internal_revenue_service number release date index number --------------------------- ------------------------------------------------------ ----------------------- ---------------------------------------- -------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc intl b02 plr-118602-10 date march ty ------- ty ------- legend taxpayer fc year state x country y subsidiary parent affiliate accounting firm accountant accountant vp attorney president law firm --------------------------- ---------------------- ------------------------------------------------------------------ ------- ------------- --------------------- ---------------------------- --------------------------- ---------------------------------------------------------------- ----------------------------- --------------------- -------------------------- -------------------------- ---------------------- ------------------- -------------------------------------------------- ------------------------------------------------------ dear ------------ plr-118602-10 this is in response to the letter received by our office on date submitted by your authorized representative requesting the consent of the commissioner of the internal_revenue_service for taxpayer to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to taxpayer’s investment in fc the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination facts taxpayer is a state x corporation and made an investment in fc through subsidiary a state x limited_liability_company in year subsidiary always has been a disregarded for u s federal_income_tax purposes as an entity separate from taxpayer parent a country y corporation established taxpayer to invest in u s real_estate the investment_advisor and manager on behalf of parent in connection with its investment in taxpayer is affiliate also a county y corporation taxpayer is a calendar-year and accrual-method taxpayer since its incorporation taxpayer has engaged accounting firm to prepare its federal_income_tax returns taxpayer’s federal_income_tax returns have been signed by accountant or accountant since year accountant and accountant are competent tax professionals and have advised taxpayer with respect to u s tax issues including elections for many years prior to investing in fc vp who is the vice-president and secretary of taxpayer and attorney who is a tax specialist from law firm discussed and concluded that an investment in fc would be an investment in shares of a passive_foreign_investment_company pfic and that a qef election should be made with respect to fc president who is an attorney at law firm and the president of taxpayer sent an email to accountant with details of the discussion and highlighted the conclusion that a qef election should be made on taxpayer’s u s federal_income_tax return for year accountant prepared and timely filed the income_tax return for year but failed to make the qef election taxpayer has submitted an affidavit signed under penalties of perjury describing the events that led to the failure to make the qef election by the election due_date including the role of accountant taxpayer has also submitted affidavits of accountant vp and attorney corroborating the representations made by taxpayer plr-118602-10 taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner of the internal_revenue_service to make a retroactive election under sec_1_1295-3 with respect to fc for year law sec_1295 provides that a pfic shall be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such company for the taxable_year and the company complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a taxpayer may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united_states government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayers to make a retroactive qef election with respect to fc for year under sec_1_1295-3 provided that taxpayer comply plr-118602-10 with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election this private_letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this ruling must be attached to any_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representatives sincerely jeffrey g mitchell branch chief international


department of the treasury internal_revenue_service washington d c tax exempt and government an vy division n la significant index no t eo ra t dear sir or madam this is in response to a request for a ruling as supplemented and modified under sec_4941 of the internal_revenue_code submitted on m's behalf by m’s authorized representative as modified m has requested a ruling involving o’s services to partnership n m has been recognized as exempt under sec_501 of the code and classified as a private_foundation described in sec_509 m’s trustees and substantial contributors include q r and s s is the son of q and r disqualified persons with respect to m within the meaning of sec_4946 m has assets currently in a diversified portfolio of marketable_securities m also has investments in rental real_estate and other_securities q r and s are members of the t family and are q and r are husband and wife u has been recognized as exempt under sec_501 of the code and classified as a private_foundation described in sec_509 q r and s serve as officers and foundation managers for u o is a limited_liability_company treated as a partnership for federal tax purposes that is engaged in the business of providing full service real_estate management services o purchases and manages real_estate for its own account as well as a variety of t family investment vehicles o’s members are s and p p is a corporation p is owned by q r and s p is a disqualified_person under sec_4946 of the code with respect to m m states that through the t family’s interests in various corporations partnerships and limited_liability companies the t family owns and operates properties located in various states m states that employees of o and p manage the t family’s real_estate portfolio services provided by o and p employees include the following property management billing and collection of rents accounting compliance leasing activity and lease negotiations risk management cash management debt management and supervision of outside professionals and contractors n is a limited_liability_company incorporated under state law as originally requested by m m u and o are the members of n m will have no voting control_over n o will own a profits interest in n n will be controlled and managed by o m will hold a profits interest in n and u will have a profits interest in n as represented below there are proposed changes to these original representations n’s gross_income will be derived from rents_from_real_property interest and dividend income and net capital_gains from the sale of investment_property it is represented that more than of the gross_income of n will be derived from such passive sources _n’s articles of incorporation provide that its members shall manage n - the articles further provide that the articles may be amended restated or modified from time to time by members holding more than of the votes held by members then entitled to vote consent to or otherwise decide any matter submitted to the members as determined pursuant to the operating_agreement of n n’s members will invest funds in n for purposes of acquiring additional real_estate holdings m originally represented that v another sec_501 private_foundation related to q r and s may also invest with m o and u in the acquisition of certain real_estate investments in future years m has modified its representations m now represents that m will not co- invest its assets with the assets of disqualified persons in n o will manage and supervise the operations of n o will provide the following services for m in managing n a identification and analysis of potential real_estate acquisitions b contract negotiations c cash management d debt management including budgeting e negotiation of financing f review of loan agreements and expenditures g accounting h supervision of property operations and inspections i advertising j leasing and lease negotiations k goodwill relations with tenants and communities i interface with municipalities and compliance with new ordinances m collections of rents n supervision and administration of risk management program o supervision of personnel and human resources including hiring firing administration of employee benefit programs and personnel policies p supervision and administration of legal and tax services and other incidental and ancillary activities associated with the ownership of passive rental real_property m has submitted supplemental information indicating that o may also perform services related to the disposition of property it is represented that o will not perform maintenance repair janitorial cleaning landscaping or other operational services and capital improvement services for n but will arrange through third party contractors the performance of such services m has submitted supplement information indicating that o may perform supervision of capital improvement services m states that n will compensate o solely from the revenue and assets of n o will receive compensation_for the services described above in connection with the management of properties acquired by n compensation provided to o would constitute reasonable_compensation and be comparable with the customary practices within the industry