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-136629-09 date january legend taxpayer -------------------------------------------------------------------- --------------------------- state a b c -------------- ------- --------- dear ---------------------- this is in response to a request for rulings dated date submitted by your authorized representative the rulings concern the interplay of the rules in subchapter_t of the internal_revenue_code concerning the taxation of cooperatives and their patrons and the calculation of the sec_199 deduction for certain cooperatives contained in sec_199 taxpayer is a tax-exempt farmers’ marketing and purchasing cooperative organized under the laws of state a taxpayer has been doing business since-------- the existing entity was formed in--------with the merger of two historic farmers’ cooperatives taxpayer applied for recognition of its tax-exempt status pursuant to sec_521 of the code in--------and filed its first return as a tax-exempt farmers’ cooperative for its--------taxable year taxpayer’s principal line_of_business is marketing b growth in the united_states by its members plr-136629-09 taxpayer also purchases commodities such as ----------------------and other --------- --------------- products ------- and ------- supplies for resale to its members taxpayer purchases these commodities in bulk and resells them to its members taxpayer purchases -------------- and ------------ at --------------and stores these products at its bulk facilities these---------are sold to members in smaller quantities taxpayer is also engaged in the manufacturing and production of -----------------------------------and ----------- -------------------- taxpayer’s principal line_of_business is its purchase and resale of----------- primarily ------ but also--------and -------------- - grown by its members taxpayer enters into individual b purchase and sale agreements with its members pursuant to the terms of these agreements members produce b and deliver it to taxpayer at receiving and storage stations located throughout taxpayer’s trade territory members’ typical growing seasons span the period that begins at planting in april and ends at harvest in september or october of the same calendar_year most of taxpayer’s annual inventory by volume is delivered and accepted between april and november although taxpayer markets and sells the b year-round taxpayer grades its members’ b upon receipt and agrees to receive and store the b products to market the b on its members’ behalf to account for the proceeds of its marketing activities on a non-pooling basis and to distribute those proceeds less necessary expenses to its members taxpayer offers five alternate b delivery schedules and pricing mechanisms to its members in the written b contracts fixed price under which a member agrees to deliver a specified quantity of b at a particular place and within a fixed delivery window and taxpayer is obligated to purchase that b at a named price per c title does not pass to taxpayer until the member delivers the b basis purchase in which a member agrees to deliver a specified quantity of b within a fixed delivery window and taxpayer is obligated to purchase that b at a price to be determined based on a negotiated discounted futures price the discount or basis takes into account the difference between local market prices and chicago board_of trade futures prices taxpayer takes title to the b at delivery future or cash purchase in which the member and taxpayer agree on a price for b to be delivered within a certain delivery window but the price calculation contains hedging and basis risk management features title to the b passes at delivery plr-136629-09 delayed price in which the member and taxpayer agree to price at a later date gain that the member has already delivered to taxpayer the member may elect to price the b at any time before the contract termination_date by notifying taxpayer that he or she will accept taxpayer’s current bid published daily title passes to taxpayer at the time of delivery and spot price in which a member arrives at one of taxpayer’s receiving facilities with b and sells the b to taxpayer at that day’s current bid price selection of a particular pricing mechanism depends on a number of factors including taxpayer’s publishing bid prices price trends and cash needs of members after taking delivery of its members’ b taxpayer aggregates its inventory for bulk resale most of taxpayer’s sales are made to a river terminal facility in which taxpayer holds a partial membership interest taxpayer also markets and sells its members’ b to local -------------------- to local farmers for use as ----------------------and to other local receiving and loading facilities for shipment to the west coast at the end of its fiscal_year taxpayer closes its books with respect to business done with each member at which time it calculates its margin with respect to business done with and on behalf of members taxpayer calculates its margin by first calculating its gross margin or sales proceeds less overhead and other expenses the gross margin is divided by the total number of c sold by taxpayer to determine the gross margin per c taxpayer then multiplies the gross margin per c by the number of each member’s c sold to calculate the member gross margin the margin is then calculated by subtracting payments made by taxpayer to the member in exchange for b from that member’s member gross margin members who do business with taxpayer typically will receive distributions of the net_proceeds of taxpayer’s marketing and sales activities in two forms advances following delivery and acceptance of a member’s b based on and at the time called for by the pricing mechanism in the parties’ written contracts and patronage_dividends calculated on a patronage basis and distributed at the end of each fiscal_year based on taxpayer’s net_proceeds from its marketing and sales activities and in accordance with its bylaws advances by taxpayer to its members are made in the form of checks in accordance with the members’ agreements with taxpayer and with state a cooperative law these advance_payments assure that taxpayer and with state a cooperative law these advance_payments assure that taxpayer remains competitive with non- cooperative b wholesalers and distributors which generally pay producers for their b upon receipt plr-136629-09 taxpayer does not use pooling arrangements or the completed_crop_pool_method_of_accounting in general a cooperative using a pooling arrangement or the completed_crop_pool_method_of_accounting commingles commodity products each producer is paid the average net price received at resale of the commodity making up the pool pooling is used to spread the risk of price fluctuations in commodity products as well as expenses of the cooperative according to taxpayer in such pooling arrangements upon delivery or shortly thereafter producers receive one or more advances in the form of per-unit retain allocations because the price per unit with respect to a pooling cooperative is uniform for each commodity for the period of the pool it is almost always necessary for the cooperative to make a final per-unit_retain_allocation to members based on the difference between the total advances previously received and the final price per unit determined after the pool closes in addition after the pool closes a final distribution is made to producers in the form of a patronage_dividend the final distribution reflects the margin of the cooperative with respect to the product although all of the distributions to patrons other than the final patronage_dividend are reflected in inventory costs for both accounting and tax purposes all of the distributions are deductible for purposes of sec_1382 of the code in contrast non-pooling cooperative such as taxpayer negotiate individually with each producer with respect to the purchase_price of the product in general non- pooling cooperatives divide the expenses of processing and the revenues from sales among their members non-pooling cooperatives resell their members’ products in bulk and each member is allocated their share of the sale proceeds in proportion to the volume and quality of product the member delivered each member’s margin however depends on the price he or she agreed in advance to receive from the non-pooling cooperative as a result individual members of non-pooling cooperatives bear the burden and benefits of price fluctuations instead of spreading this risk among all members historically non-pooling cooperatives have labeled advance_payments as cost_of_goods_sold rather than per-unit retains allocations like per-unit retain allocations of pooling cooperatives however these costs of goods sold are capitalized into the cooperative’s inventory and recovered when that inventory is sold like pooling cooperatives patronage_dividends paid_by non-pooling cooperatives to their members are accounted for as distributions deductible under sec_1382 of the code taxpayer currently reports the advances paid to producers on schedule a of form 1120-c previously form 990-c as cost_of_goods_sold taxpayer reports amounts distributed to patrons as patronage_dividends on schedule h of such forms as a deduction from gross_income for financial_accounting and bookkeeping purposes prior to its current_year taxpayer denominated such advances as costs of goods sold for its current fiscal_year in taxpayer’s accounting software such advances have been denominated as per-unit retain allocations paid in money purpims plr-136629-09 for tax purposes taxpayer currently does not deduct advances