the amount of which is fixed without reference to the net_earnings of the organization pursuant to an agreement between the organization and the patron first taxpayer’s grain payments to a patron are paid pursuant to an agreement namely the particular agreement applicable to the method the patron uses to determine how and when his or her grain is sold to taxpayer second taxpayer’s grain payments to a patron are made with respect to products marketed for him namely the grain delivered by the patron for marketing by taxpayer as described above taxpayer markets the grain it acquires from patrons and patrons share in taxpayer’s net_earnings from its marketing activities in the form of patronage_dividends third the amount of the grain payments to each patron is fixed without reference to the net_earnings of taxpayer since at the time the payments are made taxpayer’s actual net_earnings for the year are neither known nor determinable while per-unit retains are often made on the basis of a specified amount per unit of product marketed what is important is that they not be made with respect to net_earnings revrul_68_236 1968_2_cb_236 provides that to constitute a per-unit_retain_allocation the allocation need not be made strictly on the basis of a specified amount per-unit of product marketed provided it is made with respect to products marketed for the patron and not with respect to the net_earnings of the organization whether an allocation meets the foregoing description will be a question of fact the fact that all patrons do not receive the same payments for their grain ie that taxpayer does not pool does not mean that grain payments should not be treated as per-unit retain allocations paid in money in 619_f2d_718 8th cir the eighth circuit_court of appeals plr-112176-10 characterized payments to farm service’s poultry growers as per-unit retain allocations paid in money even though they were determined under a formula that resulted in some poultry growers receiving more than others depending upon the efficiency of their operations and the market price of chickens when they delivered their chickens to farm service the tax_court in 70_tc_145 described the formula as follows the grower was paid_by petitioner for growing chickens based on the delivery weight to the processing plant less the weight of chickens condemned by the u s department of agriculture the formula under which the grower was paid also took into account variable market rates for full grown chickens and an efficiency factor that related the number of pounds of feed to the pounds of chickens produced the efficiency factor was figured into the grower's compensation because farm service supplied all chicken feed under the contract provisions established with each of the growers there was also a guaranteed minimum amount the grower would receive from the cooperative irrespective of wholesale market variations for example the contract in effect on date provided that ‘in no event will the grower member receive less than dollar_figure cents per pound less u s d a condemnation ’ on its books petitioner treated payments to its growers as a cost of production taxpayer has treated its grain payments as purchases not as per-unit retain allocations paid in money however how the payments have been reported by taxpayer in prior years does not determine how the payments are treated prospectively in this ruling whether or not taxpayer is pooling is a moot issue for purpose of this ruling because its grain payments meet the definition of per-unit retain allocations paid in money in any event nothing in subchapter_t of the code limits the exclusion or deduction for per-unit retain allocations to cooperatives with pools sec_1_199-6 of the regulations provides that sec_1_199-6 is the exclusive method for the cooperative and its patrons to compute the amount of the sec_199 deduction the effect of these sections is that a cooperative such as taxpayer will compute the entire sec_199 deduction at the cooperative level and that none of the distributions whether patronage_dividends or per-unit retain allocations received from the cooperative will be eligible for sec_199 in the patron’s hands that is the patron may not count the qualified_payment received from the cooperative in the patron’s own sec_199 computation whether or not the cooperative keeps or passes through the sec_199 deduction accordingly the only way that a patron can claim a sec_199 deduction for a qualified_payment received from a cooperative is for the cooperative to plr-112176-10 pass-through the sec_199 amount in accordance with the provisions of sec_199 of the code and the regulations thereunder we note that to prevent a cooperative from deducting the per-unit retain allocations made in money or qualified certificates for the second time when the associated grain is sold the cost_of_goods_sold mechanism associated with inventory must be adjusted to reflect the deductions allowable under subchapter_t of the code specifically cooperatives need to include the per-unit retain allocations in inventory cost for purposes of making inventory and sec_263a of the code computations and then adjust the ending inventory and cost_of_goods_sold to prevent double deduction of the per-unit retain allocations the adjustments can be made to either the inventory or the line item deduction for the per-unit retain allocations in other words if the per-unit retain allocations are deducted on a deduction line in the cooperative's tax_return they should be removed entirely from the ending inventory and cost_of_goods_sold computed for the tax_year alternatively if the per-unit retain allocations are not deducted on a deduction line in the tax_return the per-unit retain allocations reflected in the