m represents that m has submitted a supplemental statement of facts indicating that the service has issued a ruling concluding that the merger and transfer of v’s assets into m will be treated as a termination of v’s private_foundation_status pursuant to sec_507 of the code such transfer will not be subject_to termination_tax imposed by sec_507 of the code m has made the additional representations indicating that m and u will hold a combined profits interest in n of approximately unrelated third parties will hold the balance of the profits interest m has provided a supplemental statement of facts indicating that m and other tax-exempt organizations will be passive investors in n with no participation in n’s management sec_501 of the code provides in part that an organization is exempt from federal_income_tax if it organized and operated for charitable and educational_purposes and if no part of the net_earnings of the organization inures to the benefit of any private_shareholder_or_individual sec_4941 of the code provides that the term self-dealing means any direct or indirect payment of compensation or payment or reimbursement of expenses by a private_foundation to a disqualified_person sec_4941 of the code states that the term self dealing means any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4941 of the code provides that except in the case of a government_official as described in sec_4946 the payment of compensation and the reimbursement of expenses by a private_foundation to a disqualified_person for personal services which are reasonable and necessary to carrying out the exempt_purpose of the private_foundation shall not be an act of self-dealing if the compensation or payment or reimbursement is not excessive sec_4946 of the code defines a disqualified_person to include with respect to a private_foundation a foundation_manager and substantial contributors sec_4946 of the code states that the term foundation_manager includes a trustee of a foundation having the authority or responsibility over the activities of the foundation sec_4946 and f of the code respectively provide that the term disqualified_person includes a corporation of which persons described in subparagraph a b c or d own more than percent of the total combined voting power and a partnership in which persons described in a b c or d own more than percent of the profits interest sec_53_4941_d_-1 of the foundation and similar excise_taxes regulations provides that a transaction between a private_foundation and an organization which is not controlled by the foundation within the meaning of of this paragraph and which is not described in section subparagraph a e f or g because persons described in sec_4946 b c or d own no more than percent of the total combined voting power or profits or beneficial_interest of such organization shall not be treated as an indirect act of self-dealing between the foundation and such disqualified persons solely because of the ownership_interest of such persons in such organization a by controlled authority private_foundation in by aggregating their votes or positions of sec_53_4941_d_-1 of the regulations provides that for purposes of this paragraph an organization is private_foundation if the foundation or one or more of its foundation managers acting only in such capacity may only require the a transaction which if engaged in with the private organization to engage in similarly for purposes of this paragraph foundation would constitute self-dealing an organization is controlled by a the case of such a transaction between the organization and a disqualified_person if such disqualified_person together with one or more persons who are disqualified persons by reason of such a person's relationship within the meaning of sec_4946 through g to such disqualified_person may only by aggregating their votes or positions of authority with that of the foundation require the organization to engage in such a transaction the ‘controlled’ organization need not be a private_foundation for example it may be any type of exempt or nonexempt organization including a school hospital operating_foundation or social_welfare_organization for purposes of this paragraph an organization will be considered to be controlled by a private_foundation or by a private_foundation and disqualified persons referred to in the second sentence of this subparagraph if such persons are able in fact to control the organization even if their aggregate voting power is less than percent of the total voting power of the organization's governing body or if one or more of such persons has the right to exercise veto power over the actions of such organization relevant to any potential acts of self-dealing sec_53_4941_d_-1 of the regulations provides that the term ‘indirect self-dealing’ shall not include a transaction involving one or more disqualified persons to which a private_foundation is not a party in any case in which the private_foundation itself engage in such a transaction thus for example even if a private_foundation has control within the meaning of subparagraph of this paragraph of a corporation the corporation may pay to a disqualified_person except a government_official reasonable_compensation for personal services by reason of sec_4941 could sec_53_4941_d_-3 of the regulations provides that under sec_4941 except in the case of a government_official as defined in sec_4946 the payment of compensation by a private_foundation to a disqualified ‘person for the performance of personal services which are reasonable and necessary to carry out the exempt_purpose of the private_foundation shall not be an act of self-dealing if such compensation or payment or reimbursement is not excessive for purposes of this subparagraph the term ‘personal services’ includes the services of a broker serving as agent for the private_foundation but not the services of a dealer who buys from the private_foundation as principal and resells to third parties for the determination whether compensation is excessive see sec_1_162-7 of this chapter income_tax regulations this paragraph applies without regard to whether the person who receives the compensation or payment or reimbursement is an individual example sec_1 and of sec_53_4941_d_-3 of the regulations provides as follows a and b partners in example m a partnership is a firm of lawyers engaged in the practice of law m serve as trustees to private_foundation w and therefore are disqualified persons in addition a and b own more than percent of the profits interest in m thereby making m a disqualified_person m performs various legal services for w from time to time as such services are requested the payment of compensation by w to m shall not constitute an act of self-dealing if the services performed are reasonable and necessary for the carrying out of w's exempt purposes and the amount_paid by w for such services is not excessive acting in example c a manager of private_foundation x owns an investment counseling business his capacity as an investment counselor c manages x's investment portfolio for which he receives an amount which is determined to be not excessive the payment of such compensation to c shall not constitute an act of self-dealing n has elected to be treated as a partnership for federal_income_tax purposes therefore n will be treated as a partnership for purposes of sec_4946 of the code in order to determine whether the self-dealing provisions of sec_4941 are applicable since o is a disqualified_person with regards to m services provided by o to n an entity in which m previously held at least a profits interest and which has no disqualified_person co-investors may constitute self-dealing under sec_4941 of the code m has provided supplemental information indication that m and u will hold a combined profits interest of in n unrelated third parties will hold the balance or remaining profits interest in n the personal service exception of sec_53 d -3 c of the regulations addresses this concern the services to be provided by o include a range of professional and managerial financial and real_estate investment services including negotiating real_estate purchase contracts financing terms and cash management services which are comparable to the broker lawyer and investment management examples in the regulations under the facts and circumstances o’s services to n are personal services following sec_53 d -1 b of the regulations o can receive reasonable_compensation for personal services provided by o to n m represents that n is an investment_partnership that holds interests in real_estate n’s gross_income will be derived from rents_from_real_property interest and dividend income and net capital_gains from the sale of investment_property thus n derives more than percent of its income from passive sources pursuant to sec_53 c and therefore n is not a business_enterprise within the meaning of sec_4943 of the code based on the above we rule that services rendered by o to n in respect to assets allocable to m constitute personal services and therefore n may compensate o under the self-dealing exception under sec_4941 d e of the code so long as the services are reasonable and necessary and the compensation is not excessive this ruling is limited to the applicability of sec_4941 d e of the code to issue ruled herein the ruling is based on the understanding that there will be no material changes in the facts upon which it is based this ruling does not purport to rule on any other issue or code section not addressed herein this ruling is directed only to m n o p q r s u and v sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours signed robert c harper ie robert c harper jr manager exempt_organizations technical branch