made to members as purpims instead taxpayer removes such advances from ending inventory and includes the advances in the cost_of_goods_sold amount for its tax_year thus taxpayer does not double count such advances for purposes of computing its tax_liability or making inventory and sec_263a of the code computations according to taxpayer the economics of pooling and non-pooling cooperatives are virtually identical the difference occurs at the individual member level because producers negotiate and reach agreement separately with the cooperative with respect to the price of their product as a result each individual producer bears both the burden and the potential benefit of any market price fluctuations vis-à-vis the average price of the product marketed by the cooperative under sec_521 of the code exempt farmers’ cooperative are defined as farmers’ fruit growers’ or other associations that are organized and operated on a cooperative basis for the purpose of marketing and selling the products of their members and other producers or for the purpose of purchasing supplies and equipment for use by their members or other persons to qualify for exemption from federal_income_tax under sec_521 a cooperative must operate on a nonprofit basis marketing cooperatives must return to their members or other producers the proceeds of sales less necessary marketing expenses on the basis of the quantity or the value of the products furnished by the members or other producers purchasing_cooperatives must sell the purchased products to their members or others at cost plus necessary expenses despite the nonprofit requirement exempt_cooperatives are permitted to pay dividends and to maintain reasonable reserves exempt farmers’ cooperatives must satisfy additional operational and ownership requirements first they must limit business done with nonmembers marketing cooperatives may market the products of nonmembers but the value of those products may not exceed the value of the member products marketed by the cooperative similarly purchasing_cooperatives may purchase supplies and equipment for nonmembers but the value of those products may not exceed the value of supplies and equipment purchased for members and the value of purchases made for persons who are neither members nor producers may not exceed percent of the value of all of the cooperative’s purchases unlike non-exempt cooperatives exempt farmers’ cooperatives are permitted to issue capital stock to non-members under certain circumstances capital stock issued to non-members may only be non-voting preferred_stock in which does not permit its owners to participate directly or indirectly in the profits of the association and the dividend rate on which does not exceed the greater of percent or the legal rate of interest permitted by the state of incorporation plr-136629-09 to the extent that an exempt farmers’ cooperative complies with the provisions of sec_521 of the code it may deduct from its gross_income most non-patronage distributions it makes to its members as well as dividends_paid with respect to preferred_stock owned by non-members thus the exemption under sec_521 carries the single level of tax generally available under the subchapter_t for income patronage sources to income from non-patronage sources as well 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 indebtedness letter of advice or other written notice which discloses to the recipient plr-136629-09 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 provided that it does not create or increase a patronage tax loss but is required under sec_199 to reduce the deduction or exclusion it would otherwise claim under sec_1382 for per-unit retain allocations and patronage_dividends sec_199 of the code provides that a cooperative passes through an amount of its sec_199 deduction by identifying such amount in a written notice mailed to such person during the payment period described in sec_1382 sec_1382 provides that the payment period for a year is the period beginning with the first day of such taxable_year and ending with the fifteenth day of the ninth month following the close of such year plr-136629-09 sec_1_199-6 of the regulations provide that in order for a patron to qualify for the sec_199 deduction sec_1_199-6 requires that the cooperative identify in a written notice the patron's portion of the sec_199 deduction that is attributable to the portion of the cooperative's qpai for which the cooperative is allowed a sec_199 deduction this written notice must be mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the taxable_year the cooperative may use the same written notice if any that it uses to notify patrons of their respective allocations of patronage_dividends or may use a separate timely written notice s to comply with this section the cooperative must report the amount of the patron's sec_199 deduction on form 1099-patr taxable_distributions received from cooperatives issued to the patron while a cooperative is permitted to disregard per-unit retain allocations and patronage_dividends in its sec_199 deduction sec_1_199-6 of the regulations provide that a qualified_payment received by a patron of a cooperative is not taken into account by the patron for purposes of sec_199 sec_1_199-6 of the regulations 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 taxpayer is an organization to which part i of subchapter_t applies it is engaged in the marketing of agricultural or horticultural products ie b which it markets and various farm supplies which it sells to its members as a specified agricultural or horticultural cooperative taxpayer is entitled to the benefit of sec_199 of the code and sec_1_199-6 of the regulations which permit such cooperatives to disregard deductions under sec_1382 and c for purposes of computing qpai and taxable_income for sec_199 purposes sec_1382 provides deductions for per-unit retain allocations paid in money property and qualified per-unit retain_certificates as well as for patronage_dividends paid in money property and qualified written notices of allocation it also provides for deductions when nonqualified per-unit retain_certificates and nonqualified written notices of allocation are redeemed taxpayer does not operate on a pooling basis taxpayer purchases b from its members and markets that b the amount that each member receives when it sells b to taxpayer for marketing depends upon where how and when the member chooses to sell that b to taxpayer plr-136629-09 members have a number of options for determining how and when sales are made as a result two neighboring farmers delivering the same amount of b to taxpayer during any year will be paid different amounts for that b depending upon where when and how they sell the b to taxpayer however all members share in taxpayer’s net_earnings from member b operations in proportion to the number of c of b they market through taxpayer those net_earnings are distributed after the end of each year in the form of patronage_dividends the question presented in this ruling is whether the payments made by taxpayer to members for b 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 b payments in the sec_199 computation if the b payments to members 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 members’ sec_199 computations if the b payments to members 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 members’ 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 according to taxpayer b marketing cooperatives such as taxpayer have never thought of their b payments as per-unit retain allocations paid in money however taxpayer’s b payments meet the definition of per-unit retain allocations paid in money which are excludible or deductible under sec_1382 of the code the b payments are made in cash so the paid in money requirement is met taxpayer’s b payments also meet all the requirements of the definition of per-unit_retain_allocation contained in sec_1388 of the code which defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of this subchapter applies to a patron with respect to products marketed for him the amount of which is fixed without reference to the net_earnings of the organization pursuant to an agreement between the organization and the patron first taxpayer’s b payments to a member are paid pursuant to an agreement namely the particular agreement applicable to the method the member uses to determine how and when his or her b is sold to taxpayer second taxpayer’s b payments to a member are made with respect to products marketed for him namely the b delivered by the member for marketing by taxpayer as described above taxpayer markets the b it acquires from members and members share in taxpayer’s net_earnings from its marketing activities in the form of patronage_dividends plr-136629-09 third the amount of the b payments to each member is fixed without reference to the net_earnings of taxpayer since at the time the payments are made taxpayer’s actual net_earnings for the 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 do not receive the same payments for their b ie that taxpayer does not pool does not mean that b 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 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 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 plr-136629-09 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 taxpayer’s b payments qualify as per-unit retain allocations within the meaning of sec_1388 of the code because they are distributed with respect to b that taxpayer markets for its members the members receive the payments based on the quantity of b delivered the b