ending inventory should be removed and included in the cost_of_goods_sold amount for that tax_year this procedure will allow the cooperative to deduct the per-unit retain allocations once while also preserving the integrity of its sec_263a calculation for the reasons described above taxpayer’s grain payments to patrons meet the definition of per-unit retain allocations paid in money the per-unit retains must be treated as such for all purposes of the code and are reported in box of form patr taxable_distributions received from cooperatives if properly treated as per- unit retain allocations paid in money then taxpayer will be entitled to disregard such payments in determining the amount of its sec_199 deduction we note that payments to nonmembers who are not eligible to share in patronage_dividends ie those with whom taxpayer does not operate on a cooperative basis with do not constitute per-unit retains paid in money within the meaning of sec_1382 of the code and accordingly are treated exclusively as purchases in the cost_of_goods_sold mechanism plr-112176-10 accordingly we rule as requested that grain payments to members and other participating patrons constitute per-unit retain allocations paid in money within the meaning of sec_1382 of the code for purposes of computing its sec_199 domestic_production activitie sec_2 deduction taxpayer’s qualified_production_activities_income and taxable_income should pursuant to sec_199 of the code be computed without regard to any deduction for grain payments to members and other participating patrons the conclusions set forth in this ruling address only purchases that are per-unit retain allocations paid in money as they relate to grains marketed by the cooperative during the taxable_year and does not apply to purchases of grain that remain in inventory at year end no opinion is expressed or implied regarding the application of any other provision in the code or regulations this ruling is directed only to the taxpayer that requested it under sec_6110 of the code it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours paul f handleman paul f handleman chief branch office of the associate chief_counsel passthroughs special industries ------------------------------ ---------------------------------------- --------------------------------- -------------------------------- ---------------------------------- ----------------------------- 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internal_revenue_service department of the treasury index no p o box ben franklin station washington dc number release date person to contact telephone number refer reply to cc dom p si - plr-104984-99 date date re legend spouse decedent k l m n county state date date date dollar_figurex dollar_figurey dollar_figurez dear we received your letter dated date requesting rulings on behalf of l concerning the application of sec_2601 and sec_2651 of the internal_revenue_code this letter responds to your request the facts and representations submitted are summarized as follows decedent died testate on date a resident of county state decedent was survived by his wife spouse who is also a resident of county state decedent and spouse lived for the entire 22-year duration of their marriage in state which is a community_property_state decedent and spouse had no children spouse has five children from a prior marriage decedent was also survived by his nephew k and his grandnephews l and n l and n are the sons of decedent’s niece m who predeceased decedent under the terms of decedent’s will certain tangible_personal_property was bequeathed to spouse and to other individuals the residue of decedent’s estate was bequeathed one-fourth to a marital trust governed by article fourth of the will and three-fourths or the entire residue if spouse predeceased the decedent to be held managed and distributed in accordance with article fifth of the will article fourth of the will provides that commencing on the date of decedent’s death the trustee is to pay or apply for spouse’s benefit all of the income from the marital trust not less often than quarterly the trustee is authorized in the trustee’s discretion to pay or apply additional funds from the principal of the marital trust to provide for spouse’s reasonable maintenance support comfort and welfare as the trustee deems necessary or advisable article fourth further provides that upon the death of spouse all income of the marital trust which is undistributed is to be distributed to spouse’s estate and the balance of the trust property is to be held managed and distributed in accordance with the provisions of article fifth in the same manner as though decedent had died immediately after the death of spouse the pertinent terms of article fifth are as follows the trustee is to divide the article fifth property into two equal parts one part is to be held in trust for the benefit of decedent’s nephew k k trust the other part is to be distributed free of trust to the living descendants ie l and n of decedent’s deceased niece m by right of representation the trustee of the k trust is to pay or apply all of the net_income from the k trust to k or for his use or benefit for and during his lifetime upon k’s death the remaining balance of the k trust is to be distributed free of trust to k’s descendants and if k has no descendants then living to the surviving descendants of decedent’s deceased niece m by right of representation decedent’s estate timely filed a federal estate_tax_return form_706 a qualified_terminable_interest_property qtip_election under sec_2056 was made on the return for one-fourth of the residuary_estate passing to the marital trust hereinafter qtip_trust on schedule r of decedent’s estate_tax_return the estate made