t c memo united_states tax_court banana moon trust j c chisum trustee and purple passion trust j c chisum trustee petitioners v commissioner of internal revenue respondent docket no filed date jimmy c chisum for petitioners richard a rappazzo for respondent memorandum opinion chiechi judge this case is before the court on respon- dent's motion to dismiss for lack of jurisdiction respondent’s motion we shall grant respondent’s motion background for purposes of respondent’s motion the parties do not dispute the following factual allegations that are part of the record at all relevant times each petitioner was a_trust engaged in business in the state of arizona petitioner banana moon trust filed a federal_income_tax return for estates and trusts form_1041 return for which was signed by jimmy c chisum mr chisum as the fiduciary or officer representing the fiduciary banana moon trust’s return did not contain the name of the trustee or any information that would enable respondent to determine who the trustee was petitioner purple passion trust filed a return for which was signed by mr chisum as the fiduciary or officer representing the fiduciary that return did not contain the name of the trustee or any information that would enable respondent to determine who the trustee was upon commencement of the examination of each petitioner respondent requested complete copies of the trust documents relating to each such petitioner as well as other information bach petitioner refused to provide respondent with the trust documents and other information requested although neither petitioner provided respondent with the documentation and other information requested respondent’s examining agent obtained from an unrelated third-party financial_institution what appear to be the governing trust documents for petitioner banana moon trust and the governing trust documents for petitioner purple passion trust those governing trust documents pertaining to each petitioner appear to be identical except for the name of each petitioner reflected therein the respective governing trust documents relating to peti- tioners state that they are executed under the laws of the constitution for the united_states of america and the constitu- tion for the state of nevada those documents identify the original trustee of each petitioner as sugartree llc the respective governing trust documents relating to petitioners further provide in pertinent part the anglo-saxon common_law irrevocable pure trust for asset protection purposes also known as an asset_protection_trust created by this contract and indenture on thi sec_30th day of september is authorized to exist and function by and through its board_of trustees hereinafter referred to as the board pursuant to all of the conditions contained herein with certain assets to be administered by the trustee for the benefit of the holders of capital units hereinafter referred to as beneficiaries represented by certificates of beneficial_interest in accordance with the unalienable anglo-saxon common_law rights afforded to man this trust shall be originally domiciled in the state of nevada and shall be interpreted and construed under the constitution of the united_states and the laws of the state of nevada the domicile and thereby the controlling interpretational laws under which the trust shall be construed may be changed to any other state or nation as shall be deemed prudent wise necessary or appropriate by the board_of trust-- ees the creator shall appoint a fiduciary to serve as protector of the beneficiaries the protec-- tor shall be an independent third party with no obliga- tions to any other party to this trust the protector shall have the power to remove any trustee who violates any term or condition of this trust agreement or is in breach of any anglo-saxon common_law trustee duty and shall have the power to appoint a successor trustee to fill any vacancy which occurs for any reason the board_of trustees shall have except as modified by the terms of this indenture and the minutes of the board interpreting the same all of the powers of trustees under the anglo-saxon common_law as well as those specified under the laws of the state of nevada the trustee may be replaced in any of the following manners a resignation the trustee may resign with or without cause at any time by sending a notice of his intention to do so to the trust principle sic office by certified mail however such resignation shall not be effective unless and until such time as a successor trustee has accepted the appointment to assume the duties and responsibilities of trustee on the expira- tion date of the outgoing trustee or thirty days after receipt of the resignation whichever occurs first b removal upon complaint for proper cause by any agent or person appointed by the trust the protector shall appoint a committee of arbitrators hereinafter referred to as the committee to investi- gate the complaint the committee shall have the power upon meeting investigation and a two-thirds majority vote to remove the trustee for the following specific reasons constituting proper cause a insol- vency b negligence c incompetence or d failure to perform fiduciary duties under the terms of the con- tract cc incapacitation in the event the trustee is unavailable to participate in the process of his removal or the selection of a successor trustee the protector shall have the authority to execute an affi- davit under oath setting forth the unavailability of the trustee d court appointment in the event it becomes necessary to litigate the removal of a trustee and or appointment of a successor trustee the trust by and through its beneficiaries may apply to a court of competent jurisdiction for the appointment of a successor trustee the notice_of_deficiency notice issued to petitioner banana moon trust for taxable years and was addressed as follows banana moon trust sugartree llc ttee west vista no glendale az the notice issued to petitioner purple passion trust with respect to taxable_year was addressed as follows purple passion trust sugartree llc ttee west vista avenue no glendale az banana moon trust and purple passion trust jointly filed a petition in this court that petition was signed on behalf of each petitioner by j c chisum as trustee respondent’s motion contends in pertinent part there is absolutely no evidence from which the court can adduce that mr chisum is the current trustee of either of the petitioner trusts petitioners have provided no evidence that the appointment of mr chisum as trustee was valid or authorized under the terms of the respective trust indentures petitioners have failed to demonstrate that mr chisum was legally appointed as trustee of either of the petitioner trusts and therefore is authorized to act on behalf of the petitioner trusts and bring the instant case before this court see t c rule c petitioners filed a response to respondent’s motion in which they ask the court to deny that motion that response asserts in pertinent part the respondent’s objection goes to the manage- ment of the trusts their internal affairs concerns about their administration the declaration of rights and the determinations of matters involving the trust- ees as the respondent concedes that these are ari- zona trusts this issue falls within the exclu- sive jurisdiction of the superior court here in the state of arizona see a r s at this point this court is without jurisdiction to determine whether mr chisum is the duly authorized trus-- tee the petitioners need not remind the court of the consequences of taking any_action over which subject matter is completely lacking any objection the respondent or respondent’s counsel has in this area must be taken up in the supe- rior court here in arizona assuming of course the respondent or respondent’s counsel has standing the irony is of course if respondent or respondent’s counsel does take the matter up with the superior court where the respondent will have the burden_of_proof and if the superior court finds that the trusts are valid then the respondent will be barred by res_judicata from asserting the sham trust claim that forms the basis for his deficiency determination in essence the factual claims raised by the motion to dismiss are inextricably intertwined with the facts going to the merits of the commissioner’s sham trust claim at issue in this case if the trusts are valid then mr chisum under arizona law will be presumed to be the duly authorized trustee whether it is as a trustee of a resulting trust constructive trust or expressed sic trust therefore the only course available to this court is to defer consider- ation of the jurisdictional claims to the trial on the merits 990_f2d_451 n 9th cir 940_f2d_1291 9th cir see also 824_f2d_799 9th cir a district_court may hear evidence and make findings_of_fact necessary to rule on the subject matter jurisdiction question prior to trial if the jurisdictional facts are not inter- twined with the merits emphasis added the court held a hearing