payments are determined without reference to taxpayer’s net_earnings the b payments are paid pursuant to a contract with the members establishing the necessary pre-existing agreement and obligation and the b payments are paid within the payment period of sec_1382 such per-unit retains are to be reported in box of form 1099-patr taxable_distributions received from cooperatives 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 product is sold the cost_of_goods_sold mechanism associated with inventory must be adjusted to reflect the deductions allowable under subchapter_t of the code specifically cooperatives need to include the per-unit retain allocations in inventory cost for purposes of making inventory and sec_263a of the code computations and then adjust the ending inventory and cost_of_goods_sold to prevent double deduction of the per-unit retain allocations the adjustments can be made to either the inventory or the line item deduction for the per-unit retain allocations in other words if the per-unit retain allocations are deducted on a deduction line in the cooperative's tax_return they should be removed entirely from the ending inventory and cost_of_goods_sold computed for the tax_year alternatively if the per-unit retain allocations are not deducted on a deduction line in the tax_return the per-unit retain allocations reflected in the ending inventory should be removed and included in the cost_of_goods_sold amount for that tax_year this procedure will allow the cooperative to deduct the per-unit retain allocations once while also preserving the integrity of its sec_263a calculation for reasons described above taxpayer’s b payments meet the definition of per- unit retain allocations paid in money taxpayer may disregard such payments in determining the amount of its sec_199 deduction accordingly we rule as requested that cash advances from taxpayer to its members in exchange for b products grown in the united_states are purpims as defined in sec_1382 and sec_1388 of the code and that such advances are properly included in qpai and taxable_income of taxpayer solely for purposes of calculating at the cooperative level the deduction allowed under sec_199 of the code plr-136629-09 no opinion is expressed or implied regarding the application of any other provision in the code or regulations the conclusions set forth in this ruling are limited to b payments made during a year attributable to b which is sold by taxpayer during the year no opinion is expressed or implied as to whether b payments made during a year attributable to b which is in inventory at year-end qualify as per-unit retain allocations paid in money this ruling is directed only to the taxpayer that requested it under sec_6110 of the code it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours paul f handleman paul f handleman chief branch office of the associate chief_counsel passthroughs special industries


t c memo united_states tax_court steven d rapp and judith a rapp petitioners v commissioner of internal revenue respondent docket no filed date scott m nelson and robert b patterson for petitioners blaine c holiday for respondent memorandum opinion dinan special_trial_judge this case was heard pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in continued - - respondent determined deficiencies in petitioners' federal income taxes for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively the issue for decision is whether petitioners' claimed schedule c losses for and constitute passive_activity_losses under sec_469 the resolution of this issue turns on whether petitioners materially participated in the activity of renting their condominium unit during the taxable years in issue some of the facts have been stipulated and are so found the stipulations of fact and attached exhibits are incorporated herein by this reference petitioners resided in roseville minnesota on the date the petition was filed in this case petitioner husband works as a manager of a commercial unit for norwest banks his formal education includes a bachelor's degree from the university of minnesota and a master's degree from mankato university in petitioners purchased condominium unit number the unit at bluefin bay a condominium complex located in tofte minnesota tofte is located on the shore of lake superior in superior national forest approximately miles northeast of petitioners' residence t continued issue all rule references are to the tax_court rules_of_practice and procedure bluefin bay consists of six buildings each having a different layout the six buildings contain a total of condominium units petitioners’ unit is a three-bedroom unit as unit owners petitioners were members of the bluefin bay condominium association bbca the common interest owner of bluefin bay petitioner husband was one of bbca's officers at one time serving as its president bbca owns all of bluefin bay's common property including an indoor swimming pool tennis courts a conference room a parking area water and waste treatment facilities and communication and cable equipment bbca arranged for the tofte management company tmc to manage and operate the bluefin bay complex bbca's members the unit owners entered into individual management contracts with tmc the terms of the management contracts were the result of the joint effort of numerous bbca members including petitioner husband petitioners' management_contract with tmc was effective date through the taxable years in issue under the management_contract tmc was appointed as the exclusive rental agent for petitioners' unit petitioners were required to specifically reserve their unit in writing for the days which they intended to personally use it in the event petitioners failed to properly notify tmc of their intended use rental arrangements previously made by tmc with other guests would hold - priority over petitioners' personal_use unless the guests could be assigned to another comparable unit the management_contract provided for tmc to receive percent of the gross rental proceeds from petitioners' unit in exchange for its services under the management_contract tmc's duties included but were not limited to managing reservations checking in and out guests providing housekeeping services collecting rents generating financial reports conducting damage inspections and making any necessary maintenance calls and repairs tmc owns and operates a restaurant located adjacent to the condominium complex during the taxable years in issue tmc's employees staffed a reception desk near the restaurant entrance for guests staying at bluefin bay tmc also employed managers activity directors bookkeepers a housekeeping staff anda maintenance staff all of whom participated in the activity of renting petitioners' unit tmc's employees developed drafted and printed marketing and promotional materials for bluefin bay tmc maintained a toll-free telephone number for promotional and reservation purposes tmc's employees answered this telephone line booked reservations for owners and guests and mailed promotional and marketing materials to interested parties - - tmc's employees checked in guests received deposits and issued keys they responded to maintenance calls and made any necessary repairs tmc's employees opened closed and cleaned the pool hot tub and pool house on a daily basis they also maintained bluefin bay's tennis courts and exercise room in the winters tmc's employees plowed the parking lots and shoveled salted and sanded the walkways tmc's employees collected payments from guests and checked them out of the unit they cleaned and inspected the unit after guests departed the cleaning activity included cleaning the interior of the unit and laundering the linens and towels tmc's employees maintained daily books_and_records reflecting the collected rents and fees owed by petitioners they issued monthly and annual reports to petitioners reflecting the rental_activity owner charges and tmc's share of the gross rentals petitioners’ duties under the management_contract included providing tmc with a schedule of their intended personal_use maintaining adequate insurance on their unit and complying with certain interior quality standards tmc made detailed inspections of petitioners' unit at least annually and compiled lists of mandatory repairs and items which needed to be replaced in order to satisfy the interior quality standards petitioners were given the choice to personally make -- - these repairs and improvements or to authorize tmc to make them if they failed to comply by certain dates tmc would arrange for the work to be performed by its employees or subcontractors and charge petitioners accordingly petitioners traveled to bluefin bay to times during each of the taxable years in issue in most cases petitioners would stay at bluefin bay in their unit for a long weekend they also spent one full week each year in their unit petitioners' trips to bluefin bay usually combined family vacations with owner activities such as attending board meetings and or making some repairs to their unit petitioner husband also participated in bbca meetings at locations close to petitioners' residence during the taxable years in issue on schedules c attached to their and returns petitioners reported the following amounts with respect to the rental of their unit gross_income dollar_figure dollar_figure dollar_figure total expenses big_number big_number big_number net_loss big_number big_number big_number petitioners claimed business loss deductions on their and returns in amounts equal to the amounts of their net losses reported on the schedules c in the