department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division uniform issue nos attn legend company a division x benefit y person to contact telephone number office symbols t ep ra t1 jun dear sirs and madams this is in response to your request dated date as supplemented by correspondence dated june benefit y described below under sec_105 for a letter_ruling on the proper treatment of a a k a c of the internal_revenue_code code m a g a a k and the principal business of company a is the sale of life_insurance accident_and_health_insurance annuity_contracts prototype and specimen plan documents and recordkeeping services for pension profit sharing and other retirement plans among other products to individuals and institutions division x is a division of company a that markets division x proposes to offer group disability products benefit y which will be issued to and owned by a qualified defined_contribution_plan that includes a cash_or_deferred_arrangement coda as described in sec_401 k maintaining such a qualified_plan to be held by the employer for the benefit of the plan of the code 401_k_plan or the employer the purpose of benefit y is to permit employees who are disabled to continue to save for retirement benefit y is designed to replace the elective_deferrals matching_contributions and any nonelective contributions that would have been credited to a participant's account under a 401_k_plan had the participant not become disabled eligible to participate in the employer' sec_401 plan and who make elective_deferrals benefit y will cover only employees who are the premium for benefit y will be an administrative generally upon charge against all enrolled participants' accounts including elective_deferrals disability benefit y will pay benefits annually to the disabled participant's account under the 401_k_plan in an amount equal to the sum of the amount of elective_deferrals matching_contributions and or profit-sharing or other nonelective contributions made on behalf of such participant to the 401_k_plan in the year immediately preceding the year in which such participant became disabled participant had his or her elective_deferrals suspended such as by receiving a hardship_withdrawal or having made elective contributions that exceed qualification limitations benefit y would be based on the annualized if however upon disability a rate of elective contributions and matching_contributions made during the twenty-four month period preceding the date of disability if however an employee was not eligible to participate in the 401_k_plan was eligible but had elected not to make elective_deferrals under the plan or his or her participation in the plan was voluntarily suspended on the day immediately preceding the date on which he or she became disabled such individual would not be eligible for benefit y payment of proceeds from benefit y commence upon completion of any required elimination period after the i disability and continue until the earliest of month in which the participant attains age if the participant becomes disabled before attaining age ii a period ranging from three months to forty-eight months if the participant becomes disabled after attaining age depending upon the participant's age when disability occurs recovery from the disability death contract for disabilities due to certain medical conditions specified in the disability policy or the participant's failure to satisfy certain conditions such as the failure to provide requested medical information or to participate in a prescribed rehabilitation program nonforfeitable when paid the expiration of a period specified in the the participant's iv all benefit y payments will be the participant's iii vi v based on the above facts and representations company a requests the following rulings benefit y when purchased by a 401_k_plan will constitute an incidental accident_and_health_insurance benefit within the meaning of sec_1 l b ii of the income_tax regulations benefit y when provided to employees in the manner described in this request will not be considered an other benefit which is conditioned directly or indirectly on the employee electing to have the employer make or not make elective_deferrals under the 401_k_plan within the meaning of sec_401 k a of the code and sec_1 k -l1 e of the regulations the continued participation of the disabled_employee in the 401_k_plan through the payment of elective_deferrals matching_contributions and or any nonelective contributions by benefit y does not violate the exclusive benefit rule_of sec_401 code of the the limitations of sec_401 a k c of the code apply only at the time the premiums for benefit y are paid and not as benefits under benefit y are allocated to the disabled participant's account under the plan m g a and to the extent that premiums under benefit y are paid_by employer contributions including elective_deferrals an employee's coverage under benefit y will be considered employer-provided coverage under an accident_and_health_plan which will be excludable from the employee's gross_income under sec_106 of the code and sec_1_106-1 of the regulations the payment of premiums under benefit y will not be considered an assignment_of_income which would otherwise result in immediate taxation to the participant benefit payments under benefit y to the disabled participant's account under the 401_k_plan will be tax deferred and not includible in the affected participant's gross_income under sec_105 of the code at the time they are allocated to such participant's account and the distribution of amounts from the participant's account under’ the 401_k_plan including benefit y payments allocated to such account shall be subject_to taxation under the principles of sec_72 and sec_402 of the code with regard to ruling_request one sec_1 of the regulations states in part that no b specific limitations are provided in sec_401 a of the code with respect to investments which may be made by the trustees of a_trust qualifying under sec_401 trustees to purchase any investments permitted by the trust agreement to the extent allowed by local law generally the contributions may be used by the sec_1_401-1 ii of the regulations provides that a profit-sharing_plan within the meaning of code sec_401 is primarily a plan of deferred_compensation but the amounts allocated to the account of a participant may be used to provide for him or his family incidental life or accident_or_health_insurance incidental insurance benefits as described in in and revrul_76_353 revenue_ruling have been paid directly to the revrul_61_164 c b 1974_2_cb_2 c b beneficiary ies designated by the plan participant this case the 401_k_plan itself is the designated_beneficiary for any payments made from benefit y because benefit y and the proceeds of benefit y remain assets of the 401_k_plan there is no taxable_distribution within the meaning of sec_402 of the code when benefit y nevertheless payments from benefit y to the plan will result in an increase in the balance in the participant's account just as continued to make contributions to the plan protection to the plan participant from the economic loss that would occur if he or she were unable to continue to