on respondent’s motion at which mr chisum appeared on behalf of petitioners ’ at that hearing mr chisum contended inter alia i was one of the members of sugar tree llc and subse- guently substituted the trustee to give a better con- trol in the tax matters and in the business administra- tion ‘at the hearing the court informed mr chisum that its allowing him to appear at the hearing on behalf of each petitioner did not mean that the court agreed that he in fact had the capacity to be appearing on their behalf the fact that this trust 1s again administered within the state of arizona it comes under the exclu- sive jurisdiction of the courts of arizona and the law of arizona for determining the real parties there was sic subsequent items subsequent trustee replacements that are not a part of the record the role of protector that the respondent brings up is only one of the methods of removal of a trustee any trustee has the authority and the power to resign at any time petitioners presented no additional contentions and proffered no evidence at the hearing on respondent’s motion discussion rule provides in pertinent part a petitioner deficiency or liability actions a case shall be brought by and in the name of the person against whom the commissioner determined the deficiency in the case of a notice_of_deficiency or by and with the full descriptive name of the fiduciary entitled to institute a case on behalf of such person see rule a a case timely brought shall not be dismissed on the ground that it is not properly brought on behalf of a party until a reason- able time has been allowed after objection for ratifi- cation by such party of the bringing of the case and such ratification shall have the same effect as if the case had been properly brought by such party c capacity the capacity of a fiduciary or other representative to litigate in the court shall be determined in accordance with the law of the juris-- diction from which such person's authority is derived all rule references are to the tax_court rules_of_practice and procedure the respective governing trust documents pertaining to petitioners suggest that each petitioner was organized as a_trust under the laws of the state of nevada however in petitioners’ response to respondent’s motion and at the hearing on that motion mr chisum asserted that the administration of each petitioner trust is governed by the laws of the state of arizona and that the exclusive jurisdiction in determining the validity of the trust and of the trustee is in the superior court of the state of arizona assuming arguendo as petitioners claim that each peti- tioner is a_trust the administration of which is subject_to the laws of the state of arizona under arizona law see rule c a trustee has the power to commence litigation on behalf of a_trust see ariz rev stat ann sec c west in the instant case each petitioner has the burden of proving that this court has jurisdiction see 65_tc_346 national comm to secure justice assuming arguendo as the respective governing trust documents pertaining to petitioners suggest that each petitioner is a_trust the administration of which is subject_to the laws of the state of nevada under nevada law see rule c a trustee has the power to commence litigation on behalf of a_trust if the trust instrument so provides see nev rev stat ann sec_163 and michie the respective governing trust documents pertaining to petitioners stated in pertinent part that the board_of trustees of each petitioner trust was to have all of the powers of trustees under the anglo-saxon common_law as well as those specified under the laws of the state of nevada -- - in the rosenberg case v commissioner 27_tc_837 by establishing affirmatively all facts giving rise to our jurisdiction see 35_tc_177 15_bta_645 in order to meet that burden each petitioner must provide evidence establishing that mr chisum has authority to act on its behalf see national comm to secure justice in the rosenberg case v commissioner supra pincite 22_bta_686 we reject petitioners' position that under arizona law the validity of the purported appointment of mr chisum as trustee of each petitioner falls within the exclu- sive jurisdiction of the courts of the state of arizona on the record before us we find that each petitioner has failed to establish that mr chisum is authorized to act on its behalf to reflect the foregoing an order of dismissal for lack of jurisdiction granting respon- dent’s motion will be entered we have considered all of the contentions and arguments of petitioners that are not discussed herein and we find them to be without merit and or irrelevant


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uil dollar_figure nov aep’ rats legend taxpayer a ira x amount a financial_institution a financial_institution b dear this is in response to your request dated july as supplemented by _ in which your authorized representative correspondence dated october on your behalf requested a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that he received a distribution from financial_institution a of amount a taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due to an error made by financial_institution b taxpayer a further represents that the amount distributed has not been used for any other purpose taxpayer a opened an individual_retirement_account ira x with financial_institution a on january taxpayer a with the intent to move ira x to a new financial_institution requested that a check be issued to him for the balance in the account on february taxpayer a was issued a page os check payable to him for amount a taxpayer a then went directly to financial_institution b accompanied by his wife and instructed financial_institution b to open a rollover ira account and deposit amount a into that ira account according to taxpayer a financial_institution b’s representative asked if he wished to have both his and his wife’s name shown on the account taxpayer a states that he was informed that it was alright to have both names on the account and that statements would be addressed to his wife as she was a member of financial_institution b quarterly statements furnished from financial_institution b show that no withdrawal has been made from the account taxpayer a first became aware that ira x was not properly rolled over tax_return was being prepared and his accountant questioned when his him concerning the 1099-r issued by financial_institution a showing a distribution of amount a taxpayer a’s wife then contacted financial_institution b to discuss the issue with them and to inform them that taxpayer a’s intent was to roll over amount a understanding that this had been done in response to this inquiry financial_institution a provided a letter dated february a's intent to rollover amount a to an ira into an individual_retirement_account and that it was his acknowledging taxpayer based on the facts and representations you request a ruling that the internal_revenue_service waive the day rollover requirement contained in sec_408 of the code with respect to the distribution of amount a sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into ii the entire amount received including money and any other_property is page such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a timely rollover was caused by an error on the part of financial_institution b therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount a into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount a will be considered a rollover_contribution within the meaning of sec_408 of the code page no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer a who requested it sec_6110 of the code provides that it may not be used or cited as precedent please address all correspondence to se t ep ra t3 sincerely yours ok b lah - laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


number release date id office uilc cca_2009092109284837 ---------- from ------------------- sent monday date am to -------------------- cc --------------------------------- subject re attachment samuelli pdf the amended partnership returns are most likely nullities since they probably do not comply with sec_6227 in all respects a request that does not use a form_8082 can comply with sec_6227 if it meets all the requirements that would be contained in the reg and the form these requirements are laid out in samuelli v commissioner attached i doubt that these amended returns meet all the criteria even if they are considered valid substituted returns under sec_6227 we still cannot assess any additional resulting tax if the partner objects see i r c b accordingly the only way we can make an unquestionably good valid assessment is to issue an fpaa or to enter into a closing_agreement with the affected partner a closing_agreement would convert the agreed item and remove this item from the tefra procedures for the partner who signs the closing_agreement it would not remove other items in the absence of a closing_agreement or fpaa the government and the taxpayer would both be bound by the original partnership return see sec_6222 and 94_tc_853 if we disagree with the original partnership return we should issue an fpaa to adjust those items that is the return we would be adjusting - not the amended returns what you decide to include in a closing_agreement or fpaa is your call