the election under sec_2652 after decedent’s death spouse claimed that certain properties included in decedent’s gross_estate on the federal estate_tax_return belonged to her as her separate_property and her one-half interest in community_property spouse alleged that the trustee of the qtip_trust l improperly exercised his discretion to invade principal of the trust for her reasonable maintenance support comfort and welfare by refusing to make any distributions of principal to her spouse also objected to the investment strategy that the trustee pursued with regard to the qtip_trust on date spouse k l and n reached an agreement to settle spouse’s claims the stated purpose of the agreement is to resolve separate_property claims and community_property claims of spouse the administration of the probate_estate and the qtip_trust and to preserve the relationships the parties have among themselves their extended families and mutual friends under the terms of the settlement agreement the amount of dollar_figurex will be paid to spouse in cash or other_property in settlement of her claims for separate and community_property the agreement also directs that the trustee of the qtip_trust pay the amount of dollar_figurey to spouse in exchange for spouse’s release of her rights to any part of the principal of the qtip_trust the agreement further provides that spouse will sell her income_interest in the qtip_trust to k trust l and n for cash or other_property valued at dollar_figurez the consideration will be paid proportionately in accordance with the respective interests of k trust l and n in the remainder of the qtip_trust upon completion of the sale the qtip_trust will terminate and the property in trust will be distributed to the remainder beneficiaries according to their respective interests therein the settlement agreement is contingent on court approval which has been obtained by the parties and favorable rulings from the internal_revenue_service the requested rulings are as follows for purposes of the generation-skipping_transfer_tax gstt imposed by sec_2601 the decedent will be treated as the transferor of all property distributed to k trust from the qtip_trust under sec_2651 the terminating distributions from the qtip_trust to l and n will not be subject_to the generation-skipping_transfer_tax sec_2601 imposes a tax on every generation-skipping_transfer gst a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2612 provides that the term taxable_termination means the termination by death lapse of time release of power or otherwise of an interest_in_property_held_in_trust unless a immediately after such termination a non-skip_person has an interest in such property or b at no time after such termination may a distribution including distributions on termination be made from such trust to a skip_person sec_2612 provides that the term taxable_distribution means any distribution from a_trust to a skip_person other than a taxable_termination or a direct_skip under sec_2612 the term direct_skip means a transfer subject_to a tax imposed under the gift_tax or estate_tax provisions of an interest in property to a skip_person sec_2613 provides that a skip_person means a natural_person assigned to a generation which i sec_2 or more generations below the generation assignment of the transferor or a_trust - a if all interests in the trust are held by skip persons or b if there is no person holding an interest in such trust and at no time after such transfer may a distribution including distributions on termination be made from such trust to a non-skip_person sec_2651 sets forth rules to determine the generation to which any person other than the transferor belongs sec_2651 provides that an individual who is a lineal descendant of a grandparent of the transferor shall be assigned to that generation which results from comparing the number of generations between the grandparent and such individual with the number of generations between the grandparent and the transferor sec_2651 as added by the taxpayer_relief_act_of_1997 effective in the case of terminations distributions and transfers occurring after date provides a special rule for determining the generation assignment of individuals with a deceased parent as follows for purposes of determining whether any transfer is a generation-skipping_transfer if- a an individual is a descendant of a parent of the transferor or the transferor’s spouse or former spouse and b such individual’s parent who is a lineal descendant of the parent of the transferor or the transferor’s spouse or former spouse is dead at the time of the transfer from which an interest of such individual is established or derived is subject_to the estate_tax or the gift_tax upon the transferor such individual shall be treated as if such individual were a member of the generation which i sec_1 generation below the lower_of the transferor’s generation or the generation assignment of the youngest living ancestor of such individual who is also a descendant of the parent of the transferor or the transferor’s spouse or former spouse and the generation assignment of any descendant of such individual shall be adjusted accordingly under sec_2651 this special rule does not apply with respect to a transfer to any individual who is not a lineal descendant of the transferor or the transferor’s spouse or former spouse if at the time of the transfer the transferor has any living lineal_descendants sec_2652 provides that generally the term transferor means a in the case of property subject_to the estate_tax the decedent and b in the case of property subject_to the gift_tax the donor sec_2652 provides that in the case of any trust with respect to which a deduction is allowed to the decedent under sec_2056 