make contributions to the plan is benefit although not distributed is purchased by the plan if the participant had consequently the providing a current oo payment of premiums under benefit y on behalf of a participant is an incidental insurance benefit that is subject_to the limitations set forth in the published guidance accordingly the payment of premiums under benefit y on behalf of a participant will constitute an incidental accident_and_health_insurance benefit within the meaning of sec_1_401-1 regulations if premiums_paid under benefit y plus any other incidental insurance benefits do not exceed the permitted limitations on such benefits on behalf of such participant the ii of the with respect to ruling_request two sec_401 a of the code provides that benefits other than matching_contributions must not be contingent on an employee's election to defer shall not be treated as benefit is conditioned directly or indirectly on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash a qualified coda if any other a coda of any employer sec_1_401_k_-1 ii of the regulations includes health insurance and life_insurance benefits under the definition of other_benefits sec_1_401_k_-1 clear that a sec_401 plan may purchase life_insurance with a participant's contributions without violating the contingent benefit rule ii of the regulations makes it however benefit y proceeds like the return on any other plan investment increase the accumulations in the 401_k_plan that will be payable to the participant or beneficiary when a distributable event as defined in the plan actually does occur meanwhile the participant generally may not access such proceeds any proceeds of benefit y remain assets of the plan and no distribution within the meaning of sec_402 of the code results when a portion of a plan participant's elective_deferrals are invested in benefit y benefit y and we believe the treatment of benefit y as a plan investment is consistent with the position that the purchase of benefit y coverage does not violate the contingent benefit rule under sec_401 a the code of accordingly with respect to ruling_request two we conclude that benefit y when provided to employees in the manner described in this request will not be considered an other benefit which is conditioned directly or indirectly on the employee electing to have the employer make or not make elective_deferrals under the 401_k_plan within the meaning of sec_401 a the regulations of the code and sec_1 k -l e of with regard to ruling_request three section of the code generally provides that in order a for a plan to be qualified under code sec_401 corpus or income of its related trust must not be used for or diverted to purposes other than the exclusive benefit of the employees or their beneficiaries the sec_1_401-1 of the regulations clarifies by providing that a plan is for code sec_401 the exclusive benefit of employees or their beneficiaries even though it may cover former employees as well as present employees and employees who are temporarily on leave in revrul_72_180 1972_1_cb_107 a unit benefit pension_plan was amended to provide that a participant who became disabled would receive a pension at the normal_retirement_age based on compensation_for the year immediately preceding the year in which he became disabled with additional service credits for the entire period of disability up to normal_retirement_age the employee thus continued to accrue benefits under the pension_plan as with his salary frozen in the year preceding the date of his disability b of the regulations permits a qualified revrul_72_180 stated that section if he had remained actively employed plan to provide for continued participation in the event of leave of absence for a specified purpose such as service in the armed_forces sickness or disability was held that the provisions made for disability benefits did not adversely affect the continued qualification of the pension_plan under sec_401 a of the code it accordingly with respect to ruling_request three we conclude that the continued participation of the disabled_employee in the 401_k_plan through the payment of elective_deferrals matching_contributions and or any nonelective contributions by benefit y does not violate the exclusive benefit rule_of sec_401 a of the code with regard to ruling_request four section of the code provides that the annual a compensation of each employee taken into account under a qualified_plan must not exceed dollar_figure plus the cost- of-living adjustment sec_401 and g of the code provide limitations on elective_deferrals for qualified sec_401 plans sec_401 of the code sets forth participation and nondiscrimination standards for qualified sec_401 plans including applying percentage tests to the amounts of employer contributions for highly compensated and for nonhighly compensated employees sets forth similar percentage tests for the sums of employee contributions and corresponding matching employer contributions of each participant sec_401 of the code sec_404 of the code sets forth limits for deductibility of employer contributions to qualified_stock bonus and profit sharing trusts sec_415 of the code sets forth the limitations for contributions and other additions with respect to a participant to a qualified defined_contribution_plan such as a sec_401 plan unlike the contributions paid for premiums for the proceeds from benefit y that are paid to benefit y a sec_401 plan are neither employer contributions nor employee contributions nor forfeitures but are plan investment earnings accordingly with respect to ruling_request four we conclude that the limitations of sec_401 a a k m g a c of the code apply only at the time the premiums for benefit y are paid and not at the time benefits under benefit y are allocated to the disabled participant's account under the plan and with respect to ruling_request five sec_106 a of the code provides that gross_income of an employee does not include employer-provided coverage under an accident_or_health_plan tax regulations provides that gross_income does not include contributions by the employer to accident or health_plans for compensation through insurance or otherwise to the employee for personal injuries or sickness sec_1_106-1 of the income under the regulations the employer may contribute a qualified_plan under sec_401 of to an accident_or_health_plan either by paying the premium or by contributing to a separate trust or fund which provides accident or health benefits the trustee of the code is not the employer of the plan participants so sec_106 of the code does not apply to the facts in this case of qualified_retirement_plans and specifically the taxation of qualified_plan_distributions is governed by an entirely different statutory arrangement rather the federal_income_tax treatment however in this case the plan itself is the designated_beneficiary for any payments made from benefit y since benefit y and the proceeds of benefit y remain assets of the qualified_plan there is no taxable_distribution within the meaning of sec_402 of the code when benefit y of premiums under benefit y will not be includible in the employee's gross_income because they will not be distributions