statutory_notice_of_deficiency respondent disallowed the claimed business loss deductions on the ground that the claimed losses were sustained - in connection with a passive_activity in which petitioners did not materially participate sec_469 generally disallows for the taxable_year any passive_activity_loss that exceeds passive_activity income see sec_469 d a passive_activity is any activity which involves the conduct of any trade_or_business in which the taxpayer does not materially participate see sec_469 in general sec_469 provides that a taxpayer shall be treated as materially participating in an activity only if the taxpayer 1s involved in the operations of the activity on a basis which is regular continuous and substantial sec_469 authorizes the secretary to prescribe regulations as may be necessary or appropriate to carry out the provisions of sec_469 including regulations which specify what constitutes material_participation sec_469 sec_1_469-5t temporary income_tax regs fed reg date provides that an individual will the term passive_activity also includes any rental_activity regardless of whether the taxpayer materially participates in the activity sec_469 a rental_activity is any activity where payments are principally for_the_use_of tangible_property see sec_469 however petitioners' activity does not constitute a rental_activity within the meaning of sec_469 because the average customer stay at their unit was less than days see sec_1 1t e a temporary income_tax regs fed reg date --- - be treated as materially participating in an activity for the taxable_year if and only if the individual participates in the activity for more than hours during such year the individual's participation in the activity for the taxable_year constitutes substantially_all of the participation in such activity of all individuals including individuals who are not owners of interests in the activity for such year the individual participates in the activity for more than hours during the taxable_year and such individual's participation in the activity for the taxable_year is not less than the participation in the activity of any other individual including individuals who are not owners of interests in the activity for such year the activity is a significant_participation_activity for the taxable_year and the individual's aggregate participation in all significant participation activities during such year exceeds hours the individual materially participated in the activity for any five taxable years whether or not consecutive during the ten taxable years that immediately precede the taxable_year the activity is a personal_service_activity and the individual materially participated in the activity for any three taxable years whether or not consecutive preceding the taxable_year or based on all of the facts and circumstances the individual participates in the activity ona regular continuous and substantial basis during such year these regulations provide for taxpayers to be treated as materially participating in an activity if they satisfy one of the seven enumerated tests petitioners argue that they satisfy the requirements of sec_1_469-5t temporary income_tax --- - regs fed reg date respondent argues that petitioners have not satisfied this material_participation test we must initially decide whether petitioners participated in the rental of their unit for more than hours during each of the taxable years in issue sec_1_469-5 income_tax regs generally provides that any work done by an individual in connection with an activity in which the individual owns an interest at the time the work is done shall be treated as participation of the individual in the activity we consider petitioners’ combined hours of participation in deciding whether this material_participation test is satisfied see sec_469 sec_1_469-5t f temporary income_tax regs fed reg date with respect to the evidence which may be used to establish hours of participation sec_1_469-5t temporary income_tax regs fed reg date provides methods of proof the extent of an individual's participation in an activity may be established by any reasonable means contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries petitioners submitted copies of their monthly calendars from and two documents which purport to summarize -- - their hours of participation in the activity of renting their unit and petitioner husband's testimony neither of the summary documents was prepared contemporaneously petitioner husband testified that the detailed summary document joint exhibit 6-f was prepared in the other summary document was prepared at some time after in preparation for this case and we do not rely upon it we also have serious doubts about the accuracy of the detailed summary document the monthly calendars corroborate little more than the dates of petitioners' trips to bluefin bay and petitioner husband's local bbca meetings petitioner husband's testimony establishes that he spent some hours working out the details of the individual management contracts and serving as bbca's president however his testimony with respect to petitioners' participation in renting the unit and performing repairs to the unit was unpersuasive the maintenance records show that petitioners filled out work orders for tmc's employees to perform such simple repairs as replacing light bulbs in addition dennis rysdahl who oversees the management and operation of bluefin bay and did so during the taxable years in issue testified that petitioner wife's participation in making repairs and improvements to the unit was greater than petitioner husband's mr rysdahl testified that petitioner wife was involved in decorating the unit but the maintenance records show that petitioners left the actual work of decorating their unit to tmc or its subcontractors petitioner wife's involvement appears to have been limited to making decisions concerning how the unit should be decorated petitioner wife did not testify about her alleged hours of participation after carefully reviewing the record we find that petitioners have not proved that they participated in the activity of renting their unit for more than hours during any of the taxable years in issue we therefore need not decide whether petitioners satisfy the sec_1_469-5t temporary income_tax regs fed reg date second requirement of participating in the activity of renting their unit more than any other individual see serenbetz v commissioner tcmemo_1996_510 we conclude that petitioners did not materially participate in the activity of renting their unit during and accordingly we hold that petitioners' claimed losses from such activity constitute passive_activity_losses which are not deductible in the taxable years in issue by reason of sec_469 to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp 3-plr-117659-99 date date target state x a b this letter responds to a request dated date for rulings as to the federal_income_tax consequences of a proposed transaction the information submitted is summarized below target a state x corporation is engaged in the a and b businesses for what has been represented to be a valid business_purpose target will enter into the following transaction i ii iii iv target will form with nominal capital a single member state x limited_liability_company acquiring parent this entity will elect to be treated as a corporation for federal_income_tax purposes acquiring parent will form another single member state x limited_liability_company acquiring this entity will elect to be treated as a corporation for federal_income_tax purposes acquiring will acquire all of the assets of target in exchange for voting member interests in acquiring parent and the assumption_of_liabilities target will liquidate and distribute the acquiring parent voting member interests received in the exchange to its shareholders acquiring parent will not elect to file a consolidated_return the taxpayers have made the following representations in connection with the transaction a the fair_market_value of the acquiring parent member interest received by each plr-117659-99 shareholder of target will be approximately equal to the fair_market_value of the target stock surrendered in the exchange b acquiring will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by target immediately prior to the transaction for purposes of this representation amounts paid_by target to dissenters amounts used by target to pay its reorganization expenses amounts paid_by target to shareholders who receive cash or other_property and all redemptions and distributions except for regular normal dividends made by target immediately preceding the transfer will be included as assets of target held immediately prior to the transaction c acquiring has no plan or intention to sell or otherwise dispose_of any of the assets of target acquired in the transaction except for dispositions made in the ordinary course of business or transfers described in sec_368 d target will distribute the member interests securities and other_property it receives in the transaction and its other properties if any in pursuance of the plan_of_reorganization e the liabilities of target assumed by acquiring and the liabilities to which the transferred assets of target are subject were incurred by target in the ordinary course of its business f acquiring parent will not assume any target liabilities in the transaction g following the transaction acquiring will continue the historic_business of target or use a significant portion of target’s historic_business_assets in a business h acquiring parent acquiring target and the shareholders of target will