ie qualified_terminable_interest_property the estate of the decedent may elect to treat all of the property in such trust for gstt purposes as if the election to be treated as qualified_terminable_interest_property had not been made this election is commonly referred to as the reverse_qtip_election sec_26_2652-1 of the generation-skipping_transfer_tax regulations provides that if a transferor of qtip property elects under sec_2652 to treat the property as if the qtip_election had not been made the identity of the transferor of the property is determined without regard to the application of sec_2044 sec_2207a and sec_2519 ruling in the present case upon decedent’s death pursuant to the terms of decedent’s will a qtip_trust was established for the lifetime benefit of spouse on the decedent’s estate_tax_return the estate made the qtip_election with respect to the entire qtip_trust and elected under sec_2652 to treat all the property in the qtip_trust for gstt purposes as if the qtip_election had not been made as a result of this election the decedent is treated as the transferor of the qtip_trust for gstt purposes accordingly pursuant to sec_26_2652-1 above we conclude that for gstt purposes the decedent will be treated as the transferor of all property distributed to k trust ruling in the present case after the sale of spouse’s qualifying_income_interest_for_life the qtip_trust will terminate the qtip_trust property will be distributed to the remainder beneficiaries l n and k trust according to their respective remainder interests in the qtip_trust under the terms of decedent’s will the analysis of the present facts under the rule_of sec_2651 is as follows l and n are both descendants of a parent of the transferor decedent and l’s and n’s parent m is a lineal descendant of the parent of the transferor decedent and m the parent was dead at the time of decedent’s death when the transfer of one-fourth of the residuary_estate to the qtip_trust occurred this transfer is the transfer from which l’s and n’s interests are derived and to which the estate_tax applied in addition at the time of decedent’s death decedent had no living lineal_descendants under sec_2651 l and n are treated as if each were a member of the generation which is one generation below the lower_of the transferor’s decedent’s generation or the generation assignment of the youngest living ancestor of l and n who is also a descendant of the parent of the transferor decedent accordingly l and n are treated as if each were a member of the generation that is one generation lower than that of the transferor decedent therefore we conclude that the distributions to l and n as a result of the termination of the qtip_trust will not be taxable terminations and will not be subject_to the gstt except as ruled above we express or imply no opinion concerning the federal tax consequences of this transaction under the cited provisions of the code or any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours office of the assistant chief_counsel passthroughs and special industries by kaherine a mellody senior technician reviewer branch enclosure copy for sec_6110 purposes


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp plr-107554-99 date date legend foreign z foreign x foreign y parent sub sub subsidiaries date a date b date c date x date parent’s company official outside tax plr-107554-99 professional new outside tax professional authorized representatives business a dollar_figurex dollar_figurey dollar_figurez dollar_figureaa dollar_figurebb dollar_figurecc condition x x y dear plr-107554-99 this responds to your date letter requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file a statement parent as the common parent of the consolidated_group is requesting the extension of time to file a statement of allowed loss under sec_1 c with respect to the deconsolidation of sub during the taxable_year ending on date x sometimes hereinafter referred to as the election the election is required in order to obtain the benefits of sec_1 c additional information was received in letters dated june august and date the material information submitted for consideration is summarized below parent is the common parent of a consolidated_group that has a calendar taxable_year and uses the accrual_method of accounting prior to date a sub was a wholly owned domestic subsidiary of parent and the subsidiaries were wholly owned domestic subsidiaries of sub on date a sub was a foreign_corporation that was x owned by foreign x and y by parent parent was a wholly owned subsidiary of foreign x and foreign x was a subsidiary of foreign y it is represented that parent and sub were under common_control within the meaning of sec_304 parent and its subsidiaries are engaged in business a on date which is in a taxable_year subsequent to the taxable_year that date x is in foreign z acquired foreign x from foreign y the applicable country of incorporation and residency of the foreign_corporations are set forth above in the redacted legend on date a parent sold all of the stock of sub to sub for dollar_figurex which is represented to be the then fair_market_value of the sub stock it is further represented that parent's basis in its sub stock was dollar_figurey and that the excess of parent’s basis in the sub stock over its fair_market_value was dollar_figurez the transaction resulted in the deconsolidation of sub and the subsidiaries it is represented that i the date a transaction was subject_to sec_304 ii the date a transaction resulted in the deconsolidation of sub iii sec_1 b applies to the date a transaction and iv parent is entitled to the benefits of sec_1 c it is also represented that an election under sec_338 was not made with respect to the