under sec_402 of the code is purchased by the plan the payment thus accordingly with respect to ruling_request five participants in the plan who elect coverage under benefit y are not currently taxed on the cost of coverage because the purchase of coverage under benefit does not constitute a distribution under code sec_402 with respect to ruling_request six in this case benefit y and the proceeds of benefit y remain assets of the qualified_plan premiums under benefit y constitutes a purchase of assets by the plan and is neither a gratuitous assignment_of_income nor an assignment_of_income for consideration by the electing plan participants accordingly the payment of with regard to ruling_request seven sec_105 a of the code provides that except as otherwise provided in sec_105 amounts received by an employee through accident_or_health_insurance for personal injuries or sickness shall be included in gross_income to the extent such amounts the employer which were not includible in the gross_income of the employee or are attributable to contributions by are paid_by the employer in this case any benefit y proceeds that are paid to the k plan's trust are considered plan earnings under the purpose and payment process of benefit y there is no direct payment to the plan participant and no benefit proceeds are made available to the participant no distributable event occurs at the time at which benefit y proceeds are paid to the plan's trust for allocation to a participant's account for the purpose of the continuation of the participant's retirement accumulations during the disability period since the proceeds of benefit are received by the plan and not the employee sec_105 of the code does not apply the code and the applicable regulations with regard to benefit y there is no taxation of a plan participant until some amount attributable to proceeds from benefit y is distributed or made available to the participant however under the rules of sec_402 of accordingly with regard to ruling_request seven we conclude that amounts paid under benefit y to the disabled participant's account under the qualified_plan will not be includible in the participant's gross_income at the time such amounts are allocated to the participant's account with respect to ruling_request eight subsections of code sec_72 provide in general that a - c a distributee is taxed on the amount received which exceeds the investment_in_the_contract and that such investment_in_the_contract as of the annuity_starting_date is the aggregate amount of premiums or other consideration paid for the contract minus the aggregate amount received under the contract before such date to the extent that such amount was excludable from gross_income under this subtitle or prior income_tax laws in general cash distributions from sec_401 k plans are fully taxable except for the return of after- tax employee contributions distributees have basis in qualified_plan_distributions only when the distributees were previously taxed on the contributions pursuant to code section accordingly with respect to ruling_request eight we conclude that the distribution of amounts from the participant's account under the 401_k_plan including benefit y payments allocated to such account shall be subject_to taxation under the principles of sec_72 and sec_402 of the code this ruling is based on the assumption that amounts received by the 401_k_plan from benefit y may not be withdrawn from the plan prior to a participant attaining normal_retirement_age while benefit y is paying benefits to the plan this letter expresses no opinion regarding whether any sec_401 plan that purchases benefit y with employer contributions including elective_deferrals satisfies the requirements for qualification under sec_401 a of the code this ruling is directed only to the taxpayer that requested it may not be used or cited by others as precedent code sec_6110 provides that it sincerely yours donzell h littlejohn acting manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of this letter notice of intention to disclose


internal_revenue_service national_office technical_advice_memorandum number release date date third party communication none date of communication not applicable tam-133566-05 cc ita b06 index uil no case-mis no director lmsb retailers food pharmaceuticals healthcare lm rfph taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference -------------------------------------------------- -------------------------------- -------------------------------- ---------------- ------------------------------------------------------ ---------------------------------------------------------- -------------------------------------------------- -------------------------------------------------------- legend taxpayer products marketing agreement s ------------------------------------------------------------------------------ ---------------------------------------------------------------------------------------------------------------- advertising agreement s ------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ rebate agreement s year year ---------------------------------------- ---------------------------------------- -------------------------------------- ------------------------------------- -------------------------------- --------------------------- ------------------------------------------ --------------------------------------------- whether amounts received from vendors pursuant to taxpayer’s marketing taxpayer is a retailer of products taxpayer uses an overall accrual_method and tam-133566-05 year year date issue agreement in year and year constituted discounts that may be treated as reductions to the cost of inventory under sec_1_471-3 of the income_tax regulations conclusion amounts received from vendors pursuant to taxpayer’s marketing agreement in year and year constituted discounts that may be treated as reductions to the cost of inventory under sec_1_471-3 facts accounts for inventories under the retail_inventory_method taxpayer was under examination in year and year prior to year taxpayer included rebate sec_1 and allowance sec_2 in income upon receipt taxpayer filed a form_3115 effective for year seeking permission to change its methods_of_accounting with respect to rebates and several other items pursuant to revproc_97_27 1997_1_cb_680 since year when taxpayer was granted permission to make the accounting_method changes proposed in its form_3115 taxpayer has treated rebates as reductions in the cost of merchandise purchased pursuant to sec_1_471-3 taxpayer has consistently treated allowances received pursuant to its advertising agreements as reimbursements of or reductions in costs incurred to promote vendors’ products for financial_accounting purposes in year and year taxpayer presented the rebates in part as an offset to advertising expense up to the amount of that expense and most of the rebates in excess of advertising costs were taken into account in determining the cost_of_goods_sold taxpayer adopted the position endorsed by the financial_accounting standards board in emerging issue task force eitf no titled accounting by a customer including a reseller for certain consideration received from a