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-104145-03 date date legend x a date dear this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on date the sole shareholder of x a desired that x elect s_corporation treatment for x effective on date but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed plr-104145-03 sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely carolyn hinchman gray senior counsel branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------ --------------------------------- -------------------------------------------------- ----------------------------- -------------------------------- 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-112454-12 date date legend taxpayer -------------------------------------------------------------------- -------------------------------------------------- state a company a company b bank 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 organized as a cooperative corporation under the laws of state a cooperative marketing act the act provides that a ssociations organized under this act shall be deemed nonprofit as they are not organized to make profit for themselves as such or for their members as such but only for their members as producers taxpayer is a full-service farmers cooperative offering a complete line of supplies and services for approximately ---------producer members and ---------participating patrons in ---- counties throughout central state a plr-112454-12 the principal products and services that taxpayer provides to its members and participating patrons are as follows grain marketing taxpayer’s members and participating patrons grow wheat grain sorghum milo corn and soybeans through a combination of its own efforts and those of a joint_venture with -------- other cooperatives known as company a taxpayer makes it possible for its members’ and participating patrons’ grain to be marketed on a cooperative basis company a’s grain sales for its fiscal_year ended ----------------------- --------totaled dollar_figure------------------- and taxpayer’s members and participating patrons accounted for a significant portion of that grain agronomy products and services taxpayer supplies its members with fertilizer crop protection products and seed taxpayer has fertilizer facilities at --- locations throughout its trade territory taxpayer also provides members with various agronomy services such as seed cleaning and custom application of agronomy products taxpayer maintains a complete line of rental equipment to meet its members’ agronomy product application needs fuel taxpayer supplies members with diesel_fuel heating oil and gasoline taxpayer offers 24-hour fuel service at ---- locations and delivers bulk fuel to its members on their farms feed many of taxpayer’s members are involved in livestock swine beef and dairy and poultry production through a joint_venture with ------ other cooperatives known as company b taxpayer makes feed available to these members taxpayer is organized and operated on a cooperative basis and qualifies as a nonexempt subchapter_t cooperative taxpayer limits its membership to persons who are bona_fide producers of agricultural products each member is required to purchase one share of common_stock when he or she first becomes a member and to earn an additional ---- shares of common_stock as part of his or her patronage_dividends from taxpayer common_stock is the only voting_stock of taxpayer taxpayer’s articles of incorporation provide that e ach eligible holder of common_stock shall be entitled to only one vote in any meeting of the stockholders regardless of the number of shares of stock owned thus voting is on a one-member one-vote basis because common_stock may only be owned by producers producers collectively control taxpayer persons who are not producers may become participating patrons participating patrons are eligible to share in patronage_dividends but they are not permitted to vote when they become participating patrons they are required to purchase one share of participating_stock which is similar to the common_stock except plr-112454-12 that it does not have voting rights they are also required to earn an additional ---- shares of participating_stock as part of their patronage_dividends as a cooperative taxpayer operates at cost taxpayer is obligated by its articles of incorporation and bylaws to allocate and pay patronage_dividends to its members and participating patrons each year out of its net_earnings from business done with or for members and participating patrons most over ---- percent of taxpayer’s business is conducted with or for members and participating patrons on a patronage basis for patronage purposes taxpayer accounts for its business based using four allocation units grain patronage income from taxpayer’s grain business including the patronage portion of put through fees taxpayer receives from company a its distributive_share of company a income or loss and its storage and drying income is shared by members and participating patrons delivering grain to taxpayer’s elevators for sale to company a based upon bushels of grain the grain business is described in detail below agronomy patronage income from sales of agronomy products and services is shared by members and participating patrons based upon dollars of purchases of agronomy products and services from taxpayer energy patronage income from sales of energy products is shared by members and participating patrons based upon dollars of purchases of energy products from taxpayer other supplies and feed patronage income from sales of other supplies and from taxpayer’s distributive_share of company b’s income is shared by members and participating patrons based upon dollars of purchases of other supplies from taxpayer and feed from company b taxpayer pays its patronage_dividends in cash and qualified written notices of allocation referred to by taxpayer as revolving fund certificates which provide a significant source of working_capital for taxpayer for its fiscal_year ended -------------------------- taxpayer’s patronage_dividends totaled approximately dollar_figure------million of which approximately dollar_figure-----million was paid_by the grain allocation unit patronage_dividends were paid ---- percent in cash and ---- percent in qualified written notices of allocation taxpayer and its predecessors have been in the grain marketing business for many years in ------- taxpayer and ------ other cooperatives formed company a in an effort to market the grain of their members more effectively plr-112454-12 company a is organized as a state a limited_liability_company taxed as a partnership for federal_income_tax purposes its members are taxpayer ------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- taxpayer is the principal member of company a - currently taxpayer is entitled to share in ---------percent of company a’s profits and losses and has ---------percent of the votes company a was organized to allow taxpayer and the other cooperative members to market the grain of their farmer members more effectively on a cooperative basis with the formation of company a the grain marketing activities previously conducted exclusively by each of the cooperatives were divided between company a and the cooperatives in a manner intended to allow the cooperatives and company a to market the grain of the members of the cooperatives more efficiently and effectively several principles governed the division of responsibilities generally activities that could be more effectively conducted jointly were assigned to company a and those that could be more effectively conducted separately were retained by the cooperatives while a number of responsibilities have been transferred to company a the cooperatives remain actively involved in the grain marketing process currently the division of responsibilities between company a and its cooperative members is as follow first each cooperative continues to own the grain elevators it historically owned or subsequently constructed or acquired after the formation of company a and continues to have any related debt the cooperatives are each responsible for the costs of operating and maintaining their own elevators thus they are responsible for such costs as utilities insurance repairs and maintenance and property taxes related to the elevators the warehouse agreement specifies that each cooperative is responsible for maintaining its elevators in good operating condition at all times it also provides that each cooperative is responsible for insuring the elevators and for any environmental liabilities related to operation of the elevators currently taxpayer owns grain elevators that are part of the company a joint_venture at ---- locations and these elevators have a combined storage capacity of ------- million bushels of grain one of the other cooperatives in the joint_venture owns ----- grain elevators and the other ------ own ------ each second company a currently has the responsibility of purchasing grain from the farmer members of the cooperatives setting the bid prices and discount schedules for each elevator entering into grain purchase contracts with the farmer members preparing grain settlement statements and paying members for the grain when each purchase is consummated owning and financing the grain inventories hedging the plr-112454-12 inventories and open grain purchase and sale