acquisition by sub of the stock of sub or the subsidiaries moreover parent will determine the amount of basis_reduction under sec_1 b in accordance with sec_1 c on its tax_return for the taxable_year ending on date x parent attached information that i described the sec_304 sale of sub stock to sub for dollar_figurex and ii identified that parent’s basis in the sub stock had been reduced from dollar_figurey to dollar_figureaa a reduction of dollar_figurecc pursuant to sec_1 c this information was not in the form specified by sec_1 c and was not entitled allowed loss under sec_1 c parent's return for the taxable_year ending on date x which includes the date on which the transfer and deconsolidation occurred was filed on date b the extended due plr-107554-99 date therefor which is after date the effective date of sec_1 the election was not attached to the return or otherwise filed the period of limitations on assessments under sec_6501 has not expired for parent's and its subsidiaries’ specifically for parent’s sub 1's sub 2's and the subsidiaries’ taxable_year s in which the deconsolidation occurred the taxable years in which the election should have been filed or any taxable years that would have been affected by the election had it been timely filed parent as the common parent of the consolidated_group was required by sec_1 c to make and attach the election to its return for the year in which the deconsolidation occurred in order to limit the amount of basis_reduction required under sec_1 b to the sum of the amounts specified in sec_1 c the election was due on date b ie the extended due_date on which parent’s return was filed for the taxable_year ending on date x the year in which the deconsolidation of sub occurred as an attachment to the return however for various reasons the election was not attached to the return or otherwise filed on date c parent’s company official new outside tax professional and authorized representatives discovered the election had not been filed subsequently this request under sec_301_9100-1 for an extension of time to file the election was submitted to the service sec_1 b provides that as a general_rule if a member's basis in a share of stock of a subsidiary exceeds its value immediately before a deconsolidation of the share the basis of the share is reduced at that time to an amount equal to its value sec_1 h provides that sec_1 is applicable with respect to deconsolidations on or after date sec_1 c as a general_rule provides that the amount of loss disallowed under sec_1 b with respect to a share of stock shall not exceed the sum determined by the formula specified in sec_1 c sec_1 c provides that sec_1 c ie the limitation on the amount of basis_reduction on deconsolidation applies only if the separate statement required under this paragraph is filed with the taxpayer's return for the year of the deconsolidation the statement must be entitled allowed loss under sec_1 c and the required information that must be contained therein is specified in sec_1 c sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability of the consolidated_return_year under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i provided the taxpayer demonstrates to the satisfaction of the commissioner that plr-107554-99 the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a in this case the time for filing the election was fixed by the regulations ie sec_1 c therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent to file the election provided parent shows it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent’s company official outside tax professional new outside tax professional and authorized representatives explain the circumstances that resulted in the failure_to_file the election the information establishes that tax professionals were responsible for the election that parent relied on the tax professionals to timely make the election and that the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations that have been made we conclude that parent acted reasonably and in good_faith in failing to timely file the election the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly subject_to the below conditions we grant an extension of time under sec_301_9100-1 until days from the date_of_issuance of this letter for parent as the common parent of the consolidated_group to file the election with respect to the deconsolidation of sub and its subsidiaries on date a as described above the above extension of time is conditioned on i condition x which is contained in the above legend and is redacted because it will identify the taxpayer and ii the taxpayers' parent's sub 1's sub 2's the subsidiaries’ and any and all of their subsidiaries' tax_liability being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax plr-107554-99 liability for the years involved a determination thereof will be made by the district director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ liability is lower sec_301_9100-3 parent should file the election in accordance with sec_1 c that is parent must file an amended_return for its tax_year ending on date x to attach to the return the election and information set forth in sec_1 c in addition parent should attach a copy of this letter to the amended_return no opinion is expressed as to the tax effects or consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayer its employees and representatives however the district_director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply a copy of this letter is being sent to parent’s company official pursuant to the power_of_attorney on file in this office this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel corporate by richard todd counsel to the assistant chief_counsel corporate