pay their respective expenses if any incurred in connection with the transaction i j k there is no intercorporate indebtedness existing between any of acquiring parent acquiring and target that was issued acquired or will be settled at a discount no two parties to the transaction are investment companies as defined in sec_368 and iv the sum of the fair_market_value of the assets of target transferred to acquiring will equal or exceed the sum of the liabilities assumed by acquiring plus the amount of liabilities if any to which the transferred assets are subject l target is not under the jurisdiction of a court in a title_11_or_similar_case within the plr-117659-99 meaning of sec_368 m the combination of target with and into acquiring is a transaction that does not qualify under sec_368 n acquiring parent and acquiring will both be treated as corporations for federal_income_tax purposes under sec_301_7701-3 o acquiring parent has no plan or intention to either liquidate or otherwise dispose_of acquiring stock p there is no plan or intention for acquiring acquiring parent ie the issuing_corporation as defined in sec_1_368-1 or any person related as defined in sec_1_368-1 to acquiring or acquiring parent to acquire during the five year period beginning on the date of the proposed transaction with consideration other than acquiring parent stock the acquiring parent stock furnished in exchange for a proprietary interest in target in the proposed transaction either directly or through any transaction agreement or arrangement with any other person q during the five year period ending on the date of the proposed transaction none of the following will have acquired target stock with consideration other than acquiring parent stock either directly or through any transaction agreement or arrangement with any other person acquiring acquiring parent or any person related as defined in sec_1_368-1 to acquiring or acquiring parent neither target nor any person related as defined in sec_1_368-1 determined without regard to sec_1_368-1 to target will have acquired target stock with consideration other than acquiring parent stock or target stock either directly or through any transaction agreement or arrangement with any other person and no distributions except for ordinary normal regular dividend distributions made pursuant to target's historic dividend paying practice will have been made with respect to target stock either directly or through any transaction agreement or arrangement with any other person the aggregate value of the acquisitions redemptions and distributions described in or if any will not exceed percent of the value without giving effect to the acquisition redemption and distribution of the proprietary interests in target on the effective date of the proposed transaction based solely on the information submitted and representations made we hold as plr-117659-99 follows the acquisition by acquiring of substantially_all the assets of target solely in exchange for acquiring parent voting member interests and the assumption by acquiring of liabilities of target followed by the distribution by target of the acquiring parent voting member interests to its shareholders in complete_liquidation will be a reorganization under sec_368 for purposes of this ruling substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets of target acquiring parent acquiring and target will each be a_party_to_a_reorganization pursuant to sec_368 no gain_or_loss will be recognized by target on the transfer of substantially_all of its assets to acquiring solely in exchange for acquiring parent voting member interests and the assumption by acquiring of target liabilities sec_357 and sec_361 no gain_or_loss will be recognized by acquiring on receiving the target assets solely in exchange for acquiring parent voting member interests sec_1_1032-2 acquiring parent's basis in its acquiring member interests will be equal to the basis target had in the target assets prior to the transaction decreased but not below zero by the amount of liabilities assumed by acquiring plus the liabilities to which the transferred assets are subject sec_1_358-6 the basis of each target asset in the hands of acquiring will be the same as the basis of that asset in the hands of target immediately before the exchange sec_362 the holding_period of each target asset received by acquiring will include the holding_period during which the asset was held by target sec_1223 no gain_or_loss will be recognized by the shareholders of target on the receipt of acquiring parent voting member interests solely in exchange for target stock sec_354 the basis of the acquiring parent voting member interests received by each shareholder of target will equal the basis of the target stock surrendered by such shareholder in exchange therefor sec_358 the holding_period of the acquiring parent voting member interests received by each shareholder of target will include the holding_period of the target stock surrendered by such shareholder in exchange therefor provided the target stock was held as a capital_asset on the date of the exchange sec_1223 plr-117659-99 no gain_or_loss will be recognized by target on the distribution of acquiring parent voting member interests to its shareholders in pursuance of the plan_of_reorganization sec_361 pursuant to sec_381 and sec_1_381_a_-1 acquiring will succeed to and take into account the items of target described in sec_381 subject_to the provisions and limitations specified in sec_381 sec_382 sec_383 and sec_384 and the regulations thereunder pursuant to sec_1_381_b_-1 the taxable_year of target will end on the effective date of the reorganization no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings this ruling letter is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent it is important that a copy of this letter be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated sincerely yours assistant chief_counsel corporate senior technician reviewer branch by


t c memo united_states tax_court thomas h and maureen hesse petitioners v commissioner of internal revenue respondent docket no filed date k layne morrill specially recognized for petitioners richard a rappazzo for respondent memorandum opinion armen special_trial_judge this case was heard pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure this case is before the court on respondent's motion to dismiss for lack of jurisdiction filed pursuant to rule respondent contends that dismissal is warranted on the ground that the petition was not filed within the time prescribed by sec_6213 and sec_7502 in contrast petitioners contend principally that the notice_of_deficiency was rescinded and that dismissal is warranted for that reason alternatively petitioners contend that a subsequent internal_revenue_service irs letter constitutes a second notice_of_deficiency and that the petition was timely filed in respect of such letter background at the time that the petition was filed with the court petitioners resided in mesa arizona on date respondent mailed a notice_of_deficiency the notice_of_deficiency to petitioners in the notice respondent determined a deficiency in petitioners' federal_income_tax for the taxable_year in the amount of dollar_figure the deficiency was attributable principally to the disallowance of schedule c deductions in explanation of the disallowance the notice stated that the expenses in question represented startup expenses that must be capitalized in the petition for redetermination that petitioners ultimately filed petitioners placed only dollar_figure of the determined deficiency in dispute at the hearing on respondent's motion petitioners confirmed that they intended to contest only dollar_figure of the determined deficiency the notice_of_deficiency was issued by respondent's district_office in phoenix arizona the contact person specified in the notice was r fenton the last paragraph of the first page of the notice_of_deficiency stated as follows the time for filing a petition with the court or days as the case may be is set by law and cannot be extended or suspended thus contacting the service for more information or receiving other correspondence from the service will not change the period for filing a petition with the tax_court the court cannot consider your case if the petition is filed late petitioners received the notice_of_deficiency shortly after it was mailed to them petitioners read the notice and understood the significance of filing a petition within the day period of time however petitioners were surprised to receive the notice because petitioners had been cooperating with respondent's agents in the examination of their income_tax return in this regard petitioners had anticipated that the information that they had most recently furnished would be dispositive and would lead to an administrative resolution of their case on or about date petitioners telephoned lana hatley an irs compliance officer to whom in date the notice_of_deficiency was not addressed to petitioners outside of the united_states hence the 150-day period provided by sec_6213 does not apply in this case responsibility for the ongoing examination of petitioners' income_tax return had been reassigned ms hatley explained that because of the press of other business she had not had the opportunity to review the material that petitioners had previously furnished ms hatley suggested that petitioners write to ms fenton the contact person specified in the notice_of_deficiency and request further consideration of their case by ms hatley by letter dated date petitioners wrote to ms fenton