vendor in year eitf issue no states that cash consideration received from a vendor is presumed to be a reduction of the cost of vendors’ goods and should therefore be characterized as a reduction of cost of merchandise sold when recognized in the reseller’s income statement however this presumption is overcome when the consideration is either a payment for assets or amounts received from vendors pursuant to the marketing agreements hereinafter rebates amounts received from vendors pursuant to the advertising agreements hereinafter allowances tam-133566-05 services delivered to the vendor in which case the cash consideration should be characterized as revenue or other income as appropriate when recognized in the reseller’s income statement or a reimbursement of costs incurred by the reseller to sell vendors’ products in which case the cash consideration should be characterized as a reduction of that cost when recognized in the reseller’s income statement taxpayer regularly files financial statements including annual reports with the securities_and_exchange_commission taxpayer stated in year annual report that taxpayer currently receives advertising co-op allowances for the promotion of vendors’ products that are typically based on guaranteed minimum amounts with additional_amounts being earned for attaining certain purchase levels taxpayer received consideration in the form of advertising co-op allowances from its vendors pursuant to annual agreements which are generally on a calendar_year basis as permitted by eitf taxpayer elected to apply its provisions prospectively to all agreements entered into or modified after date prior to the adoption of eitf in year the entire amount of advertising co-op allowances received was offset against advertising expense and resulted in a reduction of selling and store operating_expenses in year and year advertising co-op allowances exceeded gross advertising expense these excess amounts were recorded as a reduction of cost of merchandise sold in the accompanying consolidated statement of earnings in year pursuant to eitf the majority of the advertising co-op allowances will be initially recorded as a reduction in merchandise in cost of inventories and a subsequent is sold merchandise sold when taxpayer also co-op allowances that will be recorded as an offset against advertising expense as they are reimbursements of specific incremental and identifiable costs to promote vendors’ products the related product certain advertising reduction receives incurred taxpayer used the term advertising co-op allowances in its annual report to refer to amounts paid collectively allowances and rebates for our purposes under both the advertising agreements and marketing agreements taxpayer historically treated the advertising co-op allowances or allowances and rebates received pursuant to the advertising agreements and marketing agreements as offsets against advertising expense for financial_accounting purposes however with the adoption of eitf issue no taxpayer began to record the rebates received under the marketing agreements as reductions to the cost_of_goods_sold while continuing to apply the taxpayer strives to acquire merchandise at the lowest possible cost taxpayer tam-133566-05 allowances paid under the advertising agreements as offsets against advertising expense meets with its vendors on an annual basis to agree on the projected volumes of purchases anticipated over the next twelve months based on these projections taxpayer enters into both rebate agreements and marketing agreements with its vendors that reflect the negotiated terms of the discount sec_3 and rebates the rebates are linked to the dollar-volume of actual purchases and in some cases involve guaranteed minimums based on projected purchases on some occasions taxpayer may enter into an advertising agreement in which taxpayer agrees to furnish advertising services for a particular vendor in exchange for allowances these arrangements are not based on purchase volumes and entail a commitment by taxpayer to undertake specific activity to benefit the vendor ----------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- agreements are computed as a designated percentage of purchases in some of the marketing agreements the rebates may not be less than the designated percentage multiplied by taxpayer’s projected purchases for the year from the vendors paying the rebates the designated percentages and the projected purchases while varying among vendors are negotiated by taxpayer to obtain the net lowest prices for purchases from its vendors taking into account base invoice prices all other rebates discounts offered by vendors and the increasing economies of scale achieved by the vendors as taxpayer’s purchase levels increase rebates are recorded for accounting purposes as purchases are made substantially_all of the rebates are applied as a reduction of amounts due on vendor invoices occasionally taxpayer receives cash payments under the marketing agreements according to taxpayer its use of multiple contractual mechanisms for getting to the lowest net cost occurs for historical business reasons many years before year the discounts6 and rebates under rebate agreements and marketing amounts received from vendors pursuant to the rebate agreements hereinafter discounts in year and year all but a few of the approximate ---------vendors that provide rebates to taxpayer entered into both agreements usually the purchase projections are reached rebates may be renegotiated and often are during the year by taxpayer and its vendors if it appears purchase projections will not be attained depending on the factors that contributed to the failure to meet the purchase projections the examination team has not challenged taxpayer’s treatment of the discounts received under the rebate agreements accordingly the remainder of the ruling will focus on the rebates paid under the marketing agreements we assume these cash payments are received from vendors subsequent to purchases and are not otherwise similar to the upfront cash payments addressed in westpac pac foods v commissioner t c memo tam-133566-05 services were provided by taxpayer under cooperative advertising programs although this practice has been discontinued the request for rebates under the ------- of an equitable contribution to vendee overhead supplanted it and the marketing agreement in its current form is still used for this purpose at issue in this request for technical_advice is the effect of the following language contained in the form of the marketing agreement hereinafter statement on taxpayer and its tax treatment for rebates received pursuant to the marketing agreements --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------- specifically the examination team requested technical_advice on whether the amounts received from vendors pursuant to taxpayer’s marketing agreement in year and year constituted income from providing services to vendors under sec_61 of the internal_revenue_code code or discounts under sec_1_471-3 taxpayer claims that its advertising and marketing expenditures are directed solely at maximizing value to taxpayer and without regard to the rebates paid_by any vendor