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 psi b05 plr-124583-08 date date legend coop ------------------------------------------------------------------------ --------------------------------------- ---------- --------------- ------ ------ ------------------ state a geographic area b c d dear -------------- this is in response to a request_for_ruling dated date submitted by your authorized representative the ruling concerns 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 coop is a nonexempt agricultural_cooperative corporation organized and existing under the laws of the state a the members of coop are b farmers in geographic area who deliver their c to coop the members enter into a marketing agreement with coop plr-124583-08 under which they agree to deliver c in accordance with the bylaws coop operates in accordance with its articles of incorporation and its bylaws to process and market c and b products for its members members are located throughout the geographic area coop has a d year end at the end of each year coop computes its net_proceeds and distributes patronage income to its members coop also owns operates several plants that process the c into value-added products and is a majority owner of another plant operated as an llc those products are then marketed throughout the geographic area coop’s c marketing and value- added businesses work to fulfill coop’s mission to maximize member returns all member c and b products received by coop are commingled with other member’s products and pooled the duration of the pools is the coop’s fiscal_year unless coop chooses another period coop has consistently used an annual pool the coop’s marketing agreements and bylaws clearly state that the cooperative must distribute the net_proceeds on a patronage basis but like many other c cooperatives around the country coop has capitalized a portion of the net_proceeds known as the c check into inventory net_proceeds from marketing c and c products consist of four components the first three of which is referred to by coop as the c check the four components are advances are made on or around the last day of the month based on the producer’s c pounds delivered during the first days of the month monthly settlement checks are paid on or about the fifteenth day of the following month representing the prior month’s actual net_proceeds less advances the thirteenth check is a final settlement payment attributable to marketing c paid after the close of the year the patronage_dividend representing profit from coop’s manufacturing and processing operations the first three components emanate from the c marketing element and the residual net_proceeds represent the profit from manufacturing and processing of c into finished products from the plants all four components are paid to coop’s members under the bylaws and are based on coops patronage sourced net_proceeds the computation of advances settlement payments and the thirteenth check are determined using generally_accepted_accounting_principles the final payment or patronage_dividend is determined under a federal taxable_income basis as further discussed later the advances the twelve monthly settlement checks and the thirteenth check together comprising the c check are treated as per unit retains paid in money purpims under federal tax law plr-124583-08 coop operates as many marketing cooperatives around the country do as a pooling cooperative in general a pooling cooperative is a marketing_cooperative that segregates the patronage product received during the year into a pool a pool opens as deliveries of a product are made and closes after all or substantially_all of the product is sold or disposed of in some cases a cooperative will leave the pool open into the next year called the open pool method in other cases where sufficient information is available the cooperative will close the pool at its year end and sell the remaining patronage product in inventory forward to the next year’s pool at the product’s value determined at lower_of_cost_or_market lcm called the closed pool method the cooperative distributes the net_proceeds from the sale of each pool to the patrons generally in proportion to the volume of the commodity delivered to the pool pooling is essentially a risk sharing device rather than each patron separately selling his or her product for a market price at the time of delivery all patrons co-mingle their product and share the revenues and expenses of processing and selling in effect each producer receives an average price coop’s pooling arrangement is such that a separate pool is opened with each fiscal_year coop is using the closed pool method in its financial statement and tax_return accounting coop has always capitalized into inventory the c check payments thus the ending inventory includes the capitalized c check amount adjusted for the lcm effectively the cooperative is selling inventory forward to the next year and measuring its year end profit at lcm this means that the product on hand at the end of the year is sold forward to the next year’s pool at the lcm and the next year’s pool will get any benefit or cost of a difference between the lcm and the actual amount_realized on the c products the financial statements for coop reflect the c check payments to members as part of the inventory cost of the cooperative and therefore only the final payment or patronage_dividend is reflected as part of the net_income the presentation on the tax_return is the same as the financial statements form 990-c and the new form 1120-c requires the cooperative to report per-unit retains paid in money in schedule a cost_of_goods_sold as will be discussed below this does not change the fact that the full amount of the c check and patronage_dividend are sec_1382 payments and may be deducted on the income_tax return and may be added back for purposes of computing the sec_199 deduction nonexempt subchapter_t cooperatives are permitted to exclude or deduct distributions to their patrons that qualify as patronage_dividends or per-unit retain allocations provided those distributions otherwise meet the requirements of subchapter_t of the code sec_1388 of the code defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of this subchapter applies to a patron plr-124583-08 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 purs may be made in money property or certificates per-unit retain allocations paid in money purpims 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 b or a tax_benefit figured under sec_1383 when the certificates are later redeemed sec_1388 of the code provides that the term patronage_dividend means an amount_paid to a patron by a cooperative on the basis of the quantity or value of business done with or done for such patron sec_1388 provides that a patronage_dividend is an amount_paid under an obligation that must have existed before the cooperative received the amount so paid sec_1388 provides that patronage_dividend means an amount_paid to a patron that is determined by reference to the net_earnings of the cooperative from business done with or for its patrons that section further provides that a patronage_dividend does not include any amount_paid to a patron to the extent that such amount is out of earnings other than from business done with or for patrons sec_1_1382-3 of the income_tax regulations states that income derived from sources other than patronage means incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association sec_1382 of the code provides that except as provided in sec_1382 the gross_income of any cooperative shall be determined without any adjustment as a reduction in gross_receipts an increase in cost_of_goods_sold or otherwise by reason of any allocation or distribution to a patron out of net_earnings or by reason of any amount_paid to a patron as per-unit retain allocations sec_1382 of the code provides in part that in determining the taxable_income of a cooperative there