and requested that their file be transferred to ms hatley for ms hatley's further consideration the penultimate paragraph of petitioners' letter stated as follows the basis for this transfer of file is my request and lana's agreement to a further interview we believe that she now has all the information she requires in order to perform her audit of and our meeting will conclude the open issues petitioners' request was granted and ms hatley undertook to consider further petitioners' case accordingly on date and at ms hatley's request petitioners faxed various documents to ms hatley for her consideration communication between petitioners and ms hatley continued through date on the basis of their telephone conversation with ms hatley on or before date as well as ms hatley's agreement to consider further their case petitioners believed that the notice_of_deficiency had been rescinded and that they did not need to file a petition in respect of the notice in order to protect their appeal rights petitioners' belief was also based on the fact that ms hatley appeared to be in a management position at the time of the above-described telephone conversation and that neither she nor any other of respondent's agents advised petitioners that the notice_of_deficiency was still in effect indeed if petitioners had been so advised they would have filed a petition with this court within the day period provided by sec_6213 by letter dated date respondent's director of the phoenix internal_revenue_district advised petitioners that in effect the deficiency determination previously made in the notice_of_deficiency remained unchanged the letter dated date also stated in part as follows we have considered the information you recently gave us about your federal tax_liability for the year shown above if you do not accept our findings you may within the period stated in the statutory notice petition the united_states tax_court for a redetermination of your tax_liability this correspondence and consideration of your case has not extended the period in which you may file a petition with the united_states tax_court if no petition is filed within the allotted time we will assess the tax and bill you at the bottom of the letter under the heading reason for disallowance the following sentence was hand-written to the extent verified the expenses are allowable as start-up costs and must be capitalized the irs letter dated date was mailed to petitioners in an envelope bearing a postmark date of date the irs letter dated date was mailed to petitioners approximately weeks after the 90th day after the notice_of_deficiency was sent to petitioners in other words when petitioners received the irs letter dated date and indeed on the date on which such letter was generated the 90-day period within which petitioners could have filed a petition in respect of the notice_of_deficiency had expired because petitioners believed that the notice_of_deficiency had been rescinded they regarded the irs letter dated date as a second notice_of_deficiency in view of the fact that further consideration of their income_tax return had not led to an administrative resolution of their case petitioners then filed a petition with this court such petition was mailed to the court on date and was filed by the court on date the latter two days ie the 90th day after the notice_of_deficiency was sent to petitioners was tues date date and date were both within days of the date on which the irs letter dated date was mailed to petitioners at no time did petitioners ever request form_8626 agreement to rescind notice_of_deficiency from respondent nor did petitioners ever execute such form and tender it to respondent at no time did any of respondent's agents ever proffer form_8626 to petitioners or execute such form on behalf of respondent discussion the court's jurisdiction to redetermine a deficiency depends upon the issuance of a valid notice_of_deficiency and a timely- filed petition rule a c 93_tc_22 90_tc_142 sec_6212 expressly authorizes the commissioner after determining a deficiency to send a notice_of_deficiency to the taxpayer by certified or registered mail a notice_of_deficiency is sufficient if it is mailed to the taxpayer at the taxpayer's last_known_address sec_6212 pursuant to sec_6213 the taxpayer ha sec_90 days or days if the notice is addressed to a person outside of the united_states from the date that the notice_of_deficiency is mailed to file a petition with the court for a redetermination of the deficiency sec_6212 authorizes the commissioner with the consent of the taxpayer to rescind any notice_of_deficiency mailed to the taxpayer if a notice_of_deficiency is rescinded the taxpayer has no right to file a petition with the court based on such a notice moreover a notice that is rescinded is not treated as a notice_of_deficiency for purposes of sec_6212 which restricts the issuance of further notices of deficiency sec_6212 the parties do not dispute that the notice_of_deficiency was mailed to petitioners at petitioners' last_known_address nor do the parties dispute that the petition was mailed and filed more than days after the issuance of such notice respondent contends that this case should be dismissed for lack of jurisdiction because the petition was not filed within the time provided by sec_6213 and sec_7502 in contrast petitioners contend principally that the notice_of_deficiency was rescinded and that for such reason this case should be dismissed for lack of jurisdiction alternatively petitioners contend that the irs letter dated date constituted a second notice_of_deficiency and that their petition was timely filed when measured from the date of mailing of such letter we must first decide whether the notice_of_deficiency was rescinded because if such notice was rescinded we will dismiss on that ground rather than for lack of a timely-filed petition see eg 92_tc_729 affd without published opinion 935_f2d_1282 3d cir the rescission issue is indistinguishable from that in slattery v commissioner tcmemo_1995_274 what we said in that case regarding rescission applies equally in the present case thus we now turn to the question of whether the notice_of_deficiency was rescinded sec_6212 provides that the secretary may with the consent of the taxpayer rescind any notice_of_deficiency mailed to the taxpayer clearly the statute requires mutual consent by the secretary and the taxpayer to effect a rescission of a notice_of_deficiency we know of no authority deeming a notice_of_deficiency rescinded in absence of a formal rescission while the facts presented herein may suggest that respondent considered a rescission she did not consent to a rescission returning a case file from the 90-day section of respondent's office to the examination_division for purposes of a conference is not tantamount to a rescission even though the conference due to miscommunication was eventually scheduled for a date subsequent to the running of the 90-day period accordingly we conclude that the notice_of_deficiency involved herein was not rescinded pursuant to sec_6212 _________________ the internal_revenue_service has provided guidance to taxpayers wishing to consent to the rescission of a notice_of_deficiency see revproc_88_17 1988_1_cb_692 this revenue_procedure requires the taxpayer to request form_8626 agreement to rescind notice_of_deficiency which becomes effective when executed on behalf of the commissioner we recognize that petitioners in the present case believed that the notice_of_deficiency had been rescinded however under the operative statute the rescission of a notice_of_deficiency is not a function of the taxpayer's subjective belief rather the rescission of a notice_of_deficiency requires mutual consent by the commissioner and the taxpayer and such mutual consent must be objectively apparent in the present case there is no objective manifestation of mutual consent by respondent and petitioners to rescind the notice_of_deficiency indeed we find no evidence that respondent even contemplated the rescission of such notice further consideration of a taxpayer's case during the pendency of the 90-day period without more does not constitute a rescission slattery v commissioner supra accordingly although it is regrettable that petitioners came to believe that the warning set forth in the last paragraph of the first page of the notice_of_deficiency see supra page did not apply to them we hold that the notice_of_deficiency was not rescinded pursuant to sec_6212 we note that one of the reasons that the commissioner may with the taxpayer's consent rescind a notice_of_deficiency is if the taxpayer submits information establishing the actual tax due to be less than the amount shown in the notice revproc_88_17 sec_3 1988_1_cb_692 what we think that the revenue_procedure suggests is that the commissioner intends to consider first and then rescind if appropriate rather than to rescind first and then consider obviously there will be cases such as the present one where the commissioner considers the taxpayer's information but nevertheless concludes that such information does not warrant any revision to the determination made in the notice_of_deficiency it is also regrettable that respondent's letter dated date was issued after the expiration of the 90-day period provided by sec_6213 although we are sensitive to this unfortunate fact we must note that neither estoppel nor other equitable considerations afford any basis for us to assume jurisdiction over a case in the absence of a timely-filed petition sec_7442 elgart v commissioner tcmemo_1996_379 slattery v commissioner tcmemo_1995_274 