contracts selling the grain to customers and arranging the logistics for shipping the grain to customers company a has a dollar_figure----- million seasonal line of credit with bank to permit it to finance its grain purchases grain inventories and hedging activities originally bank required the members of company a to guarantee company a’s borrowing over the years company a has built up its equity by retaining a portion of its earnings as a result bank no longer required a member guarantee - the members’ equity in company a effectively replaced the members’ guarantee while company a is the borrower the relationship with bank is jointly managed by taxpayer’s chief_executive_officer taxpayer’s chief financial officer and company a’s chief operating officer the activities described above were centralized at company a because they are the activities that the members of company a felt would result in cost savings and revenue enhancement if conducted jointly third to allow company a to conduct the activities described above the members of company a and company a have entered into the warehouse agreement which grants company a the exclusive right and license to manage and operate the members elevators as grain warehouse s duly licensed in state a under company a ’s grain warehouseman’s license under the state a warehouse act warehouse agreement sec_1 fourth while company a is responsible for managing and operating the elevators it does not have the employees and back-office capabilities to permit it to do so itself thus it has outsourced these functions to its members through the warehouse agreement company a focuses on the marketing of the grain the day- to-day operations at each member cooperative’s elevators continue to be conducted by the cooperative and its employees under the general over-all direction of company a as a result each cooperative is responsible for receiving and weighing the grain delivered to its elevators for testing the grain and for assessing appropriate dockage for the grain each cooperative and the company a fieldmen are involved in preparing appropriate grain contracts and each cooperative handles the other paperwork associated with the receipt and purchase of grain including elevator tickets warehouse receipts for grain stored for members and settlement statements and grain checks for grain purchased from members all of this is done in company a’s name and the checks are drawn on company a’s bank account plr-112454-12 each cooperative is responsible for the costs of drying wet grain delivered to its facilities each cooperative is responsible for monitoring the grain in its elevators maintaining that grain in condition and has agreed to indemnify company a for any deterioration or failure of grain quality this includes monitoring grain which is owned by company a and grain which is in storage for others each cooperative is responsible for loading out the grain from its elevators for shipment in accordance with company a’s instructions annually a review is made of the quantity and quality of all grain on hand and shipped from the elevators of each cooperative and compared to the dockage assessed to the grain as delivered to the elevators the cooperative is responsible to reimburse company a for the additional dockage incurred by company a on the grain similar adjustments are made for deficiencies in quantities of grain this places the risk of loss with respect to the quantity and quality of the grain in the elevators upon each of the cooperatives much as if the cooperative was the owner of the grain the operating_agreement and warehouse agreement together provide how the net_earnings of the joint_venture are shared by the members of company a the warehouse agreement provides that each cooperative will be paid a ‘put through fee’ for each bushel delivered and accepted on a dry clean basis at the cooperative’s elevators the put through fee is currently ------per bushel for corn and ------per bushel for all other grains the put through fee is intended to compensate each cooperative for use of its elevators and for the services provided by the cooperatives operating the elevators in addition since each cooperative has the responsibility for drying grain a s compensation the cooperative shall be entitled to retain the benefit of all moisture discounts for such grain ie drying fees finally the warehouse agreement provides that each cooperative_member of company a shares in the storage income earned at all elevators based upon the ratio of the number of bushels of licensed and approved storage capacity of each member’s elevators to the licensed and approved storage capacity of all members’ elevators the warehouse agreement describes the rationale for this sharing as follows company a and its members recognize that it will be in the best interest of the parties if the marketing handling and storage decisions for grain are made by company a but with the combined operations in mind such decisions will mean some facilities are used more for storage than others but the storage benefit should be shared among all members of company a plr-112454-12 because all storage activities are performed by the members and the grain is stored in elevators owned and maintained by the members the storage income is treated as earned directly by the members for accounting and tax purposes the operating_agreement provides that the net_earnings of company a after subtracting the put through fees exclusive of any storage income will be shared by members in accordance with their percentage interests the percentage interests of the members of company a currently are as follows taxpayer ---------percent --------- -------------------------------------------- -------percent ---------------------------------------------------- -------------- ---------percent and the -------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- -------- percent these percentages are determined based upon the total licensed storage capacity of any one member as the numerator to the total licensed capacity of all company a members as the denominator this is the same formula used to share the storage income currently the licensed storage capacity of taxpayer’s ---- elevators is ----------------bushels and the licensed storage capacity of all members’ elevators is --- ----------------bushels so taxpayer’s percentage interest is ---------percent the percentage interests are adjusted from time to time to reflect changes to the storage capacity of existing elevators and the acquisition by members of additional elevators company a’s earnings are shared based upon relative licensed storage capacity for several reasons company a and its members recognize that the earnings_of a grain elevator are generally directly related to the storage capacity of the elevator thus if two grain elevators each handle million bushels of grain during the year and one has significantly less storage capacity than the other the one with less storage capacity is generally going to be less profitable because it will be unable to generate profits that are associated with carrying grain company a’s profit sharing is designed to reflect the profitability of what each member brings to the venture measured in terms of the storage capacity of the members’ elevators company a and the members as a group have also wanted to incent the addition of storage capacity and the sharing ratio does that company a does not distribute all of its earnings to members each year in cash though since company a is taxed as a partnership each member is taxed on its distributive_share of earnings whether or not distributed over the years company a has retained a portion of the earnings to build up its working_capital for financial reporting purposes taxpayer is required to prepare its financial statements on a consolidated basis including company a and other controlled_subsidiaries and reflecting the noncontrolling interest of the other members of company a as a separate component which is negative of consolidated members’ equity as noted above currently taxpayer’s percentage interest in company a is ---------percent this percentage interest is used not only for sharing profits and losses but also for voting purposes the operating_agreement provides that each member of this company shall have a vote equal to such member’s percentage interest in this plr-112454-12 company however taxpayer’s ---------percent percentage interest does not give taxpayer unfettered control of company a since decisions not in the ordinary course of business require approval of a super majority interest defined as two or more members owning more than ----------percent of the percentage interests however as the predominant member taxpayer has significant influence and control of company a the grain purchases and sales are currently reported on taxpayer’s consolidated financial statements as taxpayer’s consolidated purchases and sales however for tax_return purposes taxpayer and company a file separate returns company a files a partnership return on form_1065 reporting grain purchases and sales and its net_income after subtracting put through fees and other expenses of operation taxpayer files a federal_income_tax return on form 1120-c besides reporting the income and expenses of its supply business that return reports its put through fees drying and storage income taxpayer’s