shall not be taken into account amounts paid during the payment period for the taxable_year as patronage_dividends to the extent paid in money qualified written notices of allocation or other_property with respect to patronage occurring during such taxable_year sec_1_1382-2 provides in part that there is allowed as a deduction from the gross_income of any cooperative to which part i of subchapter_t applies amounts paid to patrons during the payment period for the taxable_year as patronage_dividends with respect to patronage occurring during such taxable_year but only to the extent that such amounts are paid in money qualified written notices of allocation or other_property other than nonqualified written notices of allocation sec_1388 of the code plr-124583-08 defines the term nonqualified written notices of allocation as meaning a written_notice_of_allocation other than a qualified_written_notice_of_allocation or a qualified_check that is not cashed on or before the 90th day after the close of the payment period for the taxable_year for which the distribution of which it is part is paid sec_1382 of the code provides in part that in determining the taxable_income of a cooperative there shall not be taken into account amounts paid during the payment period for the taxable_year as per-unit retain allocations paid in money other_property or qualified certificates with respect to marketing occurring during such taxable_year sec_1382 of the code provides that for purposes of sec_1382 in the case of a pooling arrangement for marketing products the patronage shall be treated as occurring during the taxable_year the pool closes and the marketing of products shall be treated as occurring during any taxable years the pool is open though sec_1382 of the code is awkwardly drafted the flush language of sec_1382 clarifies what it means for an item not to be taken into account it states that for purposes of this title a patronage_dividend is treated as an item_of_gross_income and as a deduction therefrom and a per-unit_retain_allocation in money or qualified certificates are treated as a deduction in arriving at gross_income sec_1382 of the code provides in part that the payment period for any taxable_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 thus per-unit retain allocations paid in money or qualified certificates are deductions in arriving at gross_income if paid with respect to an open pool within the payment period for the taxable_year because patronage_dividends paid in money and qualified certificates are treated as deductions in arriving at gross_income form 990-c and new form 1120-c requires such dividends to be reported on schedule h as a deduction from gross_income because a per-unit retain allocations paid in money or qualified certificates are treated as a deduction in arriving at gross_income they are reported on schedule a of the form 990-c which represents the cooperative’s cost_of_goods_sold this does not change the fact that coop is allowed a full deduction under sec_1382 of the code for per-unit retains paid in money or qualified certificates 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 specifically cooperatives need to include the purs 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 purs the plr-124583-08 adjustments can be made to either the inventory or the line item deduction for the purs in other words if the purs 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 purs are not deducted on a deduction line in the tax_return the purs 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 purs once while also preserving the integrity of its sec_263a calculation under sec_199 of the code patrons that receive a qualified_payment from a specified agricultural and horticultural cooperatives are allowed a deduction for an amount allocable to their portion of the 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 extracted mpge 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 agricultural and horticultural products the cooperative is treated as having 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 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 of 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_1_199-6 provides that a qualified_payment received by a patron of a cooperative is not taken into account by the patron for purposes of sec_199 plr-124583-08 sec_1_199-6 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 sec_1_199-6 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 the cooperative 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 d of the code and the regulations thereunder coop’s c checks qualify as per-unit retain allocations within the meaning of sec_1388 of the code because they were distributed with respect to c that coop markets for its patrons and by the fact that the patrons receive the payments based on the quantity of c delivered the c checks are determined without reference to the coop’s net_earnings the c checks were paid pursuant to a contract with the patrons establishing the necessary pre-existing agreement and obligation and the c checks were paid within the payment period of sec_1382 based on the foregoing we rule as requested that sec_199 of the code allows certain payments from the cooperative to its patrons to be added back for purposes of computing the sec_199 amount coop should include all net_proceeds payments or allocations including the c check and patronage_dividend in its computation of the sec_199 amount specifically the c check is considered a per-unit retain paid in money under sec_1382 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 plr-124583-08 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


internal_revenue_service department of the treasury index number washington dc person to contact telephone number refer reply to cc dom fi p 5-plr-121715-98 date mar legend authority state foundation association bonds property trustee u u o i date date date date date bond counsel plr-121715-98 dear this is in response to your request on behalf of the authority for an extension of time under sec_301 of the procedure and administration regulations to file the notice of defeasance escrow required by regulations sec_1_141-12 of the income_tax facts the authority is an agency of state and is authorized to issue bonds to finance various types of projects association and the foundation together the organizations have each received letters from the internal_revenue_service confirming their status as exempt_organizations under sec_501 of the code the on date the authority issued the bonds and loaned a of the bond proceeds to the organizations pursuant to a loan agreement the bond proceeds to various other c organizations has been represented that the bonds were qualified c bonds under the authority also loaned an unspecified amount of it the organizations used a portion of the loaned bond proceeds to purchase and remodel the property organizations sold the property to a for-profit company for b it has been represented that on date the organizations established a defeasance escrow in satisfaction of the remedial action provisions set forth at sec_1_141-12 on date the bond counsel advised the organizations with respect to the on or about date defeasance escrow and provided its opinion to both the authority and the organizations from the authority executed originals of a notice to the commissioner the notice stating that an escrow had been established as part of a remedial action under sec_1_141-12 regarding the bonds counsel expected that bond counsel would mail the notice to the the date on which internal_revenue_service on or before date the 90-day period for a timely notice expired the authority the organizations and bond bond counsel received on or about date while preparing the bond transcript bond counsel could not locate proof of mailing for the notice and could not recall whether it had ever been mailed sent the notice to the midstates key district_office by certified mail on date expired less than days after the 90-day period had bond counsel llc9 plr-121715-98 the authority's request for relief was filed before the failure to provide the notice was discovered by the service the requested relief is granted the authority's tax_liability will not be lower than it would have been if the notice had been timely mailed to the service if law sec_103 of the code provides that except as stated sec_103 gross_income does not include interest on any state in or local bond apply to any private_activity_bond that is not a qualified_bond sec_141 provides that qualified bonds under include qualified c bonds sec_103 provides that sec_103 does not sec_145 sets forth the requirements for qualified c bonds property that is to be acquired with the net_proceeds of the issue must be owned by a 501_c_3_organization or governmental_unit in order for the bonds to be qualified c bonds as material here sec_145 provides that all with certain exceptions that are not material here a provides that sec_1_141-0 through apply to under sec_1_145-2 references to the private_business_use sec_1_141-2 and sec_1_141-12 include the sec_145 ownership test in thus under sec_1_145-2 if the issuer takes a deliberate test action that causes a facility financed with c bonds to no longer be owned by a 501_c_3_organization or governmental_unit the bonds are treated as though they meet the private use test of sec_1 sec_145 sec_1_141-12 provides in part that an action that sec_1_141-12 a deliberate action if the issuer takes a remedial action causes an issue to meet the private business tests is not treated as described in nonqualified bonds is the establishment of a defeasance escrow within days of the deliberate action if within days of the escrow's establishment appropriate written notice is given to the commissioner one remedial action under sec_1_141-12 f with respect to the e or sec_301_9100-1 provides in part that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election but not more than months under all subtitles of the code except subtitles e under sec_301_9100-1 the term election is defined in part to include an application_for relief in respect of tax material here under sec_301_9100-1 the term regulatory election means an election whose due_date is prescribed by a regulation revenue_procedure notice or announcement published in the internal_revenue_bulletin and i as g h plr-121715-98 sec_301_9100-3 through c i sets forth rules that the service generally will use to determine whether under the facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic elections sec_301_9100-3 provides that subject_to paragraphs b i through iii deemed to have acted reasonably and in good_faith when the taxpayer applies for relief under this section before the service discovers the failure to make the regulatory election c i provides that the interests of the government are not prejudiced if granting relief will not cause the taxpayer to have a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been'timely made taking into account the time_value_of_money sec_301_9100-3 the taxpayer will be section of conclusion based on the facts and representations submitted the authority is granted an extension of time to july provide the notice required by sec_1_141-12 to this letter is directed only to the taxpayer who requested sec_6110 of the code provides that it may not be it used or cited as precedent attorney on file with this office a copy of this letter is being sent to your authorized representative in accordance with the power of sincerely yours chief_counsel financial institutions products enclosure copy for sec_6110 purposes


t c summary opinion united_states tax_court patricia diane ross petitioner v commissioner of internal revenue respondent docket no 8728-13s filed date patricia diane ross pro_se adam p sweet for respondent summary opinion dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years at issue and rule references are to the tax_court rules_of_practice and procedure respondent issued a statutory_notice_of_deficiency to petitioner determining deficiencies in income_tax of dollar_figure for and dollar_figure for respondent determined an addition_to_tax under sec_6651 for failure_to_file timely a federal_income_tax return for of dollar_figure and for of dollar_figure respondent also determined accuracy-related_penalties under sec_6662 of dollar_figure for and dollar_figure for after concessions the issues remaining for decision are whether petitioner is entitled to deduct for and expenses for the business use of her home is entitled to deduct for and amounts paid to her minor children as wages is liable for sec_6651 additions to tax for failure_to_file timely her federal_income_tax returns for and without reasonable petitioner did not contest in the petition adjustments a and b on form 4549b income_tax examination changes of the notice_of_deficiency for either year and the issues are deemed conceded see rule b respondent determined in petitioner’s favor in the notice_of_deficiency adjustment d for and adjustments e g and h for both years adjustment f self-employment_tax is computational petitioner made no argument at trial and presented no evidence with respect to adjustment i and it is deemed conceded see 100_tc_367 96_tc_226 the parties stipulated that the returns for both years were not timely filed cause and due to willful neglect and is liable for accuracy-related_penalties under sec_6662 for and some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received in evidence are incorporated herein by reference petitioner resided in washington d c when the petition was filed background petitioner was a sole_proprietor engaged in multiple business activities in the years at issue she ran a business called ross professional services llc rps that did government staffing work involving things like résumé and application preparation and background and reference checks she was also engaged in consulting and had a tax preparation business in and most of rps operated in rented space in a building near petitioner’s house petitioner did her consulting and tax preparation work in the basement of her home petitioner filed with her federal_income_tax return for each year only one schedule c profit or loss from business for all of her business activities under the name rps the schedules c filed for and claimed deductions for home_office expenses on forms expenses for business use of your home on the line for area used regularly and exclusively for business petitioner placed the number on the line for total area of home petitioner placed the number she then computed the percentage use of her home for business a sec_33 petitioner’s three children worked in her rps operations in the children were age sec_15 sec_11 and in general the children’s work included shredding stuffing envelopes copying sorting checks filing pulling trash carrying equipment and helping to shop for supplies petitioner prepared timesheets forms w-2 wage and tax statement and other employment_tax returns in the names of her children after researching internal_revenue_service publications she did not withhold or pay over employment_taxes or income_tax in connection with their work most of the amounts petitioner considered as wages paid to her children were payments she made to third parties two of the children had recorded earnings exceeding dollar_figure in and all three had recorded earnings exceeding dollar_figure in petitioner did not withhold federal_income_tax with respect to the amounts she considered as wages paid to her children most of the receipts represented as expenditures_for the benefit of petitioner’s children are petitioner’s credit card purchases for meals at restaurants petitioner submitted at trial separate schedules c for rps and her consultant and tax preparer business claiming business use of her home only for the latter many of them for pizza although most of the expenditures are