lamont v commissioner tcmemo_1993_469 and cases cited therein continued we turn now to petitioners' alternative contention that the irs letter dated date constitutes a second notice_of_deficiency in this regard petitioners point out that their petition was timely filed if measured from the date of mailing of such letter a notice_of_deficiency must meet certain substantial requirements 787_f2d_939 4th cir affg 84_tc_1308 thus the notice must at a minimum disclose that the commissioner has determined a deficiency the amount the basis thereof and the applicable_taxable_year 787_f2d_1541 11th cir affg 84_tc_1308 see 814_f2d_1363 9th cir revg on another issue 81_tc_855 80_tc_34 affd in part and vacated in part on another issue 756_f2d_1430 9th cir see also sec_7522 in the present case we do not think that the irs letter dated date constituted a notice_of_deficiency such letter did not purport to determine any deficiency moreover such letter was clearly not intended by respondent to be a notice_of_deficiency rather the irs letter merely served continued to advise petitioners that respondent had considered the information that petitioners had furnished and had concluded that such information did not warrant any revision to the determination previously made indeed such letter also advised petitioners that this correspondence and consideration of your case has not extended the period in which you may file a petition with the united_states tax_court and that if petitioners wished to pursue the matter they could within the period stated in the statutory notice petition the united_states tax_court such advice is only consistent with a finding that the irs letter dated date did not constitute a second notice_of_deficiency and we so hold conclusion because petitioners did not file their petition with the court within the time prescribed by sec_6213 and sec_7502 we lack jurisdiction to redetermine petitioners' tax_liability for the year in issue accordingly we must grant respondent's motion to dismiss for lack of jurisdiction here we recall that the notice_of_deficiency disallowed petitioners' schedule c deductions because such deductions constituted startup expenses that were required to be capitalized the irs letter dated date reaffirmed that determination although petitioners cannot pursue their case in this court they are not without a judicial remedy specifically they may pay the tax file a claim_for_refund with the internal_revenue_service and if their claim is denied sue for a refund continued in order to give effect to the foregoing an order granting respondent's motion and dismissing this case for lack of jurisdiction will be entered continued in the appropriate federal district_court or the united_states court of federal claims 55_tc_138


government entities division department of the treasury internal_revenue_service washington d c aug uniform issue list se'tep ra ts legend taxpayer a taxpayer b ira x ira y ira z amount a amount b amount c date a date b date c date d dear this is in response to your request dated as amended by correspondence dated contained in sec_408 of the internal_revenue_code the code ’ in which you request a waiver of the 60-day rollover requirement the following facts and representations have been submitted under penalty of perjury in support of the ruling requested page taxpayer a and taxpayer b were married and filed a joint_return taxpayer a received a distribution from ira x totaling amount a on date a taxpayers a rolled over amount b to ira y on date b taxpayer b passed away on date c which was within the 60-day rollover period applicable to the distribution of amount a taxpayer a rolled amount c into ira z on date d which was one day beyond the end of the day rollover period taxpayer a’s failure to roll over amount c within the 60-day period prescribed by sec_408 was due to his being distraught over the death of his wife taxpayer a never used amount c which remains in ira z 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 amount c 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 ii the entire amount received including money and any other_property is 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 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 page sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the 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 ilr b 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 in this case the service notes that taxpayer a accomplished a contribution of amount c into an ira one day after the expiration of the applicable 60-day rollover period the service also notes that taxpayer a’s failure to accomplish a timely rollover of amount c by said one-day period was caused by taxpayer a’s being distraught over the recent death of taxpayer b which led to his inadvertently not accomplishing a timely rollover taxpayer a never used amount c therefore since the failure to accomplish a timely rollover was of very short duration pursuant to sec_408 of the code the service hereby waives the day rollover requirement with respect to the distribution of amount c from ira x and the subsequent rollover into ira z taxpayer a’s contribution of amount c into ira z is deemed to have constituted a valid rollover within the meaning of code sec_408 provided all other requirements of said sec_408 of the code except the 60-day requirement were met with respect to such contribution in accordance with sec_408 of the code this ruling does not authorize the rollover of amounts that were required to be distributed by sec_401 of the code made applicable to an ira pursuant to code sec_408 if any 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 rege this letter expresses no opinion as to whether the ira described herein satisfied the requirements of sec_408 of the code this letter 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 if you wish to inquire about this ruling please contact - please address all correspondence to at id sincerely yours oo cess v7 employee_plans technical group manager enclosures deleted copy of ruling letter notice of intention to disclose


department of the treasury internal_revenue_service washington d c date cc ebeo br2 uilc number release date internal_revenue_service national_office field_service_advice memorandum for district_counsel attention senior attorney from subject jerry e holmes branch chief cc ebeo br2 docket no prebrief review this prebrief review memorandum responds to your memorandum dated the above case was tried on simultaneous opening briefs are due on this document is not to be cited as precedent legend a b issue s whether rental payments received by b from a are includible in net_earnings_from_self-employment under sec_1402 of the code conclusion the payments received by b from a are includible in net_earnings from self- employment under sec_1402 of the code facts the petitioners a and b are husband and wife during the years in issue a conducted farming operations a rented farmland from b for dollar_figure per year the rental agreement did not require that b perform any services in connection with farm production a used the land rented from b in farming operations to produce agricultural commodities such as livestock and crops b participated in farming operations approximately hours per year b performed duties such as buying loading and vaccinating cattle driving the tractor cleaning the shop spraying weeds picking up parts keeping the farm books and unloading grain b performed these services pursuant to an employment contract entered into with a each year these same services were performed in prior years in the absence of an employment contract law and analysis sec_1401 of the code imposes a self-employment_tax on an individual’s self-employment_income sec_1402 provides that the term self-employment_income means the net_earnings_from_self-employment derived by an individual subject_to certain limitations not relevant here sec_1402 provides that there shall be excluded from net_earnings_from_self-employment rentals from real_estate and from personal_property leased with the real_estate including such rentals paid in crop shares together with the deductions attributable thereto however this section provides an exception to the rentals exclusion for any income derived by the owner or tenant of land if a such income is derived under an arrangement between the owner or tenant and another individual which provides that such other individual shall produce agricultural or horticultural commodities on such land and that there shall be material_participation by the owner or tenant in the production or the management_of_the_production of such agricultural or horticultural commodities and b there is material_participation by the owner or tenant with respect to any such agricultural or horticultural commodity hereinafter referred to as includible farm rental income the facts clearly demonstrate that there was actual material_participation by b in farming operations b participated in farming operations approximately hours per year therefore the balance of this discussion will address whether there existed an arrangement obligating b to materially participate in the production or the management_of_the_production of agricultural commodities within the meaning of sec_1402 sec_1_1402_a_-4 of the regulations provides that in order for rental income received by an owner or tenant of land to be treated as includible farm rental income such income must be derived pursuant to a sharefarming or other rental arrangement which contemplates material_participation by the owner or tenant in the production or management of production of agricultural or horticultural commodities sec_1_1402_a_-4 of the regulations provides that the arrangement referred to above may be either oral or written the arrangement must impose upon such other person the obligation to produce one or more agricultural or horticultural commodities on the land of the owner or tenant in addition it must be within the contemplation of the parties that the owner or tenant will participate in the production or the management_of_the_production of the agricultural or horticultural commodities required to be produced by the other person under such arrangement to an extent which is material with respect either to the production or to the management of production of such commodities or is material with respect to the production and management of production when the total required participation in connection with both is considered sec_1_1402_a_-4 of the regulations provides that the term production refers to the physical work performed and the expenses_incurred in producing a commodity and includes such activities as the actual work of planting cultivating and harvesting crops and the furnishing of machinery implements seed and livestock an arrangement will be treated as contemplating that the owner or tenant will materially participate in the production of commodities if under the arrangement it is understood that the owner or tenant is to engage to a material degree in the physical work related to the production of such commodities sec_1_1402_a_-4 provides that the term management_of_the_production refers to services performed in making managerial decisions relating to the production such as when to plant cultivate dust spray or harvest the crop and includes advising and consulting making inspections and making decisions as to matters such as rotation of crops the types of crops and livestock and the types of machinery and implements to be furnished an arrangement will be treated as contemplating that the owner or tenant is to participate materially in the management_of_the_production of commodities if the owner or tenant is to engage to a material degree in the management decisions related to the production of such commodities in mizell v commissioner tcmemo_1995_571 the tax_court concluded that the term arrangement in sec_1402 and the corresponding regulations is not limited to contractual relationships nor to terms and conditions included in a single agreement contractual or otherwise instead the court recognized that the term arrangement often refers to some general relationship or overall understanding between or among parties in connection with a specific activity or situation accordingly in examining the arrangement with respect to the production of products on the taxpayer’s property the court looked to the overall scheme of the farming operations which included the relevant leases the partnership_agreement requiring the taxpayer to devote his full time and attention to the partnership farming_business and the general understanding between the taxpayer and the other partners the petitioners contend that the rentals were not self-employment_income because the lease did not require that b perform any services in connection with farm production implicit in the petitioners argument is that the term arrangement for purposes of sec_1402 means only the contractual lease agreement and therefore it is not correct to look outside the four corners of the lease to determine whether an arrangement existed obligating the owner to materially participate in farm production therefore petitioners contend because the services were performed pursuant to an employment contract and not pursuant to the lease the payments were not made under an arrangement for purposes of sec_1402 the general relationship and overall understanding which existed between a and b indicates that b was obligated to materially participate in agricultural production the employment contracts which required that b provide material services and the fact that the same services were performed prior to the periods in issue in the absence of an employment contract indicate the existence of an arrangement whereby b was obligated to materially participate in the production of agricultural commodities the fact that b was paid amounts under the employment contracts does not prevent the rental payments from being characterized as net_earnings_from_self-employment under mizell all agreements including employment contracts must be considered when examining the general relationship or overall understanding between the parties the petitioners also contend that the farm rentals exception only applies to crop-share arrangements and not to cash rental arrangements the petitioners state that o ur research has disclosed that there has never been in the history of social_security law or the tax law a material_participation cash rent lease petitioners cite wuebker v commissioner t c no notice of appeal filed in the 6th circuit on date as authority for the proposition that cash rent leases are not subject_to self-employment_tax the regulations do not limit the exception to crop-share arrangements the regulations provides that in order for rental income received by an owner or tenant of land to be treated as includible farm rental income such income must be derived pursuant to a sharefarming or other rental arrangement which contemplates material_participation by the owner sec_1_1402_a_-4 in gill v commissioner tcmemo_1995_328 the tax_court concluded that cash rental payments were includible in self-employment_income thus payments under a cash rental arrangement may be includible farm rental income the issues decided in wuebker are entirely inapposite from those in the present case in wuebker the court addressed whether government payments made to a farmer in consideration for removing certain land from agricultural production were rentals from real_estate thus the wuebker court was not called upon to determine whether an arrangement existed requiring the material_participation in the production of farm products accordingly the wuebker decision is not helpful in determining whether the rental payments in the present case are includible farm rental income case development hazards and other considerations the attorney assigned to this case is john richards if you have any further questions mr richards can be reached at jerry e holmes branch chief by jerry e holmes branch chief associate chief_counsel employee_benefits exempt_organizations


internal_revenue_service number info release date cor-123428-01 uil no may the honorable tim holden member u s house of representatives the corbit building north 5th street reading pa dear congressman holden this letter is in response to your inquiry dated date on behalf of your constituent who believes the business standard mileage rate was increased only by a half-cent for and should have been increased more as explained below recent increases have been greater than a half-cent taxpayer’s options to deduct the ordinary and necessary expenses of using an automobile for business purposes a taxpayer must substantiate the cost date place and business_purpose of each use of the automobile by adequate_records to determine the cost the taxpayer has two options substantiate actual cost by keeping records or by other_sufficient_evidence taxpayers can deduct the actual business_expenses of using a personally- owned automobile and this may be advantageous when automobile costs are rising i have enclosed the relevant pages from publication travel entertainment gift and car expenses explaining the differences between the two methods use the optional business standard mileage rate the rate wa sec_31 cents per mile for it was increased by one cent to cents for and by two cents to cents in using the standard mileage rate gives approximate not actual costs gasoline prices we realize increased gasoline prices are an economic burden however the cost of gasoline is only one part of the business standard mileage rate which includes fixed and operating automobile costs these costs include depreciation or lease payments maintenance and repairs insurance and license and registration fees in addition to gasoline and oil less than one-third of the cents per mile rate comes from the cost of gasoline and oil thus when we adjust the mileage rate to cover increased gasoline prices it does not greatly increase the rate setting the business standard mileage rate the rate is a national average amount determined by an annual study performed by an independent_contractor who is an expert in the cost analysis of business use of automobiles the contractor uses recent data from each state on the component costs of owning and operating the most popular automobiles the contractor then combines this data to achieve a national composite cents-per-mile rate advantages of using the business standard mileage rate reducing a taxpayer’s record-keeping burden is the principal advantage of using the rate gasoline prices rise and fall during the year but taxpayers may continue to use the same rate without having to keep records of actual expenses rising gasoline prices can be a disadvantage for taxpayers who use the rate but falling prices can work to their advantage for example although gasoline prices fell in for all of and through date taxpayers were able to use the rate that reflected the earlier higher prices i hope this information is helpful please call john t sapienza jr identification_number at if you have any questions sincerely associate chief_counsel income_tax accounting by robert a berkovsky chief branch enclosure