distributive_share of company a income or loss and expenses related to maintaining and operating the grain elevators the return does not report grain purchases and sales or the grain inventories since those are reported on the company a return for patronage purposes taxpayer treats its grain activities as a separate allocation unit taxpayer has detailed information of the grain purchased from members participating patrons and others at its grain elevators taxpayer determines its net_earnings from its grain marketing activities including in that determination put through fees drying and storage income and its distributive_share of the earnings or loss of company a retains the portion attributable to nonmember patrons and pays tax on that portion and allocates the remainder among members and participating patrons on a patronage basis based upon bushels of grain purchased at taxpayer’s elevators distributing that amount as a patronage_dividend those patronage_dividends are excluded or deducted on taxpayer’s tax_return as a partnership company a does not itself figure a sec_199 deduction and pass that deduction through to its members company a treats its grain activities as giving rise to domestic_production_gross_receipts and its wages as attributable to domestic_production_gross_receipts in determining its ordinary_income and domestic_production_gross_receipts it has not added back any of the grain payments it makes to the farmer members and participating patrons of its cooperative members company a taxpayer and the other -------- cooperative members of company a are proposing to change the manner in which some of the grain that is marketed through company a will be purchased as described in detail above taxpayer owns and operates under company a’s direction ---- grain elevators taxpayer is responsible for staffing and operating each of its grain elevators it is also responsible for plr-112454-12 receiving weighing and testing the grain delivered to its elevators if the grain delivered is wet assessing the proper moisture discount and drying the grain maintaining the grain in condition while stored in the elevators either for the account of farmers or for company a loading the grain out of the elevators pursuant to company a’s direction taxpayer currently is liable to company a if i there are errors in weighing the grain delivered to its elevators ii any of the grain it accepts at the elevator is contaminated or has any other quality problems that are not identified when the grain is tested and graded at the time of delivery iii the condition of the grain deteriorates while in taxpayer’s elevators or iv the grain is damaged while in the elevators as a result of a fire explosion or other similar event or v there are errors in loading the grain out of the elevators the other cooperative participants in the company a venture have similar responsibilities under the warehouse agreement with respect to grain at the elevators each owns and operates no change is contemplated in these elements of the division of responsibilities between company a and the cooperative members who will continue to own and operate under the direction of company a pursuant to the warehouse agreement their respective elevators and to be responsible for the grain as described above some of the grain that is delivered by farmers to the elevators of taxpayer and the other three cooperatives is purchased by company a pursuant to forward contracts deferred pricing contracts and other kinds of special contracts entered into between the farmers and company a that call for the purchase of grain other than for the current cash bid prices it is currently contemplated that the treatment of these contract purchases will not change the specialists who enter into these contracts with farmers on behalf of company a are and will remain employees of company a and they will remain responsible for contracting with farmers for this grain company a will continue to be the purchaser of this grain and company a will continue to pay the farmers pursuant to the contracts however much of the grain that company a markets is delivered by farmer members initially for open storage and is later purchased by company a at the current cash bid price such purchases are commonly referred to as cash grain purchases employees of the cooperative members of company a are instrumental in consummating these purchases and handling the paperwork for them on company a’s behalf and the cooperative members effectively guarantee the quantity and quality of the grain being purchased however the purchaser of record for this grain is company a plr-112454-12 the treatment of cash grain purchases will change taxpayer will become the purchaser of grain purchased on that basis at the elevators taxpayer owns and operates the other three cooperatives will similarly become the buyers of grain purchased on this basis taxpayer intends to enter into master marketing agreements with farmers delivering grain to its elevators for open storage the master marketing agreements will provide the framework for later cash grain purchases by taxpayer they will contain terms customary to grain purchase agreements they will provide that title and risk of loss with respect to the grain purchased pursuant to the agreements will pass from the farmers to taxpayer at the time agreement is reached as to the price per bushel of the grain in situations where taxpayer does not have a master marketing agreement in place with a farmer interested in selling grain to taxpayer on a cash_basis taxpayer and the farmer will enter into a sale purchase contract to document the purchase as the purchaser of the grain taxpayer will be responsible for paying farmers the agreed purchase_price taxpayer will pay farmers for the grain by a check or ach deposit drawn on a taxpayer bank account the check will be accompanied and the ach deposit will be followed by a grain settlement statement specifying taxpayer as the purchaser and the farmer as seller of the grain itemizing the kind weight and quality of the grain being purchased the price per bushel of the grain storage charges applicable discounts taxes and the net amount due the farmer the grain check or ach deposit receipt sent to farmer members of taxpayer and to other persons entitled to share in patronage_dividends will contain a notice that the payment constitutes a per- unit retain allocation paid in money the amounts that taxpayer will be obligated to pay to members and participating patrons for grain purchased pursuant to master marketing agreements and sale purchase contracts are what are referred to as grain payments in this ruling for purposes of this ruling the term grain payments does not include patronage_dividends paid to members and participating patrons with respect to their grain it does not include any grain payments that company a will make to patrons pursuant to special contracts described above or any amounts paid for grain by taxpayer or company a to nonmember patrons not entitled to share in patronage_dividends taxpayer will in turn simultaneously sell the grain it purchases to company a for marketing by company a along with the grain company a will continue to buy directly from farmers and with grain company a purchases from the other members of company a with title and risk of loss passing from taxpayer to company a the other -------- cooperatives will do likewise with respect to the grain they each purchase the warehouse agreement will be amended to set forth the terms and conditions of the sales of grain from taxpayer and the other -------- cooperatives to company a the terms and conditions will be those customary in grain contracts plr-112454-12 the amended warehouse agreement will provide that company a will purchase the grain from taxpayer and each of the other three cooperatives at for the price per bushel paid_by them net of any discounts other than moisture discounts to the farmers for the grain plus a mark-up to be determined from time to time company a will remain obligated to pay taxpayer and the -------- cooperatives the put through fees currently provided for in the warehouse agreement with respect to the grain also as members of company a taxpayer and the other -------- cooperatives will continue to share in the profits that company a earns from its grain marketing and storage activities as described above after the changes described above taxpayer will reflect the purchases and sales of the grain it buys from farmers pursuant to the master marketing agreement and sale purchase contracts in its financial statements and on its tax returns taxpayer will continue to treat its grain marketing activities as a single allocation unit for patronage_dividend purposes it will not conduct its grain marketing activities on a pooling basis taxpayer will treat grain payments to farmers who are members or participating patrons as per-unit retain allocations paid in money more important taxpayer will report the grain payments in box of form 1099-patrs provided to its members and participating patrons taxpayer requests confirmation that its grain payments to members and participating patrons will qualify as per-unit retain allocations paid in money and that taxpayer will be entitled to add those amounts back in its sec_199 computation taxpayer will make certain that it does not exclude or deduct any grain payments