in the local washington d c area there are receipts for expenditures in new jersey florida north carolina california and the state of washington a large number and amount of other_payments are to score learning i which petitioner described as a tutoring play activity service petitioner provided receipts for purchases that she made largely by credit card from january through september of and for the full year she also provided for both years checking account statements from her bank on which she made the notation kids or their initial next to check card purchases point of sale debits and atm cash withdrawals discussion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer has the burden of proving that those determinations are erroneous see rule a 290_us_111 in some cases the burden_of_proof with respect to relevant factual issues may shift to the commissioner under sec_7491 the court finds that petitioner has not argued or shown that she has met the requirements of sec_7491 and the burden_of_proof does not shift to respondent sec_162 generally allows a deduction for ordinary and necessary expenses paid during the taxable_year in carrying_on_a_trade_or_business generally no deduction is allowed for personal living or family_expenses see sec_262 the taxpayer must show that any claimed business_expenses were paid primarily for business rather than personal living or family reasons see rule a 72_tc_433 to show that an expense was not personal the taxpayer must show that the expense was paid primarily to benefit his business and there must have been a proximate relationship between the claimed expense and the business see walliser v commissioner t c pincite home_office expenses generally sec_280a prohibits individuals from deducting expenses for_the_use_of a dwelling_unit that is the taxpayer’s residence but the prohibition on deductions does not apply to an item of expense allocable to a portion of the dwelling that is used exclusively and on a regular basis as the principal_place_of_business of the taxpayer’s trade_or_business sec_280a assuming that a taxpayer has a qualifying trade_or_business allowable home_office_deductions are strictly limited under the statute home_office_deductions are limited to the amount of gross_income from the use of the dwelling for a trade_or_business reduced by deductions allocable to the unit regardless of its use as the location of a trade_or_business and further reduced by allocable business deductions not related to the use of the unit itself see sec_280a where a portion of a residence is devoted to business purposes on a regular basis the portion of the costs incurred in maintaining the residence which is properly attributable to the space used in business is a question of fact to be decided in each case 84_tc_1 aff’d 791_f2d_781 9th cir in making an allocation of expenses it would generally be proper to compare the number of rooms or square feet of space devoted to a business_purpose to the total number of rooms assuming rooms of approximately equal size or square feet in the residence and apply the ratio derived to the total expenses properly attributable to the use of part of the residence for business purposes id rodriguez v commissioner tcmemo_2009_22 swain v commissioner tcmemo_1996_22 aff’d without published opinion 96_f3d_1439 4th cir other methods may be reasonable under the circumstances and may be acceptable feldman v commissioner t c pincite amounts not allowable because of the limitation may be carried over to the succeeding taxable_year subject_to the limitation of that taxable_year sec_280a on forms on the line for area used regularly and exclusively for business petitioner placed the number on the line for total area of home petitioner placed the number she then computed the percentage use of her home for business a sec_33 although there is no evidence in the record on the issue the court infers that petitioner’s computation is based on the number of floors in her house rather than the area of the house or the area of the basement used for business petitioner has not offered a sufficient description of her house or her basement to make a determination that her apparent floor method is a reasonable one and she has not established that any other reasonable method was used petitioner’s basement may include a bathroom a laundry or utility room or other areas that were not used in her business generally the court may estimate the amount of an expense and allow the deduction to that extent see 255_f2d_128 10th cir aff’g 27_tc_413 39_f2d_540 2d cir in order for the court to estimate the amount of an expense however there must be some basis upon which an estimate may be made vanicek petitioner submitted at trial separate schedules c for rps and her consultant and tax preparer business claiming business use of her home only for the latter v commissioner 85_tc_731 without such a basis an allowance would amount to unguided largesse 245_f2d_559 5th cir because there is an insufficient basis on which to base an estimate of the space used in petitioner’s business respondent’s determination on this issue is sustained see swain v commissioner tcmemo_1996_22 children’s wage expenses petitioner deducted wage expenses on schedules c for and for amounts she said were earned by her minor children doing work for rps she described their work as among other things shredding filing and helping her shop for supplies carry equipment and take out the rps trash their compensation however is not represented by paychecks issued to them almost all of the amounts that petitioner claimed as wage deductions for pay to her children are payments in_kind or irregular cash withdrawals of unstated purpose compensation is deductible as a trade_or_business expense only if it is reasonable in amount based on services actually rendered and paid_or_incurred see o’connor v commissioner tcmemo_1986_444 sec_1_162-7 income_tax regs compensation meeting those requirements is deductible even if the employer is a parent and the employee his or her child 77_tc_934 hamdi v commissioner tcmemo_1993_38 aff’d without published opinion 23_f3d_407 6th cir when a familial relationship is involved however the court closely scrutinizes the transaction 48_tc_439 hamdi v commissioner tcmemo_1993_38 sec_262 generally disallows deductions for personal living or family_expenses a normal supposition when payments are made to dependent_children or when items are purchased for them is that the money or items are in the nature of support and thus nondeductible under sec_262 holtz v commissioner tcmemo_1982_436 according to petitioner she kept receipts of expenditures that the children directed her to make matched them against their earnings and made the appropriate charges against them petitioner explained that because her children’s bank accounts are in hampton virginia if she paid them in cash or by check she would have to send a wire transfer she testified that it was more convenient to have her children direct her what to do with their money and that she was so busy she did not have time to open up local accounts for them petitioner testified that before the years at issue she paid the children by check or in cash but that she always found myself having to go to the bank to get their money petitioner’s bank records nevertheless show frequent bank transactions including deposits atm withdrawals and the use of check cards in deciding whether payments to a child are deductible the court examines all the facts and circumstances eller v commissioner t c pincite facts that militate against the deductibility of such payments include failing to pay employment_taxes and file information returns with respect to the child paying the child a flat amount determined at the beginning of the year that is not based on the services actually performed a lack of correlation between the dates and amounts of payments and the hours allegedly worked by the child failing to maintain adequate_records of the child’s hours worked and amounts employment_tax sec_3111 and sec_3301 impose taxes on employers under the federal_insurance_contributions_act fica and the federal_unemployment_tax_act futa respectively based on wages paid to employees see images in motion of el paso inc v commissioner tcmemo_2006_19 sec_3101 imposes a tax on employees under fica based on their wages paid which the employer is required to collect under sec_3102 id for purposes of fica employment does not include service performed by a child under the age of in the employ of his father or mother sec_3121 for purposes of futa employment does not include service performed by a child under the age of in the employ of his father or mother sec_3306 the return of the futa_tax is required to be filed on form_940 employer’s annual federal unemployment futa_tax return sec_601_401 statement of procedural rules all other returns of federal employment_taxes_generally are required to be filed on form_941 employer’s quarterly federal tax_return id in addition wages paid to an employee are required to be reported on form_w-2 sec_1_6041-2 income_tax regs earned and compensating the child for services which are in the nature of routine family chores see denman v commissioner t c pincite o’connor v commissioner tcmemo_1986_444 hable v commissioner tcmemo_1984_ furmanski v commissioner tcmemo_1974_47 petitioner did not withhold federal_income_tax with respect to the amounts paid for the benefit of her children because she said they were not required to file tax returns but except for one child for they were required to file a single_person who is not married not a surviving_spouse and not the head of a household must file if his or her gross_income exceeds the sum of the exemption_amount and the standard_deduction sec_6012 for both and the standard_deduction was dollar_figure sec_63 because the children are petitioner’s dependents the exemption_amount is zero sec_6012 sec_152 because petitioner’s children were minors during the years at issue however she was not required to withhold and pay over employment_taxes from amounts credited to the children or to file information returns for them petitioner also maintained records of the amounts of alleged payments she made for the benefit of the children and the hours allegedly worked by the children whether petitioner has shown however that the alleged payments are based on services actually performed or that the children were not compensated for services which are in the nature of routine family chores is less than clear petitioner stated that she paid her office workers dollar_figure to dollar_figure an hour to do some of the same types of work as her children performed according to petitioner’s testimony she paid the two younger children dollar_figure an hour and the oldest child dollar_figure an hour to shred paper and stuff envelopes using the total pay and total hours shown on petitioner’s documents the court computes the youngest child as having earned dollar_figure an hour in and dollar_figure an hour in even though she worked fewer hours in the middle child as having earned about dollar_figure an hour in and about dollar_figure an hour in having worked fewer hours in and the oldest child as having earned almost dollar_figure an hour in and only dollar_figure an hour in having worked over three times as many hours there appears to be no consistent correlation between the hours worked by a child and the amount recorded as paid for the benefit of the child for example in date the oldest child was paid dollar_figure and worked according to petitioner’s time sheets hours a rate of about dollar_figure an hour the same child was paid dollar_figure for hours of work in date a rate of about dollar_figure an hour the lack of correlation between the dates and amounts of payments and the hours allegedly worked by the children militates against the deductibility of the payments see o’connor v commissioner tcmemo_1986_444 in denman v commissioner t c pincite the taxpayer’s three minor children performed tasks around the home and office including washing windows cleaning screens shoveling snow mowing grass tending shrubs trees and underbrush assembling papers picking up mail and stuffing stamping and labeling envelopes the court characterized these activities as in the main part of parental training and discipline rather than the services rendered by an employee for an employer the activities performed by petitioner’s children seem analogous to some of those performed by the denman children it appears to the court that one of the main reasons for the lack of correlation between the dates and amounts of payments to the children and the hours allegedly worked by the children is that the children were not actually paid petitioner argues that they were paid because she bought them things of value at their direction petitioner prepared for a spreadsheet showing the composition of the earnings attributed to each child over of the earnings attributed to the oldest child and of the earnings_of the middle child were made up of petitioner’s payments to score learning i half of the earnings attributed to the youngest child were made up of cash withdrawals by petitioner most of the balance of payments attributable to each respective child consisted of amounts petitioner spent on food for the child a parent has a legal duty to support his or her children if able to do so sollars v cully a 2d d c wages paid_by a parent to a minor child for services actually performed however may be a deductible business_expense regardless of the parent’s legal_obligation to support the child the use to which the child puts the wages does not affect their deductibility however the value of meals and education furnished by a parent to a minor child is not income to the child or a deduction allowable to the parent see sec_262 despite petitioner’s substantial documentation considering all the facts and circumstances the court concludes that she has not shown by a preponderance_of_the_evidence that the amounts she claimed as expenses for wages to her minor children are deductible as business_expenses additions to tax sec_7491 imposes on the commissioner the burden of production in any court_proceeding with respect to the liability of any individual for penalties and additions to tax 116_tc_438 trowbridge v commissioner tcmemo_2003_164 aff’d 378_f3d_432 5th cir in order to meet the burden of production under sec_7491 the commissioner need only make a prima facie case that imposition of the penalty or the addition_to_tax is appropriate higbee v commissioner t c pincite sec_6651 provides for an addition_to_tax of of the tax required to be shown on the return for each month or fraction thereof for which there is a failure_to_file not to exceed the addition_to_tax for failure_to_file a timely return will be imposed if a return is not timely filed unless the taxpayer shows that the delay was due to reasonable_cause and not willful neglect see sec_6651 it is petitioner’s burden to prove that she had reasonable_cause and lacked willful neglect in not filing timely see 469_us_241 116_tc_438 sec_301_6651-1 proced admin regs the parties agree that petitioner did not timely file her federal_income_tax returns for and because petitioner failed to offer any evidence of reasonable_cause and lack of willful neglect for her failure_to_file timely respondent’s determination that she is liable for the addition_to_tax under sec_6651 for and is sustained accuracy-related_penalties sec_6662 and b and imposes a accuracy-related_penalty on any portion of an underpayment_of_tax required to be shown on a return if the underpayment is due to among other reasons negligence disregard of rules or regulations or any substantial_understatement_of_income_tax respondent bears the burden of production as to the penalty sec_7491 negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and the term disregard includes any careless reckless or intentional disregard sec_6662 negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs petitioner did not contest the adjustments for misclassified deductions for commissions and fees failed to offer evidence of a reasonable allocation of home_office expenses and failed to show that she was entitled to deduct as wage expenses amounts she expended for her children respondent has met his burden of production on this issue the accuracy-related_penalty is not imposed with respect to any portion of an underpayment if a taxpayer demonstrates that there was reasonable_cause for that portion of the underpayment and that he or she acted in good_faith with respect to that portion see sec_6664 sec_1_6664-4 income_tax regs specifically provides circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer the most important factor is the extent of the taxpayer’s effort to assess his proper tax_liability for the year id petitioner provided some documentation with respect to the amounts she paid for the benefit of her children and the hours of their activities petitioner researched internal_revenue_service publications and the requirements for withholding and reporting employment_taxes for the employment of minor children as the resolution of the wage issue benefits from the application of caselaw petitioner may not have appreciated that for what and how the children were paid would be such important factors the court concludes that petitioner’s treatment of the value of her expenditures_for her children as wages was the result of a good-faith misunderstanding of the law the court finds that petitioner made a reasonable effort to treat these amounts properly on her tax returns the other items on her returns were more basic petitioner is a paid income_tax preparer petitioner has not shown in the light of her experience and knowledge that she made a reasonable attempt to comply with the provisions of the internal_revenue_code with respect to the preparation of her federal_income_tax returns for and except for the amounts for her minor children that she treated as wages the court sustains respondent’s determination that petitioner is liable for the accuracy-related_penalties with respect to the adjustments in the notice_of_deficiency except for the amounts she treated as wages to her minor children to reflect the foregoing decision will be entered under rule


third party communication date of communication month dd yyyy cca_2014110608110401 id uilc number release date from sent thursday november am to cc bcc subject re outside_basis and tefra exam cannot dispute the tier one partnership items on the k-1 it issued to tier two that tier two used to compute its outside_basis in tier one commissioner 94_tc_853 exam would have to open a tefra proceeding for tier one in order to dispute tier one’s partnership items sec_6222 roberts v


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom p si plr-115972-98 date december legend x state d1 this responds to your letter of date written on behalf of x and additional information submitted requesting a ruling that x’s s_corporation status will be effective as of d1 facts x was incorporated under state law on d1 x’s shareholders intended that x be a subchapter_s_corporation from d1 however the s_corporation_election under sec_1362 of the internal_revenue_code was not timely filed s_corporation sec_1362 provides that a small_business_corporation may elect to be an law and analysis sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made 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 made cc dom p si plr-115972-98 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 effective as of the first day of its tax_year x’s s_corporation_election was not filed timely for the election to be effective as of d1 nevertheless x has established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and assuming that x otherwise qualifies as a subchapter_s_corporation as of d1 and x’s shareholders make any adjustments to their personal federal_income_tax returns necessary to comply with this ruling we conclude that x will be recognized as an s_corporation effective d1 x should file a completed form_2553 with a copy of this ruling attached reflecting its election of subchapter_s_corporation status as of d1 with the applicable service_center within days of the date of this letter except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x otherwise satisfies the s_corporation eligibility requirements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely signed dianna k miosi dianna k miosi branch chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-152415-02 date date legend x ein partnership state property property property property property property property property property property property plr-152415-02 property property property property property property property property property property property property property property property property property property property property property property plr-152415-02 property property property property property property year date date dollar_figurex dollar_figurey dear this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling that x's rental income from its commercial rental properties and x’s interest_income from its lending business is not passive_investment_income within the meaning of sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in year x plans to make an election to be treated as an s_corporation effective date x owns leases and manage sec_39 commercial properties property through property through x’s employees as well as through independent contractors x represents that it provides various services to its tenants services provided by x include but are not limited to the following maintaining exterior areas including policing of grounds window washing painting roofing and landscaping maintaining parking and driveway areas maintaining heating cooling lighting and electrical systems and providing janitorial services x also handles the usual marketing leasing and administrative functions involved in leasing and managing real_estate including tenant appeals and evictions seeking and screening potential tenants and negotiating leases plr-152415-02 in the fiscal_year ending date x received or accrued dollar_figurex in rents and paid_or_incurred dollar_figurey in relevant expenses other than depreciation x represents that it anticipates future amounts to be consistent with the income and expense amounts for prior periods prior to making its s election x plans to contribute property through property to partnership a state limited_partnership in exchange for a limited and general interest in partnership x will receive rental income from property through property through its interest in partnership x as part of its business also is engaged in a lending business currently x has two employees dedicated to servicing its borrowers providing consumer loans lines of credit and loans to affiliate companies x’s lending activities represent an ongoing regular and continuous source of revenue sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1362 provides than an election under sec_1362 shall be terminated whenever at any time after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation has accumulated_earnings_and_profits at the close of each of consecutive taxable years and has gross_receipts for each of such taxable years more than percent of which are passive_investment_income any termination under this paragraph shall be effective on and after the first day of the first taxable_year beginning after the third consecutive taxable_year referred to above sec_1362 provides that except as otherwise provided the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that passive_investment_income does not include gross_receipts that are directly derived in the ordinary course of a trade_or_business of i lending or financing ii dealing in property iii purchasing or discounting accounts receivables notes or installment_obligations or iv servicing mortgages sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or plr-152415-02 incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation based solely on the facts and the representations submitted we conclude that the rental income that x derives from property through property is not passive_investment_income as described in sec_1362 we also conclude that x’s interest_income derived from its lending activities will be gross_receipts directly derived in the ordinary course of a trade_or_business described in sec_1_1362-2 and will not be considered passive_investment_income under sec_1362 except as specifically set forth above we express no opinion as to the federal tax consequences of the transaction described above under any other provision of the code specifically we express no opinion on whether x is a small_business_corporation eligible to make an s election further the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of section sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 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 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours enclosures copy of this letter copy for sec_6110 purposes j thomas hines chief branch associate chief_counsel passthroughs and special industries


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 br01 plr-138465-11 date december legend ------------------------ ------------------------------------------------------------------------------ x state date ------------- ------------------- dear ----------- this letter is in response to your letter dated date on behalf of x seeking a ruling concerning the qualified income exception to the publicly_traded_partnership under sec_7704 of the internal_revenue_code facts based on the materials submitted we understand that x organized under the laws of state and as of date is a publicly_traded_partnership within the meaning of sec_7704 of the code x’s business is the production of fertilizer the fertilization production plant utilizes a gasification process to produce ammonia some of which is further processed into urea ammonium nitrate uan fertilizer the primary feedstock for x’s gasification process is petroleum coke a coal-like substance produced as a byproduct of petroleum refining x gets most of its petroleum coke from an adjacent refinery in the course of the fertilization production process hydrogen is produced as a by-product x has entered into a services agreement with the adjacent refinery whereby both agree provide each other with excess hydrogen steam and other plr-138465-11 products to promote efficient operation of each facility x is not obligated to provide any hydrogen to the other refinery unless x has excess hydrogen under the agreement the transfers of hydrogen between the parties are netted and each party makes payments only to the extent that the hydrogen it receives during a given month exceeds the hydrogen it supplies during that same month thus x may derive gross_income from the sale of hydrogen in some months law and analysis sec_7704 provides that a publicly_traded_partnership shall be treated as a corporation sec_7704 provides that the term publicly_traded_partnership means any partnership if interests in that partnership are traded on an established_securities_market or interests in that partnerships are readily_tradable on a secondary market or the substantial equivalent thereof sec_7704 provides that sec_7704 shall not apply to any publicly_traded_partnership for any taxable_year if such partnership met the gross_income requirements of sec_7704 for such taxable_year and each preceding_taxable_year beginning after date during which the partnership or any predecessor was in existence sec_7704 explains that a partnership meets the gross_income requirements of sec_7704 for any taxable_year if percent or more of the gross_income of such partnership for such taxable_year is qualifying_income sec_7704 provides that the term qualifying_income among other things income or gains derived from the exploration development mining or production processing refining transportation including pipelines transporting gas oil or products thereof or the marketing of any mineral_or_natural_resource including fertilizer geothermal_energy or timber conclusion based solely on the materials submitted we conclude that the income derived by x from the sale of excess hydrogen is qualifying_income within the meaning of sec_7704 except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of this case under any pother provision of the code specifically we express or imply no opinion as to whether x is taxable as a partnership for federal tax purposes plr-138465-11 pursuant to the power_of_attorney on file with this office a copy of this letter will be sent to your authorized representative this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent sincerely david r haglund david r haglund chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury washington dc person to contact telephone number refer reply to cc intl b1 plr-138499-01 date date internal_revenue_service number release date index no a date b date c country d date e year f dear this is in response to a letter dated b by a’s authorized representative requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s loss of long-term_resident status did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements executed by an appropriate party while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination the information submitted for consideration is substantially as set forth below a a long-term_resident of the united_states within the meaning of sec_877 relinquished her u s lawful permanent resident status expatriated on date c by returning her green card to the u s immigration and naturalization service a has been a citizen of country d during her entire life by reason of her birth on date e in country d a and her parents were born in country d a became a permanent resident_of_the_united_states and obtained her green card in year f on the date of a’s expatriation her net_worth exceeded the threshold required under sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be taxed under sec_877 and sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes plr-138499-01 page a former citizen or former long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceeds certain thresholds see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable_threshold will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because on the date of expatriation a was a resident and fully liable to income_tax in country d the country where a was born notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a submitted all the information required by notice_98_34 including any additional information requested by the service after review of the submission based solely on the information submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have as one of her principal purposes for expatriating the avoidance of u s taxes however because the information submitted does not clearly establish either the existence or lack of a principal purpose to avoid taxes under subtitle a or b of the code no opinion is expressed as to whether a’s expatriation had for one of its principal purposes the avoidance of such taxes while this ruling rebuts the presumption of tax_avoidance under sec_877 it is not conclusive as to whether a subsequently may be found to have a principal purpose of tax_avoidance under sec_877 sec_2107 and sec_2501 based on all the facts and circumstances see sec_877 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for taxable periods prior to her loss of permanent residence status or for taxable periods after her loss of permanent residence status under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling this ruling is directed only to the taxpayer requesting it sec_6110 of plr-138499-01 page the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to a’s representative sincerely yours w edward williams senior technical reviewer branch office of the associate chief_counsel international


internal_revenue_service number release date index nos cc psi plr-124819-00 may in re legend x dear this responds to your date request for a ruling whether under the circumstances described below x is the proper person to claim a credit or refund under sec_6416 and b of the internal_revenue_code with respect to the gasoline tax and sec_6427 with respect to the diesel_fuel_tax you also ask whether if x is the proper person to make these claims it may make the claims on form_720 quarterly federal excise_tax return the following facts and representations have been submitted in the request with respect to gasoline x is a wholesale_distributor as that term is defined in sec_6416 with respect to diesel_fuel x is a registered ultimate vendor as that term is defined in sec_48_6427-9 of the manufacturers and retailers excise_tax regulations unrelated to its status as a wholesale_distributor and an ultimate vendor x is a position_holder with respect to gasoline and diesel_fuel in a terminal and as such x files form_720 state is a local governmental_unit issuer is an issuer of credit cards merchant is any retailer of gasoline and diesel_fuel that accepts a credit card of issuer x has an agreement agreement with state to sell gasoline and diesel_fuel fuel for the exclusive use of state under the agreement x has caused issuer to issue to state certain credit cards that state may use at merchant to obtain fuel x represents that the agreement provides that when fuel is delivered from merchant’s fuel pump to state upon state’s presentation of issuer’s card title to fuel transfers from merchant to x and from x to state x further represents that the title transfers from merchant to x and from x to state are recognized as sales under applicable state law state pays x a price based on a formula set forth in the agreement this formula is based on a specified average wholesale price plus a set amount to cover x’s profit and certain other costs the price paid_by state is unrelated to merchant’s pump price thus the price that state pays x for fuel may be higher or lower than merchant’s pump price issuer pays merchant the pump price for fuel bought by x less credit card fees x pays issuer merchant’s pump price for fuel which includes the amount of the federal excise_tax the agreement also provides that x and not state will claim any credit or refund with respect to those taxes x bills state each month for its fuel purchases after receipt of the bill state has a set number of days to pay x if state fails to pay the credit risk falls on x and not on issuer or merchant thus as represented by x the person actually extending credit to state is x and not issuer sec_4081 imposes a tax on certain removals entries and sales of taxable_fuel including gasoline and diesel_fuel sec_48_4081-1 defines sale as including the transfer of title to or substantial incidents_of_ownership in taxable_fuel other than taxable_fuel in a terminal to the buyer for a consideration which may consist of money services or other_property sec_6402 provides that the irs may credit the amount of any overpayment against any liability in respect of an internal revenue tax on the part of the person that made the overpayment and to refund any balance to that person sec_6416 provides that the tax paid under sec_4081 on gasoline is deemed to be an overpayment if the gasoline was sold to a state_or_local_government for its exclusive use sec_6416 provides that a wholesale_distributor that buys gasoline on which the sec_4081 tax has been paid and that sells the gasoline to its ultimate_purchaser is treated as the person and the only person that paid the tax to the government notice_89_29 1989_1_cb_669 provides guidance with respect to the application of sec_6416 the sixth paragraph of notice_89_29 states if a wholesale_distributor purchases gasoline at a price that includes the tax sells such gasoline directly to the ultimate_purchaser for an exempt_purpose and meets the other requirements of sec_6416 of the code and this notice then the wholesale_distributor is treated as the person who paid the tax to the government and is the only person eligible to claim a credit or refund under sec_6416 in such a case the person that actually paid the tax on the gasoline is not eligible to claim the credit or refund however if the tax is not included in the price of the gasoline purchased by the wholesale_distributor or the gasoline is not sold directly to the ultimate_purchaser by the wholesale_distributor then only the person who actually paid the tax to the government may file a claim under sec_6416 sec_6427 provides that if diesel_fuel on which tax was imposed by sec_4081 is used by a state_or_local_government then the ultimate vendor of the fuel is eligible for a credit or refund with respect to the tax if the ultimate vendor is registered under sec_4101 and meets the requirements of sec_6416 b or d sec_48_6427-9 defines ultimate vendor as including a person that sells undyed diesel_fuel to a state for its exclusive use sec_48_6427-9 defines registered ultimate vendor as an ultimate vendor that is registered under sec_4101 as an ultimate vendor x is the proper person to claim a credit or refund under sec_6416 and sec_6427 only if among other conditions x sold fuel to state in a typical retail_sale in which a credit card is used the person extending credit does not obtain title to the merchandise and thus does not become the seller to the retail customer the person extending credit may assume the risk of default by the customer but this type of risk is assumed by any lender that finances a retail_sale in this case however x rather than merchant has contracted with state for the sale of fuel x rather than merchant sets the price that state pays x not only assumes the risk that state will default but x also assumes the risk that the price to be paid_by state will be lower than the pump price that x must pay merchant thus when state uses issuer’s credit card to obtain fuel from merchant the transaction is a sale of fuel from merchant to x and then from x to state accordingly we conclude that based on the facts and representations that have been submitted with the request x is the proper person to claim a credit or refund under sec_6416 and b because it is a wholesale_distributor that bought gasoline at a tax-included price and sold the gasoline to state for state’s exclusive use x is the proper person to claim a credit or refund under sec_6427 because it is a registered ultimate vendor that sold taxed diesel_fuel to state for state’s exclusive use we further conclude that x may make its claim under sec_6416 and b on either form_720 or form_8849 claim_for_refund of excise_taxes in accordance with the requirements of the code and the instructions for those forms x may make its claim under sec_6427 on either form_720 form_8849 or form_4136 credit for federal tax paid on fuels in accordance with the requirements of the code and instructions for those forms no ruling is being provided on whether x meets the procedural requirements for claiming a credit or refund under sec_6416 or sec_6427 this letter_ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent temporary or final regulations pertaining to one or more of the issues addressed in this letter_ruling have not yet been adopted therefore this letter_ruling will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the letter_ruling see section dollar_figure of revproc_2001_1 2001_1_irb_1 pincite however a letter_ruling generally is not modified or revoked retroactively if the taxpayer demonstrates that the criteria in section dollar_figure of revproc_2001_1 are satisfied sincerely associate chief_counsel passthroughs and special industries by ruth hoffman senior technician reviewer branch enclosures copy of this letter copy for sec_6110 purposes