under the marketing agreement there is no correlation between amounts paid_by particular vendors and amounts expended by taxpayer on advertising for the products of such vendors the rebates have been used without limitation by taxpayer for any corporate purpose taxpayer is neither obligated nor expected to provide any services in exchange for the rebates the rebates are not paid to reimburse taxpayer for any expenses_incurred or to be incurred taxpayer’s vendors do not receive and are not entitled to receive reports on how the rebates are used taxpayer does not use its own funds including any funds from the rebates to provide vendor point-of-sale displays other promotional materials customarily supplied by the vendors or other promotional materials to meet vendor specifications agreements as stated above most of the rebates are applied as a reduction of amounts due the vendor negotiations with vendors pertaining to the rebates are not based on past or projected marketing and advertising spending information is not provided to vendors as to amounts spent on marketing and advertising either generally or for any particular vendor rebates are paid under marketing agreements by some vendors of commodity products that are never advertised by taxpayer and for others that are rarely advertised certain media advertising purchased by taxpayer involves there is no designation of funds for marketing of any products in the marketing a cooperative advertising program is generally an arrangement by which a product is advertised with the names of both the vendor and the retailer while programs can vary an arrangement usually requires advertising as well as other promotions the cost of the promotion may be shared by the vendor and the retailer or the vendor may pay all the costs the statement is also contained in taxpayer’s advertising agreements in addition to advertising taxpayer incurs other expenses that also promote tam-133566-05 advertising directed to no specific product ----------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- store traffic and build awareness these expenditures include such items as the costs of displaying signs on the outside of the building the wages paid to store personnel who answer customer questions the costs of ensuring that the products that the customers want and need are on the store shelves the costs of training employees to provide good customer service rental expense and the costs of capital for store financing utility expenses for stores and the costs of management and administrative personnel that direct administer and account for all of these expenditures voluntarily clarify the statement in its marketing agreement for prospective use with all vendors hereinafter prospective clarifications to read taxpayer stated in its submission related to the ruling_request that it will --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------ sec_451 provides the general_rule that the amount of any item of gross sec_61 provides generally that gross_income means all income from law and analysis whatever source derived including compensation_for services see also sec_1_61-1 income shall be included in gross_income for the taxable_year in which received by the taxpayer unless under the method_of_accounting used in computing taxable_income such amount is to be properly accounted for as of a different period is includible in gross_income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy therefore under such a method_of_accounting if in the case of compensation_for services no determination can be made as to the right to such compensation or the amount thereof until the services are completed the amount of compensation is ordinarily income for the taxable_year in which the determination can be made sec_1_451-1 provides that under an accrual_method of accounting_income tam-133566-05 sec_471 provides that whenever in the opinion of the secretary the use of sec_1_471-1 provides that in order to reflect taxable_income correctly inventories is necessary in order clearly to determine the income of any taxpayer inventories shall be taken by such taxpayer on such basis as the secretary may prescribe as conforming as nearly as may be to the best_accounting_practice in the trade_or_business and as most clearly reflecting the income inventories at the beginning and end of each taxable_year are necessary in every case in which the production purchase or sale of merchandise is an income-producing factor commonly used by business concerns and which meet the requirements of sec_471 are cost and cost or market whichever is lower sec_1_471-3 defines cost in the case of merchandise purchased since the beginning of the taxable_year as the invoice price less trade or other discounts except strictly cash discounts approximating a fair interest rate which may be deducted or not at the option of the taxpayer provided a consistent course is followed to this net invoice price should be added transportation or other necessary charges incurred in acquiring possession of the goods sec_1_471-2 states that the bases_of_valuation of inventories most revrul_84_41 1984_1_cb_130 states that discounts represent adjustments to the purchase_price granted by a vendor which may vary depending upon volume quantity purchases or other factors established by the vendor c b nonacq withdrawn and acq 1962_2_cb_5 acq withdrawn and nonacq 1976_2_cb_3 nonacq withdrawn in part and acq in part 1982_2_cb_2 the court stated in 26_tc_707 nonacq it does not follow of course that all allowances discounts and rebates made by a seller of property constitute adjustments to the selling prices terminology alone is not controlling and each type of transaction must be analyzed with respect to its own facts and surrounding circumstances such examination may reveal that a particular allowance has been given for a separate consideration -- as in the case of rebates made in consideration of additional purchases of specified quantity over a specified subsequent period or as in in consideration of prepayment of an account receivable so as to be in effect a payment of interest the test to be applied as in the interpretation of most business transactions is what did the the case of allowances made tam-133566-05 parties really intend and for what purpose or consideration was the allowance actually made section dollar_figure of the appendix of revproc_2002_9 2002_1_cb_327 provides guidance for taxpayers seeking to obtain automatic consent to change their methods_of_accounting with respect to certain trade discounts section dollar_figure describes the circumstances in which taxpayers may obtain automatic consent to treat qualifying volume-related trade discounts as reductions in the cost of merchandise purchased at the time the discount is recognized in accordance with sec_1_471-3 the revenue_procedure defines a qualifying volume-related trade discount as a discount satisfying the following criteria the taxpayer receives or earns the discount solely as the result of the purchase of the merchandise to which the discount relates the taxpayer is neither obligated nor expected to perform or provide any services in exchange for the discount and the discount is not a