to members and participating patrons twice on its tax_return or add back any such payments twice in its sec_199 computation taxpayer may retain all or a portion of its sec_199 deduction or it may pass all or a portion of that deduction through to its patrons based on the foregoing taxpayer requests the following rulings taxpayer’s grain payments to members and participating patrons will constitute per-unit retain allocations paid in money within the meaning of sec_1382 of the code by virtue of sec_199 of the code taxpayer will be treated as having manufactured produced grown or extracted in whole or significant part the grain it purchases from members and participating patrons pursuant to the master marketing agreements and sale purchase contracts which the members and participating patrons have so manufactured produced grown or extracted for purposes of computing its sec_199 domestic_production_activities_deduction taxpayer’s qualified_production_activities_income and taxable_income will pursuant to sec_199 of the code be computed without regard to plr-112454-12 any deduction for taxpayer’s grain payments to members and participating patrons subchapter_t cooperatives are permitted to exclude or deduct distributions to patrons that qualify as per-unit retain allocations or as 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 with or for patrons sec_1_1382-3 of the income_tax regulations states that income derived from sources other than patronage means incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association patronage_dividends may be paid in money property or written notices of allocation patronage_dividends paid in money and in property are excludable or deductible under sec_1382 of the code patronage_dividends paid in written notices of allocation are deductible under sec_1382 if the written notices of allocation are qualified if the notices are nonqualified the cooperative is permitted a deduction under sec_1382 or a tax_benefit figured under sec_1383 when the notices are later redeemed sec_1388 of the code provides that the term written_notice_of_allocation means any capital stock revolving fund certificate retain certificate certificate of plr-112454-12 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 qualified_production_activities_income qpai of the organization received as a qualified patronage_dividend or per-unit_retain_allocation which is paid in qualified per-unit retain_certificates in particular sec_199 requires the cooperative to be engaged in the manufacturing production growth or extraction in whole or significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products under sec_199 in the case of a cooperative engaged in the marketing of agricultural and horticultural products the cooperative is treated as having manufactured produced grown or extracted mpge in whole or significant part any qualifying_production_property marketed by the cooperative that its patrons have mpge this is known in the industry as the cooperative attribution rule in addition sec_199 requires the cooperative to designate the patron’s portion of the income allocable to the qpai of the organization in a written notice mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the tax_year under sec_1_199-6 of the regulations for purposes of determining a cooperative’s sec_199 deduction the cooperative’s qpai and taxable_income are computed without taking into account any deduction allowable under sec_1382 or c of the code relating to patronage_dividends per-unit retain allocations and nonpatronage distributions an agricultural or horticultural cooperative is permitted to pass-through to its patrons all or any portion of its sec_199 deduction for the year provided it does so in the manner and within the time limits set by sec_199 of the code when a cooperative passes-through all or any portion of the sec_199 deduction the cooperative remains entitled to claim the entire sec_199 deduction on its return 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 plr-112454-12 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 cooperative to which subchapter_t applies it is engaged in the marketing of agricultural or horticultural products ie grain 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 plr-112454-12 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 after the changes described above members and participating patrons will be able to market grain through taxpayer and company a in one of two manners i by selling the grain directly to taxpayer by forward contracts deferred pricing contracts deferred payment contracts or other kinds of special contracts entered into between patrons and taxpayer or ii by selling the grain to taxpayer pursuant to the master marketing agreement or a sale purchase contract grain that taxpayer purchases will in turn be sold to company a for marketing the question presented in this ruling is whether the grain payments to be made by taxpayer for grain purchased through the master marketing agreement and purchase sale contracts will 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 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 for reasons set forth below taxpayer’s payments for grain purchased pursuant to the master marketing agreement or sale purchase contracts meet the definition of per-unit retain allocations paid in money which are excludible or deductible under sec_1382 of the code 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 plr-112454-12 this meeting of the minds between the cooperative and the member or participating patron must be evidenced by clear and timely evidence showing that the payment was a per-unit_retain_allocation and not sale proceeds and subsequent consistent treatment of the payment as a per-unit_retain_allocation by the cooperative first taxpayer’s grain payments to a member or a participating patron are paid pursuant to an agreement namely the master marketing agreement or sale purchase contract the agreement required in sec_1388 of the code is an agreement between taxpayer and the member or participating patron that the amount is a per-unit_retain_allocation and does not represent proceeds from a sale to the cooperative providing a notice to the member or the participating patron that grain payments constitute per-unit retain allocations paid in money and reporting grain payments as per- unit retain allocations paid in money in box of form 1099-patr demonstrate that taxpayer and the member or the participating patron agreed to treat grain payments as per-unit retain allocations paid in money and not sales second taxpayer’s grain payments to a member or participating patron are made with respect to products marketed for him namely the grain purchased from him or her by taxpayer pursuant to the master marketing agreement or sale purchase contract as described above taxpayer will market the grain it purchases from members and participating patrons by reselling that grain to company a for marketing taxpayer currently accounts for its own grain marketing earnings and distributive_share of grain marketing earnings_of company a on a patronage basis paying patronage_dividends to members and participating patrons delivering grain marketed through company a and will continue to do so third the amount of the grain payments to each member and participating 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 members and participating 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 characterized payments to farm service’s poultry growers as per-unit plr-112454-12 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 whether or not taxpayer is pooling is a moot issue for purpose of this ruling because taxpayer’s grain payments will 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 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 plr-112454-12 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 members and participating 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 1099-patr 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 furthermore because taxpayer is treated as marketing grain by reselling the grain to company a for marketing taxpayer is treated as having grown in whole or significant part any grain marketed by taxpayer that its patrons grew accordingly we rule as requested that taxpayer’s grain payments to members and participating patrons will constitute per-unit retain allocations paid in money within the meaning of sec_1382 of the code by virtue of sec_199 of the code taxpayer will be treated as having manufactured produced grown or extracted in whole or significant part the grain it purchases from members and participating patrons pursuant to the master marketing agreements and sale purchase contracts which the members and participating patrons have so manufactured produced grown or extracted for purposes of computing its sec_199 domestic_production_activities_deduction taxpayer’s qualified_production_activities_income and taxable_income will pursuant to sec_199 of the code be computed without regard to any deduction for taxpayer’s grain payments to members and participating patrons no opinion is expressed or implied regarding the application of any other provision in the code or regulations plr-112454-12 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 chief branch office of the associate chief_counsel passthroughs special industries cc