reimbursement of any expenditure incurred or to be incurred by the taxpayer we have been asked to rule on whether the amounts received from vendors pursuant to taxpayer’s marketing agreement in year and year constituted income from providing services to vendors under sec_61 of the internal_revenue_code code or discounts under sec_1_471-3 initially we note that the advertising arrangement posited by the examination team under the marketing agreement is clearly not a classic cooperative advertising agreement under a typical cooperative advertising program retailers provided advertising services while vendors compensated the retailers in the form of rebates or allowances for the advertising services performed under the terms of the advertising agreements see revrul_98_39 tam tam tam fsa in each of these cases the participating retailers were required to perform specific activities within identifiable guidelines under the various advertising programs available through the vendors however in this case there was no similar arrangement between taxpayer and its vendors under the marketing agreementdollar_figure the only language on the one-page form apart from its caption marketing agreement that could be construed as requiring advertising services is the statement and the broad and general nature of these two sentences contained on taxpayer’s form is quite dissimilar from the specific requirements usually mandated by vendor-initiated cooperative advertising arrangements taxpayer’s statement follows taxpayer uses its form the advertising agreement with vendors when it agrees to undertake specific and identifiable promotional activities for allowances received from vendors taxpayer treats the allowances as reimbursements for specific incremental and identifiable costs incurred to promote vendors’ products tam-133566-05 --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------- the examination team has argued that the statement in the marketing agreements on its own is enough to establish that taxpayer provided advertising services or was required to provide advertising services to its vendors in year and year we disagree the statement is extremely vague it is doubtful that the statement alone created a legal_obligation to provide advertising or marketing services in addition taxpayer’s representations concerning the rebates in its financial statements as well as its conduct with respect to the rebates received under the marketing agreement are consistent with the conclusion that the statement did not require taxpayer to perform advertising or marketing services we do not believe that absent other facts or circumstances the vague language used in the statement is sufficient to create a reasonable expectation that advertising marketing or any other services would be provideddollar_figure other than the statement additional facts have not been presented to show that taxpayer’s vendors were entitled to expected or received advertising services or other consideration apart from purchasing their products in exchange for the rebates paid under the terms of the marketing agreements for example there is no evidence that vendors expected or received any documentation regarding advertising by taxpayer with respect to the marketing agreements no facts were advanced to demonstrate that any of taxpayer’s vendors ever sought to obtain marketing services or information related to marketing services pursuant to the terms of the marketing agreements moreover further evidence was not submitted beyond the statement to establish that taxpayer was reimbursed for advertising services performed or to be performed under the marketing agreements in fact when taxpayer did undertake an obligation to perform advertising services it entered into an advertising agreement with its vendors for specific and identifiable marketing activities in exchange for allowances which it accounted for as reimbursements of specific incremental and identifiable costs incurred to promote vendors’ products in this case the facts indicate that advertising services or marketing expenditures were neither expected nor received and that the parties intended the rebates to serve as volume discounts we are not suggesting that taxpayer’s adoption of eitf issue no and subsequent treatment of the rebates as discounts for financial_accounting purposes is controlling for tax purposes nonetheless taxpayer’s treatment of the rebates as discounts for financial_accounting purposes serves as additional evidence that taxpayer did not believe it was expected to provide marketing services if for example some vendors will not accept taxpayer’s prospective clarifications to the marketing agreement then it will be apparent that those vendors do in fact expect some performance by taxpayer in exchange for the rebates similarly taxpayer’s failure to adopt the prospective clarifications to the marketing agreement will indicate that vendors reacted unfavorably to the prospective clarifications the examination team has also suggested that taxpayer’s vendors require the we agree that factual assertions made by taxpayer to other regulatory agencies tam-133566-05 statement in the marketing agreement to comply with the robinson-patman price discrimination act robinson-patman u s c ' regulated by the federal trade commission ftc the act requires that allowances or services be offered by sellers on proportionally equal terms to competing customers except in instances in which a seller in good_faith attempts to meet another seller's lower-priced offer among other things the act permits vendors to reimburse resellers for promotional services the examination team has asserted that taxpayer‘s vendors need the statement as proof they are receiving promotional services from taxpayer for purposes of the robinson- patman act are relevant to the issue in this case it does not appear however that taxpayer has ever testified under oath or submitted statements under penalties of perjury to the ftc that it provided promotional services in exchange for the rebates received under the marketing agreement on the other hand taxpayer has represented in its year annual report filed with the securities_and_exchange_commission that the rebates under the marketing agreements were not received in exchange for services likewise in connection with this technical_advice request taxpayer stated under penalties of perjury that the rebates were not for the provision of services to its vendors these assertions are consistent with the facts concerning taxpayer’s advertising and marketing activities presented in this case received from vendors pursuant to taxpayer’s marketing agreement in year and year constituted discounts under sec_1_471-3 that may be treated as reductions in the cost of merchandise sold caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent based on the facts presented in this case we conclude that the amounts


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 ita b05 plr-143156-04 date date ------------------- ------------------------------ ------------------------------ ---------------------------------- legend taxpayer a -------------------------------------------------------------- taxpayer b -------------------------------------------------------------- residence --------------------------------------------------------------- month month year year dear ----------- this responds to a letter received on date requesting a ruling on whether the taxpayers may exclude gain from the sale of the residence under sec_121 of the internal_revenue_code ------- ------- ------ plr-143156-04 facts unmarried taxpayers a and b jointly purchased the residence in month year using the property as their principal_residence in month year approximately seven months after purchasing the residence taxpayer a discovered that she was one- month pregnant taxpayer a and the father of the expected child are no longer in a relationship according to their representations taxpayers a and b plan to sell the residence and find separate residences because the residence is not large enough to accommodate two adults and a child and neither a nor b can afford to make the monthly mortgage payments on the residence alone law analysis sec_121 of the code provides that a taxpayer s gross_income will not include gain from the sale of property if during the five-year period ending on the date of the sale the property has been owned and used by the taxpayer as the taxpayer s principal_residence for periods aggregating two years or more the full exclusion is available only once every two years sec_1_121-2 of the income_tax regulations provides that if taxpayers jointly own a principal_residence but file separate returns each taxpayer may exclude from gross_income up to dollar_figure of gain that is attributable to each taxpayer’s interest in the property if the requirements of sec_121 have otherwise been met sec_1_121-3 of the regulations provides for taxpayers who fail to satisfy the ownership and use tests or the limit of one sale every two years sec_121 of the code provides for a reduced maximum exclusion if the primary reason for the sale is a change in place of employment health or unforeseen circumstances sec_1_121-3 of the regulations provides that a sale is by reason of unforeseen circumstances if the primary reason for the sale is the occurrence of an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence a taxpayer’s reason for the sale is deemed to be unforeseen circumstances if one of the safe_harbor events such as death divorce or multiple births from the same pregnancy occurs during the period of the taxpayer’s ownership and use of the residence as the taxpayer’s principal_residence in addition the commissioner may designate other events or situations as unforeseen circumstances in published guidance of general applicability or may issue rulings addressed to specific taxpayers identifying other events or situations as unforeseen circumstances with regard to those taxpayers plr-143156-04 sec_1_121-3 of the regulations provides that if a safe_harbor does not apply a sale is by reason of unforeseen circumstances only if the primary reason for the sale is unforeseen circumstances factors that may be relevant in determining the taxpayer’s primary reason for the sale include but are not limited to the extent to which the sale and the circumstances giving rise to the sale are proximate in time the suitability of the property as the taxpayer’s principal_residence materially changes the taxpayer’s financial ability to maintain the property is materially impaired the taxpayer uses the property as the taxpayer’s residence during the period of ownership of the property the circumstances giving rise to the sale are not reasonably foreseeable when the taxpayer begins using the property as the taxpayer’s principal_residence and the circumstances giving rise to the sale occur during the period of the taxpayer’s ownership and use of the property as the taxpayer’s principal_residence sec_1_121-3 of the regulations provides that the reduced maximum exclusion is computed by multiplying the maximum dollar limitation of dollar_figure dollar_figure for certain joint filers by a fraction the numerator of the fraction is the shortest of the following periods the period of time that the taxpayer owned the property during the 5-year period ending on the date of the sale_or_exchange the period of time that the taxpayer used the property as the taxpayer s principal_residence during the 5-year period ending on the date of the sale_or_exchange or the period of time between the date of a prior sale_or_exchange of property for which the taxpayer excluded gain under ' and the date of the current sale_or_exchange the numerator of the fraction may be expressed in days or months the denominator of the fraction is days or months depending on the measure of time used in the numerator based on the facts as represented and the relevant law as set forth above we conclude that for taxpayers a and b the primary reason for the sale of the residence will be an unforeseen circumstance consequently if taxpayers a and b sell the residence after they have owned and used it as their principal_residence for less than two of the preceding five years a and b may exclude gain up to the reduced maximum exclusion amount under sec_121 of the code except as specifically ruled upon above no opinion is expressed or implied regarding the income_tax consequences of any transaction or any item discussed or referenced in this letter in addition no opinion is expressed or implied as to whether taxpayer a and b have used the residence as their principal_residence this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed plr-143156-04 by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayers sincerely william a jackson branch chief branch income_tax accounting


internal_revenue_service department of the treasury index no washington dc contact person telephone number in reference to cc dom p si - plr-114625-98 date oct i998 legend o l date date this responds to a letter dated date together with subsequent correspondence submitted on behalf of x request ing relief under -1362 b of the internal_revenue_code x was incorporated on date and started operating a facts business on date treatment for x effective on date treated as an s_corporation was not timely filed requests a ruling that it will be treated as an s_corporation effective date the sole shareholder desired s_corporation but the election to be accordingly x sec_1362 provides that a small_business_corporation may elect to be an s_corporation law and analysis sec_1362 provides the rule on when an s election will sec_1362 provides in relevant part that be effective if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made 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 sdollar_figure election is filed under sec_1362 however 1f an s election is made sec_1362 provides that if election is made for any taxable_year and determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 b shall not apply no sec_1362 the secretary x did not file an election to be treated as an s_corporation under sec_1362 for not making a timely s election and is entitled to relief under sec_1362 x has however established reasonable_cause conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an dollar_figure corporation effective date letter please submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center within days of receipt of this temporary or final regulations pertaining to the issue have not yet been adopted addressed in this ruling this ruling will be modified or revoked if the adopted temporary or final regulations are inconsistent with any conclusion in the ruling however when the criteria in section dollar_figure of rev_proc are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances 1998_1_irb_7 see section dollar_figure of rev_proc therefore except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code is specifically no opinion is expressed concerning whether x in fact an s_corporation for federal tax purposes pursuant to a power_of_attorney on file with this office a copy of this letter will be sent to your authorized representative sincerely yours q j daniel j assistant to the 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 numbers washington dc person to contact telephone number refer reply to cc psi 2-plr-114822-03 date date legend x a b c d e f state d1 plr-114822-03 dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting that the service grant x an extension of time pursuant to sec_301 of the procedure and administration regulations to file a form_8832 entity classification election to be treated as an association_taxable_as_a_corporation for federal_income_tax purposes and relief under sec_1362 of the internal_revenue_code the information submitted states that x is a domestic limited_liability_company formed under the laws of state on d1 a b c d e and f the members of x intended to elect to treat x as an association_taxable_as_a_corporation and to then elect to treat x as an s_corporation with both elections effective d1 however x failed to timely file both the form_8832 and the form_2553 election by a small_business_corporation sec_301_7701-3 provides guidance on the classification of a domestic eligible_entity for federal tax purposes generally a domestic eligible_entity with two members is classified as a partnership unless the entity elects otherwise to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file a form_8832 with the service_center designated on that form sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government plr-114822-03 sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time until days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective d1 with the appropriate service_center x should make that election by filing form_8832 with the relevant service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose in addition we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly provided that x makes the above-mentioned election to be treated as an association and makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d1 within days following the date of this letter then such election will be treated as timely made for d1 a copy of this letter should be attached to the form_2553 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 including whether x was or is a small_business_corporation under sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number --------------------------------------- --------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------------------- id no -------------- ----------------- telephone number -------------------- refer reply to cc psi plr-140635-15 date date legend a b year ------------------------------ ---------------------------- ------ --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- dear --------------------------- this responds to a letter dated date together with subsequent correspondence submitted on your behalf by your authorized representative requesting a ruling that you be granted an extension of time under sec_301_9100-3 of the procedure and administrative regulations to file an election under sec_469 of the internal_revenue_code and sec_1_469-9 of the income_tax regulations to treat all interests in rental real_estate as a single rental real_estate activity facts according to the information submitted a and b taxpayers are married individuals who file their tax returns jointly taxpayers represent that in year they were in a real_property business as defined by sec_469 and were qualified under sec_469 to make an election to treat all interests in rental real_estate as a single rental real_estate activity however taxpayers represent that they were not advised by their professional tax_return_preparer that the election under sec_469 was available to them taxpayers represent that they filed their joint_return for year without the statement required under sec_1_469-9 law and analysis plr-140635-15 under sec_469 the term passive_activity general includes any retnal activity sec_469 provides a limited exception to this rule for taxpayers in a real_property business specifically sec_469 provides that if a taxpayer meets the requirements of sec_469 the taxpayer’s rental real_estate activity will no longer be presumably passive by its terms the exception under sec_469 is to be applied as if each interest of the taxpayer n rental real_estate were a separate activity however under sec_469 a taxpayer may elect to treat all interests in rental real_estate as a single activity sec_1_469-9 provides that a qualifying taxpayer makes the election to treat all interests in rental real_estate as a single rental real_estate activity by filing a statement with the taxpayer’s original income_tax return for the taxable_year sec_1_469-9 describes the information that must be contained in the statement sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic_extension of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for the regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when a taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonable and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 provides that except as provided in sec_301_9100-3 through iii when a taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the taxpayer will be deemed to have acted reasonably and in good_faith conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result taxpayers are granted an extension of time of one hundred twenty days form the date of this plr-140635-15 letter to make an election under sec_469 to treat all of their interests in rental real_estate as a single rental real_estate activity effective year the election must be in the form of the statement required by sec_1_469-9 and attached to an amended_return for year a copy of this letter should be attached to the election except as specifically provided herein no opinion is expressed or implied concerning the federal tax consequences of the facts described above under other provisions of the code specifically no opinion is expressed concerning whether taxpayers satisfy the requirements under sec_469 or whether taxpayers materially participate in any activity this ruling is directed only to the taxpayers requesting it sec_6110 of the internal_revenue_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 will be sent to your authorized representatives sincerely associate chief_counsel passthroughs special industries by laura c fields laura c fields senior technician reviewer branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc