internal_revenue_service number release date -------------------------- --------------------------------------------- ---------------------------------- ------------------- --------------------------------------- in re ------------------------------------ ------------------------------------- ----------------------- - department of the treasury washington dc person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc ita br05 - plr-115017-03 date date legend a -------------------------------------------------------------------- ------------------------------------------------------------------------------- company c ---------------------------- -------------- state y ------------- years ------- ------- ------- -------------- amounts x --- y ----- z ----- dollar_figureamounts dollar_figuren --------------- dollar_figureo ----------------- dollar_figurep ----------------- dollar_figureq ---------------- dear -------------------- this is in response to your letter and submissions of date submitted on behalf of a number of condominium associations associations including association a the taxpayer herein in which you requested certain rulings regarding the proper federal_income_tax treatment under various provisions of the internal_revenue_code_of_1986 attendant the receipt by a of certain settlement proceeds received from company c and other related entities in connection with the settlement of certain claims for damages resulting from an earthquake as further discussed below we are pleased to address your concerns the information submitted indicates that each of the associations on whose behalf rulings are requested is a non-profit mutual benefit corporation under the state y corporation law formed for the purposes of preserving and maintaining the common areas of the condominiums owned by its members the owners with respect to the year calendar tax_year each association will file a federal return of income_tax form_1120 as a membership_organization under sec_277 of the internal_revenue_code and will not elect to file forms 1120-h to be treated as an exempt homeowner’s association under sec_528 of the code some associations have made elections to be so treated from time to time in the past the membership of each association is comprised of all the owners of condominiums which are managed and operated by each association all of the condominiums and common areas associated therewith are managed as senior citizen’s communities under state y civil law each owner owns a separate freehold estate consisting of the area or space contained within and including the exterior walls roof and floor slab of the residential building structure each owner’s purchase also includes an undivided_interest in the land and other common elements appurtenant to the units together the associations requesting the subject rulings herein manage y buildings containing z condominium units none of the associations owns any interest in the buildings or the condominiums or the common areas which the associations manage or operate pursuant to the covenants conditions and restrictions ccrs governing each condominium project for which an association was created to manage and operate the associations have the responsibility to manage and maintain all of the common areas and to keep each project in a first-class condition and in a good state of repair each association is also authorized to make general and special_assessments against the owners and the units to provide funds to pay for maintenance_expenses including real_estate_taxes and the costs of maintaining insurance and capital improvements to the common areas bylaws specifically require that all maintenance_expenses of the common areas and the performance by the associations of all duties and powers be paid for out of assessments made to owners thus each association is supported by periodic assessments against the owners and any unpaid assessments constitute a lien on the individual property of the owner all funds collected by associations from owners are deposited into either a general maintenance current maintenance and operating account or a deferred capital maintenance and replacement account and upon the sale or transfer of any unit by an owner the owner’s interests in the trust funds are automatically deemed to be transferred to the new owner pursuant to the ccrs each association is required to maintain liability and hazard insurance with respect to the project it manages any insurance proceeds received by any association is required to be held by such association as trustee for the benefit of the owners and may only be used to repair the property if the destruction constitutes a partial destruction and the proceeds are sufficient in amount to pay the costs of repair in accordance with the ccrs the associations acquired from company c in year a condominium association master policy insuring among other things against earthquake damages the policy in year the condominiums and common areas managed and operated by the associations suffered severe damages as a result of the earthquake company c paid the amount of dollar_figuren to all of the associations at issue herein and other related associations not parties to this ruling_request in year for damages the associations believed that company c was obligated to pay substantially more under the policy than was tendered and in order to pursue their claims engaged law firms to file suit against company c on behalf of their members under the laws of state y which permits such suits a lawsuit was filed against company c on behalf of the members of the suing associations to recover damages as to the common areas and the separate interests of their members as their representatives the suit alleged that company c was in breach of contract breached its duty_of good_faith and fair dealing committed fraud and violated provisions of state y’s business and professional codes in year company c and the suing associations entered into an out-of-court settlement pursuant to the settlement agreement company c paid to all the suing associations an additional_amount of dollar_figureo all payments by company c to the suing associations were made solely to recompense the suing associations for actual damages sustained to the common areas in connection with earthquake in addition company c paid directly to the retained law firms representing the suing associations an additional_amount for attorney’s fees in the sum of dollar_figurep lastly company c paid the additional_amount of dollar_figureq to a professional organization that performed geotechnical analysis etc in connection with the preparation and analysis of reports relating to the damages sustained to the subject properties the insurance proceeds are sufficient in amount to pay for the costs to repair all of the damages caused by earthquake and each association has a fiduciary obligation to expend the insurance proceeds collected for the limited purpose of repairing the property and can not otherwise receive any benefit from the recovered funds the owners will not have the right to receive or withdraw any payments received any amounts deposited or any interest earned on the settlement proceeds paid to any of the associations the owners will not have the right to draw upon the funds or to receive a credit of any of the interest upon disposition of their units although an owner’s share of the proceeds held by an association is automatically transferred to a purchaser of the unit some of the funds received by each association will be spent to repair existing damage to the properties some funds will be distributed to members to reimburse them for actual expenditures made directly by them to fix damages attributable to earthquake and the balance of funds will be set_aside in a separate_account irrevocably dedicated to repairing and replacing common property none of the funds will be commingled with general assessment funds and they will be disbursed only for capital repairs correction of remaining damage and payment of extraordinary capital expenses none of the funds may be expended to pay for ordinary maintenance_expenses owner’s casualty_loss occurred in year and recovery_of the proceeds at issue herein did not occur until year during the intervening eight years owners made substantial repairs and improvements to their properties increasing the bases in their units over that at the time of the earthquake damage as indicated above the associations will distribute portions of the proceeds to reimburse owners for such repairs the settlement proceeds including amounts dollar_figurep and dollar_figureq were received by or on behalf of the owners in several payments and at various dates in year it is represented that settlement proceeds allocable to each owner at the time a payment was received did not exceed the tax basis of the owner in his or her condominium unit ie that owners did not at any time recover proceeds in excess of such owner’s then current tax basis in his or her condominium unit sec_61 of the internal_revenue_code provides that except as otherwise provided in subtitle a relating to income taxes gross_income means all income from whatever source derived sec_1016 of the code provides that proper adjustment shall be made to the basis_of_property for expenditures receipts losses or other items properly chargeable to capital_account sec_277 provides that in the case of a social_club or other membership_organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation deductions for the taxable_year attributable to furnishing services insurance goods or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members including income derived during such year from institutes and trade shows which are primarily for the education of members if for any taxable_year such deductions exceed such income the excess shall be treated as a deduction attributable to furnishing services insurance goods or other items of value to members paid_or_incurred in the succeeding taxable_year the deductions provided by sec_243 sec_244 and sec_245 relating to dividends received by corporations shall not be allowed to any organization to which sec_277 applies for the taxable_year sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain sec_1011 provides generally that the adjusted_basis for determining gain from the sale_or_other_disposition of property is the basis determined under sec_1012 cost adjusted as provided in sec_1016 under sec_1016 basis is adjusted by expenditures receipts losses and other items properly chargeable to capital_account under sec_1001 the entire amount of gain must be recognized except as otherwise provided sec_1033 of the code provides in part that if property as a result of its destruction in whole or in part theft seizure or requisition or condemnation or threat or imminence thereof is compulsorily or involuntarily converted into money and during the period specified in sec_1033 the taxpayer purchases property similar_or_related_in_service_or_use to the converted property at the election of the taxpayer gain will be recognized only to the extent that the amount_realized upon the conversion exceeds the cost of the replacement_property sec_1_1033_a_-3 provides generally that the provisions of sec_1033 apply in the case of property used by the taxpayer as his or her principal_residence sec_1033 provides that the replacement_period referred to in subparagraph a is the period beginning with the date of the disposition_of_the_converted_property and ending two years after the close of the first taxable_year in which any part of the gain upon the conversion is realized or such later date as the secretary may designate upon application of the taxpayer the character of amounts received as proceeds from a lawsuit or a settlement depends upon the nature of the claim and the actual basis for recovery if the recovery represents damages for lost income or profits it is taxable to the recipient as ordinary_income u s v burke 504_us_229 112_sct_1867 if however the recovery is received as a replacement of capital it is not taxable to the extent that it does not exceed the taxpayer's basis in the property 144_f2d_110 1st cir cert_denied 323_us_779 33_tc_323 revrul_81_277 1981_2_cb_14 in revrul_81_152 1981_1_cb_433 a homeowners_association instituted an action against the builder of a condominium development for damages arising from construction defects the facts in revrul_81_152 indicate that the funds recovered by the homeowners_association in the action against the builder are recovered on behalf of the unit owners therefore the revenue_ruling concludes that the homeowners_association receives the recovery as agent for the unit owners and thus the recovery represents a return_of_capital for each of the individual unit owners accordingly the revenue_ruling holds that the unit owners must reduce their bases in their property interests by their proportionate share of the recovery similarly in revrul_75_370 1975_2_cb_25 special_assessments collected by a nonexempt condominium management_corporation from its unit owner-stockholders and accumulated in a separate bank account for replacement of the roof and elevators in the condominium were held not to be includible in the corporation's gross_income revrul_75_370 indicates that the corporation receives no benefit from the funds the corporation also had the duty to expend the funds collected in the manner approved by its unit owner-stockholders the relationship between the corporation and its unit-owner stockholders insofar as the special_assessments are concerned is one of agent and principal in this case the associations including association a brought the claims for damages against company c for breach of contract fraud etc on behalf of the unit owners of the subject condominiums the proceeds from settling the lawsuit represent amounts necessary to repair or restore the subject properties that company c agreed to pay by reason of such damage but failed to honor therefore the associations did not receive the settlement proceeds on their own behalf but rather as agent for the unit owners accordingly receipt of the settlement funds is not income or a return_of_capital to the association s the settlement funds also are not income to the unit owners but instead represent a return_of_capital to each unit owner to the extent each unit owner’s portion of the recovery does not exceed that owner's basis in his or her property interest consequently the unit owners must reduce their bases in their property interests by an amount equal to their proportionate share of the recovery attributable to the common areas and his or her unit to the extent that portions of the recovery relate to individual units the owners of those units must reduce their bases by the amount of the recovery attributable to their individual units amounts distributed to the unit owners from the settlement amount in the year the association s receive the settlement are not taxable to the unit owners provided that the association s do not distribute any part of the interest earned on the settlement funds and the unit owners do not receive distributions in excess of their adjusted bases to the extent the association s use or retain the funds for repairs and restorations the funds represent a capital assessment of the unit owners consequently the unit owners shall increase their bases in their respective property interests by their proportionate share of the amounts used or retained by the association s to repair and restore the common areas of the property to the extent a unit owner's individual unit requires separate repair or restoration that unit owner shall increase his or her basis by the amounts used or retained by the association to make repairs to his or her individual unit amounts distributed to the unit owners from the settlement account in years subsequent to the year the association s receive the settlement funds also are not taxable to the unit owners provided that the association s do not distribute any of the interest earned on the settlement funds and the unit owners do not receive distributions in excess of their bases the unit owners may increase their bases to the extent they use the funds to make capital improvements to their units as indicated the character of settlement proceeds is generally determined based upon the origin and nature of the claim giving rise to the lawsuit or settlement the instant case involves the owner’s recovery_of_capital for damages resulting from earthquake damage to non-business property ie their condominium units and common areas accordingly the recovery proceeds are generally to be treated as a recovery_of basis to the owners in their units costs incurred in the recovery_of the insurance proceeds in the present case including amounts dollar_figurep and dollar_figureq constitute capital expenditures such expenditures must generally be capitalized rather than deducted or expensed see for example 107_tc_30 payment of such capital expenditures properly increases basis while the recovery_of reimbursements respecting such expenses generally decreases basis thus serving in effect to offset such additions thus to the extent basis is not exceeded the portion of recovery proceeds allocable to such expenses is neither includible in the gross incomes of the owners nor deductible by them as a business or other expense in the instant case it is represented that each owner’s proportionate share of the settlement proceeds did not exceed the owner’s basis in his or her unit at the time of its recovery and that no gain was thus realized if net_proceeds attributable to an owner were to exceed the owner’s then current tax basis the provisions of sec_1033 would apply to govern the recognition of any gain based on the above analyses we conclude as follows the proceeds received in settlement of the subject suit s by the associations including association a to recover for damages resulting from the earthquake and all other_amounts paid_by company c in relation to such settlement eg including engineering and attorney’s fees are not includible in the associations’ including specifically association a’s gross_income the recovery is received by the association s not in its own capacity as plaintiff but as agent s on behalf of and for the owners the proceeds received in settlement of the suit s by the associations including association a against company c are not income to the owners but are treated as a recovery_of basis of the owners each owner must reduce his or her basis in the units by his or her proportionate share of the recovery attributable to the common area and his or her unit the owners must increase his or her basis in the unit by his or her proportionate share of the amounts used or retained by the association s for the repair or restoration of the common area or his or her unit plus the amounts expended by the owners to repair damages to his or her unit resulting from the earthquake under the circumstances described any excess funds from the settlement held and retained by the association s in a reserve for future capital improvements are not taxable_income to the association s under the circumstances described amounts of the gross settlement proceeds paid for legal and engineering expenses including specifically amounts dollar_figurep and dollar_figureq are not income to the owners and give rise to no net increase or decrease to the tax basis of the owners in their condominiums final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling may be modified or revoked by adoption of final regulations to the extent the regulations are inconsistent with any conclusions in this ruling see section dollar_figure of revproc_2004_1 2004_1_irb_1 however when the criteria in section dollar_figure of revproc_2004_1 are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances this letter_ruling is based on facts and representations provided by the taxpayer and its authorized representatives and is limited to the matters specifically addressed no opinion is expressed as to the tax treatment of the transactions considered herein under the provisions of any other sections of the code or regulations which may be applicable thereto or the tax treatment of any conditions existing at the time of or effects resulting from such transactions which are not specifically addressed herein because it could help resolve federal tax issues a copy of this letter should be maintained with a’s permanent records pursuant to a power_of_attorney on file with this office the original of this letter_ruling is being sent to the taxpayer’s authorized representative and copies are being furnished to the taxpayer this ruling is directed only to the taxpayer who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent associate chief_counsel income_tax accounting s william a jackson by _________________________ william a jackson chief branch enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court wayne e and ann l burk petitioners v commissioner of internal revenue respondent docket no 3593-03s filed date wayne e burk pro_se john q walsh jr for respondent pajak special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax this court must decide whether petitioners are entitled to a claimed dollar_figure deduction for contributions to their individual_retirement_accounts ira some of the facts in this case have been stipulated and are so found petitioners resided in la grange illinois at the time they filed their petition sec_7491 does not apply because this case involves a legal issue for taxable_year petitioners jointly filed a form_1040 u s individual_income_tax_return on their form_1040 petitioners reported taxable interest of dollar_figure ordinary dividends of dollar_figure taxable refunds of dollar_figure a business loss of dollar_figure from the sole_proprietorship of petitioner wayne e burk petitioner and taxable pensions and annuities of dollar_figure petitioners each claimed an ira deduction of dollar_figure respondent disallowed the total amount of dollar_figure claimed by petitioners respondent contends that petitioners are not entitled to the claimed ira deduction because neither petitioner received compensation as defined in the internal_revenue_code during the taxable_year in issue sec_219 allows a deduction for qualified retirement contributions of an individual sec_219 limits the allowable deduction for any taxable_year to the lesser_of dollar_figure or an amount equal to the compensation includible in the individual’s gross_income for such taxable_year sec_219 provides that in the case of married individuals the maximum deduction under subsection b shall be computed separately for each individual sec_219 includes in compensation earned_income as defined in sec_401 but excludes any amount received as a pension or annuity or as deferred_compensation sec_401 defines earned_income as the net_earnings from self- employment as defined in sec_1402 sec_1402 defines net_earnings_from_self-employment as the gross_income derived by an individual from any trade_or_business carried on by such individual less the deductions allowed by this subtitle which are attributable to such trade_or_business sec_1402 specifically defines compensation as excluding interest and dividends 77_tc_97 petitioners’ income for taxable_year consisted of interest_income ordinary dividends taxable refunds and pension and annuity income none of which is compensation as defined in the internal_revenue_code sec_219 sec_1_219-1 income_tax regs moreover petitioners reported a net_loss from petitioner’s sole_proprietorship thus there were no net_earnings_from_self-employment no earned_income and accordingly no compensation there is no question but that petitioners had various items of income properly reportable on their income_tax return unfortunately neither petitioner received any compensation as congress defined this term for ira purposes during accordingly we conclude that petitioners are not entitled to the claimed ira deduction in issue we have no choice but to sustain respondent’s determination contentions we have not addressed are irrelevant moot or without merit reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


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 plr-137099-16 date date internal_revenue_service number release date index number ---------------------------- --------------------------- ----------------------------- re --------------------------------- legend decedent spouse date date -------------------- -------------------- ---------------------------- ------------------ dear ---------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date the estate discovered its failure to elect portability after the due_date for making the election decedent’s estate represents that the value of decedent’s gross_estate plus his lifetime adjusted_taxable_gifts is less than the basic exclusion amount in the year of the decedent’s death decedent’s estate requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 plr-137099-16 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 sec_20_2010-2 a of the estate_tax regulations provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely filed form_706 under sec_20_2010-2 the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted plr-137099-16 sec_20_2010-2 further provides that an extension of time to elect portability may be available under the procedures applicable under sec_301_9100-1 and sec_301_9100-3 for estates not required to file an estate_tax_return under sec_6018 sec_20_2010-2 provides that the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2 sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 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 that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer failed to make the election because after exercising reasonable diligence taking into account the taxpayer’s experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date decedent’s estate represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 plr-137099-16 the election should be made by filing a complete and properly prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void see sec_20_2010-2 this ruling is directed only to the taxpayer requesting it sec_6110 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 your authorized representative sincerely associate chief_counsel passthroughs special industries karlene m lesho by _____________________________ karlene m lesho senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


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 b07 plr-111352-05 date date ------------------------------------------------ ------------------------ ---------------- ------- ------------------------ legend corporation a b c dear ------------------ this letter responds to a letter from your authorized representative dated date requesting permission for corporation to revoke its election under sec_41 of the internal_revenue_code the represented facts are as follows corporation is an accrual_method taxpayer with each taxable_year ending on a all of the members of corporation’s sec_41 controlled_group are included on a single consolidated federal_income_tax return for its b taxable_year corporation on behalf of itself and the members of its controlled_group elected to compute the credit_for_increasing_research_activities research_credit utilizing the alternative_incremental_research_credit airc rules of sec_41 prior to the due_date including extensions for corporation’s income_tax return for the taxable_year ending on c_corporation on behalf of itself and the members of its controlled_group requested permission to revoke its sec_41 election for the taxable_year ending on c and all subsequent years for taxable years beginning after date taxpayers may elect to determine their research_credit under the airc rules of ' c sec_41 provides that any election under ' c a shall apply for the taxable_year in which made and all succeeding taxable years unless revoked with the consent of the secretary plr-111352-05 based solely on the facts submitted and representations made we grant permission for corporation to revoke its election to determine its research_credit under the airc rules of ' c for qualified_research_expenses paid_or_incurred during the taxable_year ending on c_corporation should compute the research_credit for the taxable_year ending on c and all succeeding years using the general_rule of ' a provided that neither corporation nor any member of its controlled_group makes a new election to determine its research_credit under the airc rules of ' c in a later year except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter further we express or imply no opinion concerning expenditures corporation or any member of its controlled_group treated as qualified_research_expenses this ruling is directed only to the taxpayer requesting it sec_6110 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 your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination sincerely s brenda m stewart senior counsel branch office of associate chief_counsel passthroughs special industries cc


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom corp plr-112594-98 date date distributing business x business y key_employee a dear we are responding to your date request for rulings as to the federal_income_tax consequences of a proposed transaction the information submitted in that ruling_request and subsequent correspondence is set forth below distributing is a closely held s_corporation actively_engaged_in_business x and business y financial information has been received indicating that distributing’s business x and business y each has had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years key_employee of business y wishes to acquire stock in a corporation operating only business y distributing has provided information showing that transferring business y to a limited_liability_company or partnership is impractical accordingly to plr-112594-98 accommodate key_employee the following transaction has been proposed i ii distributing will transfer the business x assets to newly formed controlled in exchange for the stock of controlled the exchange distributing will distribute the controlled stock pro_rata to its shareholders the distribution iii within one year of the distribution distributing will issue to key_employee an amount of stock equal to at least a percent of the outstanding_stock of distributing key_employee will pay for some of the stock with a note and will receive some of the stock as compensation the taxpayers have made the following representations in connection with the proposed transaction a b c d e f no part of the consideration distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a distributing shareholder the five years of financial information submitted on behalf of distributing’s business x and business y represent the present operations of each business and regarding each business there have been no substantial operational changes since the date of the last financial statements submitted following the transaction distributing and controlled will each continue the active_conduct of their respective businesses independently and with their separate employees the distribution is carried out to assure that key_employee remains in employ of controlled the distribution is motivated in whole or in part by this corporate business_purpose there is no plan or intention by the shareholders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in either distributing or controlled after the transaction there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 g there is no plan or intention to liquidate distributing or controlled to plr-112594-98 h i j k merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation subsequent to the transaction except in the ordinary course of business no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of the stock of controlled payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length no two parties to the transaction are investment companies as defined in sec_368 and iv distributing is an s_corporation within the meaning of sec_1361 controlled will elect to be an s_corporation pursuant to sec_1362 on the first available date after the distribution and there is no plan or intent to revoke or otherwise terminate the s election of either distributing or controlled based solely on the information submitted and the representations set forth above we hold as follows the exchange and the distribution together will qualify as a reorganization under sec_368 distributing and controlled will each be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by distributing on the exchange sec_361 and sec_357 no gain_or_loss will be recognized by controlled on the exchange sec_1032 the basis of each business x asset received by controlled will equal the basis of that asset in the hands of distributing immediately before its transfer sec_362 the holding_period of each business x asset received by controlled will include the period during which that asset was held by distributing sec_1223 no gain_or_loss will be recognized by distributing on the distribution sec_361 plr-112594-98 no gain_or_loss will be recognized by and no amount will be included in the income of the shareholders of distributing upon the receipt of controlled stock in the distribution sec_355 the aggregate basis of distributing and controlled stock in the hands of its shareholders after the distribution will equal in each instance the aggregate basis of the distributing stock immediately before the distribution allocated between the distributing and controlled stock in proportion to the fair_market_value of each in accordance with sec_1_358-2 of the income_tax regulations the holding_period of the controlled stock received by the shareholders of distributing will include in each instance the holding_period of the distributing stock on which the distribution is made provided that the shares are held by them as a capital_asset on the date of the distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 controlled is subject_to the built-in-gain tax of sec_1374 with respect to the built-in-gain assets it receives from distributing for purposes of the built- in-gain tax controlled’s recognition_period is reduced by the portion of distributing’s recognition_period that expires before distributing’s transfer of these assets to controlled the internal_revenue_service expresses no opinion about the tax treatment of the transaction under other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the completed transaction that are not specifically covered by the above rulings this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent it is important that a copy of this letter be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated plr-112594-98 pursuant to a power_of_attorney on file in this office a copy of this letter has been sent to your authorized representative sincerely yours assistant chief_counsel corporate by debra carlisle chief branch


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date cc tege eoeg et2 conex-115539-14 number release date uil ----------------------- --------------------------------- ------------------------------------- --------------------- ----------------------- ------------------------------ dear ------------ i am replying to your letter dated april to commissioner koskinen you wrote about the relationship between the internal_revenue_code the code and regulations and recent ------ that if it provides free parking to its employees claims that the irs has instructed the value of the free parking must be reported to the irs as a taxable fringe benefit --------------------------------------------------- instructions you indicate that ------ ------ provides onsite parking to its employees because you indicated that a taxpayer the laws on disclosure of taxpayer information ------------------------------------ is entitled to the confidentiality of its return_information under apply as a taxpayer ------ sec_6103 of the code therefore we can only disclose return_information if ------ consents to the disclosure we can however provide the following general information on the taxation of employer_provided parking is a ------ ----- the code does not require that an employer provide any fringe_benefits to its employees however it does provide for the federal income and employment_tax consequences if an employer chooses to provide a fringe benefit to its employees gross_income means all income from whatever source derived including compensation_for services including fees commissions fringe_benefits and similar items sec_61 of the code consequently a fringe benefit provided by an employer to an employee is presumed to be income to the employee unless another section of the code specifically excludes it from gross_income gross_income does not include any benefit that is a qualified_transportation_fringe sec_132 of the code qualified_transportation fringes include qualified conex-115539-14 parking sec_132 qualified_parking is parking an employer provides on or near the business_premises of the employer it does not include any parking on or near the employee’s home sec_132 parking is provided by an employer if the following circumstances are met parking is provided on property that the employer owns or leases employer pays for the parking or employer reimburses the employee for parking expenses regulation sec_1_132-9 q a d the amount excludable for qualified_parking may not exceed dollar_figure per month sec_132 of the code this amount is indexed for inflation annually for the indexed amount has been increased to dollar_figure per month rev_proc i r b federal_insurance_contributions_act fica_taxes federal_unemployment_tax_act futa taxes and federal_income_tax withholding are imposed on wages wages do not include any benefits provided to an employee if at the time the benefit is provided it is reasonable to believe the employee would be able to exclude the benefit under sec_132 sec_3121 sec_3306 and sec_3401 of the code regulation sec_1_132-9 q a states that generally an employee must include in gross_income the amount by which the fair_market_value of the benefit exceeds the amount_paid by the employee if any and any amount excluded from gross_income under sec_132 q a further states that if an employer provides an employee with a qualified_transportation_fringe that exceeds the monthly limit and the employee does not make any payment the value of the benefits provided that exceed the monthly limit must be included in the employee’s wages for income and employment_tax purposes i hope this information is helpful if you have any questions please contact ---------------- ---------------------- -------------------- of my staff at sincerely lynne camillo branch chief employment_tax branch office of the division counsel associate chief_counsel tax exempt government entities wages paid to federal employees are not subject_to futa_tax sec_3306


internal_revenue_service number info release date march cc psi 1-genin-167696-02 uilc dear we are answering correspondence submitted on your behalf by cpa requesting relief in order to establish date as the effective date for your s_corporation_election the information provided by our service_center indicates that an election for the requested effective date was accepted for your account in late date therefore you should continue using tax_return form_1120s for this entity in addition the irs has developed two new cd-roms to help educate small_business owners on their tax responsibilities introduction to federal taxes for small_business self-employed and a virtual small_business workshop these two cd- roms are free and can be ordered by calling the irs also provides a special website www irs gov smallbiz which is dedicated to providing information to small_business taxpayers please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful s dianna k miosi sincerely yours dianna k miosi 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 ita b05 plr-120858-16 date date legend --------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- taxpayer parent transaction ---------------------------------------------------------------------------------------------------------- month date date year year --------------------- -------------------- -------------------------- ------- ------------------------------------------------------------------------ dear ------------------- this is in response to your letter of date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the regulations on procedure and administration for taxpayer to file an election under sec_168 of the internal_revenue_code facts taxpayer was formed in year and is taxed as a c_corporation for federal_income_tax purposes taxpayer’s sole member is parent which is a tax-exempt_entity under sec_501 based on parent’s ownership_interest in and control of taxpayer taxpayer is a tax-exempt_controlled_entity within the meaning of sec_168 taxpayer is engaged in the ownership and development of residential_rental_property on date taxpayer closed a ---------------------------------------------------------------------------- ---------------------------------------- the building was placed_in_service as apartment rental units in month a subsidiary of taxpayer closed a similar transaction shortly after plr-120858-16 taxpayer closed the transaction and the building that was the subject matter of that transaction also was placed_in_service in year taxpayer and parent were required by the transaction documents and at all times intended to make the sec_168 election for taxpayer to not be treated as a tax-controlled entity the law firm that initially represented taxpayer in the both transactions at first provided unclear advice about the election requirement but then corrected the advice and offered to assist in making the election subsequently taxpayer engaged a different law firm for unrelated reasons the second law firm did not specifically advise taxpayer regarding the election requirement having presumed that the former law firm had advised taxpayer consequently taxpayer did not advise accounting staff of parent about the election requirement for year taxpayer filed its year return on date within a month after filing its return for year taxpayer discovered its failure to make a timely sec_168 election taxpayer has not made any distributions to parent law sec_167 of the internal_revenue_code provides generally for a depreciation deduction for property used in a trade_or_business under sec_168 the alternative_depreciation_system must be used for any tax-exempt_use_property as defined in sec_168 sec_168 provides that for purposes of sec_168 if any property which is not tax-exempt_use_property is owned by a partnership which has both a tax-exempt_entity and a person who is not a tax-exempt_entity as partners and any allocation to the tax-exempt_entity of partnership items is not a qualified_allocation then an amount equal to such tax-exempt entity's proportionate share of such property shall be treated as tax-exempt_use_property sec_168 states that rules similar to subparagraph a apply to other entities including tiered partnerships sec_168 provides that for purposes of sec_168 any tax-exempt_controlled_entity shall be treated as a tax-exempt_entity sec_168 provides that for purposes of sec_168 a tax-exempt_controlled_entity may elect not to be treated as a tax-exempt_entity such an election is irrevocable and will bind all tax-exempt entities holding an interest in the tax-exempt_controlled_entity sec_301_9100-7t requires elections under sec_168 to be made by the due_date of the tax_return including extensions for the first taxable_year for which the election is to be effective under sec_301_9100-1 and sec_301_9100-3 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election under all subtitles of the plr-120858-16 internal_revenue_code except subtitles e g h and i provided the taxpayer demonstrates to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government under sec_301_9100-3 a taxpayer is deemed to have acted reasonably and in good_faith if the 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 based on all of the facts and information submitted and the representations made we conclude that taxpayer is entitled to relief under a taxpayer must file an amended_return for year making the election under sec_168 taxpayer must attach the election statement and the information set forth in sec_301_9100-7t to the amended_return taxpayer also must attach a copy of this letter to the amended_return pursuant to sec_301_9100-7t a copy of the election statement also should be attached to the federal_income_tax returns of each of the tax-exempt shareholders of taxpayer caveats 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 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by taxpayer and by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-120858-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely john aramburu senior counsel branch office_of_chief_counsel income_tax accounting cc


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 b01 plr-124175-17 date february x y --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- country ---------- date --------------------------- dear -------------- this responds to a letter dated date and subsequent information submitted on behalf of x by its authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be classified as a disregarded_entity for federal tax purposes facts the information submitted discloses that x was formed on date under the laws of country x’s owner y represents that x is an eligible_entity intended to be classified as a disregarded_entity for federal tax purposes effective date however x failed to timely file a form_8832 entity classification election law and analysis sec_301_7701-2 provides that a business_entity is any entity recognized for federal tax purposes including an entity with a single owner that may be disregarded as an entity separate from its owner under sec_301_7701-3 that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code a business_entity with two or more members is classified for federal tax purposes as either plr-124175-17 a corporation or a partnership sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 entity classification election with the appropriate campus under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on the form_8832 cannot be more than days prior to the date on which the election is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the 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-124175-17 conclusion based solely on facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 consequently x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity for u s income_tax purposes effective date a copy of this letter should be attached to the form_8832 this ruling is contingent upon x and its owner filing within days of this letter all required federal_income_tax and information returns including amended returns for all open years consistent with the requested relief these returns must include but are not limited to form_8858 information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code in addition sec_301_9100-1 provides that the granting of an extension of time for making an election is not a determination that the taxpayer is otherwise eligible to make the election this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter_ruling to your authorized representatives sincerely associate chief_counsel passthroughs special industries faith p colson by ____________________________ faith p colson senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ----------------------------- -------------------------------- ------------------------------------------------------------ ---------------------- ----------------- -------------------------- -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no ---------- telephone number --------------------- refer reply to cc psi b05 plr-129968-08 date date legend legend taxpayer --------------------------------------------------------------- ---------------------- ------------------------------------------------------------ state a sub area ------------ ---------------------------------------- ------------------------ coop a ------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- corp a corp b --------------------- ---------------------- dear --------------------- this is in response to a request for a ruling dated date submitted on behalf of taxpayer by your authorized representative the ruling concerns the application of cooperative tax law to a transaction described below taxpayer was incorporated in ------------- as a nonprofit rural telephone cooperative pursuant to state a revised statutes in ------- taxpayer was granted an plr-129968-08 exemption under sec_501 of the internal_revenue_code and has since filed as an exempt_organization using form_990 return of organization exempt from income_tax taxpayer has remained tax exempt for every year until ------- since ------ taxpayer has filed a u s_corporation income_tax return form_1120 taxpayer has a wholly-owned taxable subsidiary sub for which it annually files a u s_corporation income_tax return form_1120 taxpayer’s amended bylaws discuss its operation as a cooperative as follows democratic control article iii sec_5 of taxpayer’s bylaws allows only one vote per member in corporate governance matters and that all questions shall be decided by a vote of the majority of members voting in person subordination of capital article vii sec_1 of taxpayer’s bylaws dictates that the organization will be operated on a non-profit basis further that provision prohibits payment of dividends or interest on capital furnished by taxpayer’s patrons operation at cost article vii sec_2 of taxpayer’s bylaws dictates that the cooperative’s net savings from the provision of telephone services belongs to its patrons further that section requires taxpayer to pay to all patrons the excess paid_by them over cost in furnishing of telephone services all such amounts credited to the equity account of the patron have the same status as though they were paid to the patron in pursuance of a legal_obligation to do so and the patron had them furnished taxpayer the corresponding amount as an equity contribution other margins to the extent that taxpayer earns margins from non-patronage activities those margins shall be retained by taxpayer article vii sec_2 vested members rights article ii sec_1 of taxpayer’s bylaws defines the property rights of members and former members in the event of dissolution of taxpayer it states that upon dissolution after all debts and liabilities of taxpayer have been paid and patronage capital retired or redeemed in accordance with the bylaws the remaining property and assets of taxpayer shall be distributed to members and former members in the proportion which the aggregate patronage of each member bears to the historic patronage of the organization to understand the facts relative to the transaction at issue it is first necessary to consider the members and the region that taxpayer serves taxpayer provides telephone service to residential and business members in area the area is very rural and agrarian and many of taxpayer’s owner-members depend on agribusiness either directly or indirectly for their livelihood the population in taxpayer’s service area is sparse with the location of its members thinly spread over a large area by comparison to the average telephone company with approximately access lines per square mile taxpayer’s territory has only about access lines per square mile this extremely low density of its service territory greatly plr-129968-08 increases the difficulty of taxpayer providing telecommunications infrastructure to support new technology in the early 1980s cellular telephone service began to emerge as the next technological breakthrough for the telecommunications industry in order to foster development of the cellular market the federal communications commission fcc divided the available radio spectrum in each market into two channel blocks one block was set_aside for development by wireline telephone_companies and the other for non- wireline companies in markets where there was more than one applicant for a network construction permit lotteries were used to select applications because each initial network construction permit holder was given years from the date of authorization to build and expand its cellular system within its market the fcc system insured a temporary duopoly in every service area during this 5-year fill-in period no applications from anyone other than the permit holder were accepted within the market on the holder’s channel block without its consent any remaining area within the market not covered by the permit holder was considered an unserved area after observing the early successes of providers of analog wireless telephone service in major metropolitan markets taxpayer’s management and board_of trustees reached several conclusions first wireless technology was bringing about a revolution in the communications business its potential was almost unlimited in rural areas where a greater number of people work outdoors instead of office buildings equally important cellular technology had the potential to undermine the continued economic viability of taxpayer if it was brought to the members by a competing organization the fear was that a significant amount of members might abandon land-line service in favor of cellular telephones growing foreign cellular telephone penetration in taxpayer’s service area could cause an ever-shrinking base of members to support the fixed costs of a wire-based system in other words it would be a death spiral for taxpayer to protect the organization and its members from this unacceptable risk taxpayer’s board concluded that taxpayer had to invest in the cellular technology when the fcc opened the licenses for rural areas in ------- a partnership of taxpayer a neighboring telephone cooperative coop a and an investor-owned telephone company corp a acquired state a rsa license no and developed the cellular telephone service in area through the years of operation a significant number of taxpayer’s members subscribed to its cellular services offered by the state a rsa no partnership taxpayer experienced operating losses from the partnership in the first several years and then it took several more years to recover those losses by ------- taxpayer included income from the rsa partnership in member allocations for the year and has done so ever since plr-129968-08 during the same timeframe digital subscriber line technology allowed multiple uses of a twisted pair copper telephone wire as a consequence the risk of obsolescence of taxpayer’s existing plant in service was somewhat mitigated by ------- taxpayer’s board was satisfied that there was sufficient and diverse cellular telephone coverage to serve its members’ needs and taxpayer needed to redeploy capital to fully develop its conversion from twisted-pair copper line to a fiber optic system accordingly taxpayer reached an agreement with corp b on ----------------------------to sell taxpayer’s --- percent interest and rights with respect to the state a rsa no partnership for dollar_figure------ -------- the sales transaction closed on ------------------------- at the closing date taxpayer’s tax basis in the partnership assets was dollar_figure------------- based on this transaction taxpayer anticipates being a nonexempt_cooperative for tax_year ------- predicated on the information set forth herein taxpayer requests the following ruling the income realized by taxpayer in the sale of its general_partnership interest in state a rsa no partnership constitutes patronage-sourced income which may be excluded from its gross_income when allocated to taxpayers’ patrons by a true patronage_dividend in the event a rural telephone cooperative such as taxpayer loses its tax-exempt status sec_501 of the code no longer applies until such time as the cooperative again satisfies the requirements for exemption during any taxable_period the rules applicable to the telephone cooperative depend on the reasons why it failed its exemption tests if exemption was lost because the company failed to operate on a cooperative basis then it will be taxed under the same rules applicable to for-profit corporations alternatively if the cooperative becomes taxable because it failed the so-called 85-percent-income test imposed by sec_501 then the organization will be taxed as a cooperative while the requirements of subchapter_c of the code regarding corporate_distributions and adjustments and other provisions are generally applicable to nonexempt cooperatives these entities are distinguished from other types of corporations by a specific body of tax law the scheme of taxation for nonexempt cooperatives was developed from the administrative pronouncements of the service and decision of the judiciary over a fifty- year period these rules for tax treatment of most nonexempt cooperatives and their patrons were finally codified with the enactment subchapter_t of the code as part of the revenue act of pub_l_no h_r with passage of subchapter_t the rules for deduction of patronage_dividends and the treatment of patronage_dividends in the hands of a cooperative’s patrons were defined however sec_1381 of the code states that subchapter_t is not applicable to organization engaged in furnishing electric energy or providing telephone service to persons in rural areas according to the senate_finance_committee report accompanying the act the intent of congress was that nonexempt rural electric and telephone cooperatives would continue to be treated as under present law plr-129968-08 in its report accompanying the legislation the senate_finance_committee described present law as follows under present law patronage_dividends paid_by taxable cooperatives result in a reduction in the cooperative’s taxable_income only if they are paid during the taxable_year in which the patronage occurred or within the period in the next year elapsing before the prior year’s income_tax return is required to be filed including any extensions of time granted s rep no 87th cong 1st sess under this earlier body of tax law applicable to nonexempt telephone cooperatives a cooperative may reduce its taxable_income by any qualifying patronage_dividends paid to their members patrons further under pre-1962 cooperative rules the term paid means paid in cash or paid_by notice of allocation see also revrul_83_135 1983_2_cb_149 a taxable cooperative not subject_to the provisions of subchapter_t of the code may exclude from gross_income the patronage_dividends paid or allocated to its patrons in accordance with its by-laws while subchapter_t does not control the taxation of nonexempt telephone cooperatives its foundations rest upon pre-1962 cooperative tax law as a result there are certain basic parallels between the tax treatment of nonexempt utility cooperatives and treatment of other cooperative organizations under subchapter_t therefore to extent that subchapter_t reflects cooperative taxation as it existed prior to it is in instructive resolving certain issues facing rural telephone cooperatives this is because congress stated that in enacting subchapter_t it was merely codifying the long common_law history of cooperative taxation with the exception of ensuring at least one annual level of tax at the cooperative or patron level see s rep no 87th cong 1st sess and arguably the case law post-enactment is merely a continuation and refinement of the pre-enactment common_law this is particularly true with respect to defining certain terms such as operating_on_a_cooperative_basis and patronage income perhaps the most succinct definition of the term cooperative for federal_income_tax purposes was provided by the u s tax_court in 44_tc_305 acq 1966_1_cb_3 the tax_court said under the cooperative association form or organization on the other hand the worker-members of the association supply their own capital at their own risk select their own management and supply their own direction for the enterprise through worker meetings conducted on a democratic basis and then themselves receive the fruits of their cooperative endeavors through allocations of the same among themselves as co-workers in proportion to the amounts of their active_participation in the cooperative undertaking the tax_court went on to describe three guiding principles at the core of economic cooperative theory as plr-129968-08 subordination of capital both as regards control_over the cooperative undertaking and as regards the ownership of the pecuniary benefits arising therefrom democratic control by the worker-members themselves and the vesting in and allocation among the worker-members of all fruits and increases arising from their cooperative endeavor ie the excess of operating revenues over the costs incurred in generating those revenues in proportion to the worker- members’ active_participation in the cooperative endeavor t c pincite the mechanism by which telephone cooperative achieve operation at cost is the patronage_dividend or capital credit since the payment of patronage_dividends and operation at cost is so critical to achieving cooperative status as defined by puget sound it is important to analyze this issue rural telephone cooperatives perform a final accounting at year-end to determine the net margin derived from their members’ patronage during the course of the year then the excess over cost collected from members is returned to them by a capital credit allocation based on each member’s patronage those capital credits are typically paid_by allocations of capital credit certificates or notices of allocation rather than in cash the capital credits retained form the foundation for the organization’s equity_capital a true patronage_dividend that may be excluded from the income of a rural telephone cooperative must meet the three tests set forth in farmers cooperative co v birmingham f_supp n d ia and 31_tc_674 acq aod 1959_2_cb_6 those tests are it must be made subject_to a preexisting legal_obligation the allocation must be made on the basis of patronage and the margins allocated must be derived from the profits generated from patrons’ dealings with the cooperative although the code does not provide specific guidance as to what constitutes patronage-sourced income for a nonexempt telephone cooperative regulations and rulings address the issues for cooperatives governed by subchapter_t of the code while not directly applicable to taxable utility cooperatives per se arguably they reflect the correct analysis with respect patronage income of cooperatives subject_to pre-1962 law the senate committee report accompanying the cooperative provisions in the revenue act of indicated that the congress intended to tax ordinary ie non- farmer cooperatives for non-operating income not derived from patronage as for example in the case of interest or rental income even if distributed to patrons on a pro_rata basis s rep no 82d cong 1st sess plr-129968-08 in response to that guidance of congress the service promulgated regulations distinguishing nonpatronage income from that which is patronage derived sec_1388 of the code specifies that a patronage_dividend must be determined by reference to the net_earnings of the organization from business done with or for its patrons that section further provides that the term patronage_dividend does not include any amount_paid to a patron to the extent that such amount is out earnings other than from business done with or for patrons further it does not include earnings from business done with or for other customers to whom no amounts are paid or to whom smaller amounts are paid with respect to substantially identical transactions in revrul_69_576 1969_2_cb_166 a nonexempt farmers’ cooperative borrowed money from a bank for cooperatives itself a cooperative to finance the acquisition of agricultural supplies for resale to its members the bank for cooperatives allocated and paid interest from its net_earnings to the nonexempt farmers’ cooperative which it in turn allocated to its members in determining whether the allocation was from patronage sources the ruling states the classification of an item_of_income as from either patronage or nonpatronage sources is dependent on the relationship of the activity generating the income to the marketing purchasing or service activities of the cooperative if the income is produced by a transaction which actually facilitates the accomplishment of the cooperative's marketing purchasing or service activities the income is from patronage sources however if the transaction producing the income does not actually facilitate the accomplishment of these activities but merely enhances the overall profitability of the cooperative being merely incidental to the association's cooperative operation the income is from nonpatronage sources revrul_69_576 pincite the ruling concluded that in as much as the income received by the nonexempt_cooperative from the bank for cooperatives resulted from a transaction that financed the acquisition of agricultural supplies which were sold to its members thereby directly facilitating the accomplishment of the cooperative’s marketing purchasing or service activities the income was patronage sourced sec_1_1382-3 of the income_tax regulations defines income from sources other than patronage nonpatronage income to mean incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association such as income derived from lease of premises from investment in securities or from the sale_or_exchange of capital assets in st louis bank for cooperatives v united 624_f2d_1041 cl_ct the court held that interest on demand deposits in farm credit plr-129968-08 banks or on loans to brokerage funds received by st louis bank for cooperatives was patronage sourced income the court stated that a particular item_of_income is patronage sourced when the transactions involved are directly related to the marketing purchasing or service activities of the cooperative association f 2d pincite in twin county grocers inc v united_states cl_ct a nonexempt_cooperative was denied deductions for patronage_dividends for interest on a certificate of deposit bought from a nonpatron bank because the dividend income was not patronage sourced the court held that the relation of income activity to the cooperative’s business was too tenuous courts have ruled in several instances that income from corporations organized by cooperatives to conduct activities related to the cooperative business is patronage sourced in farmland industries v commissioner 78_tcm_846 acq aod citing 765_f2d_1102 675_f2d_988 8th cir 88_tc_238 87_tc_435 the taxpayer a cooperative organized for the purpose of providing petroleum products to its patrons sought to have the proceeds from the disposition of its stock in three subsidiaries classified as patronage-sourced income in reaching its decision the court stated that its task was to determine whether each of the gains and losses at issue was realized in a transaction that was directly related to the cooperative enterprise or in one which generated incidental income that contributed to the overall profitability of the cooperative but did not actually facilitate the accomplishment of the cooperative s marketing purchasing or servicing activities on behalf of its patrons t c m pincite in land o’lakes inc supra the court held that dividends received by the nonexempt_cooperative from the st paul bank for cooperatives was patronage derived and could be allocated to land o’lakes patrons as deductible patronage_dividends the court noted that the taxpayer was required to acquire and hold the stock to obtain a loan the proceeds of which were used to finance cooperative activities on favorable terms finding that the subject transaction was not significantly distinguishable from the transaction in revrul_69_576 in the instant case taxpayer believed that investing in cellular technology was a correct decision for its members as a matter of providing the best available service and thwarting any potentially disastrous competition as a matter of risk aversion taxpayer joined with coop a and corp a in a general_partnership for the joint construction and operation of the state a rsa after taxpayer’s board was satisfied that cellular telephone service was universally available to all of its members it decided to sell taxpayer’s cellular partnership_interest and redeploy that capital to the very expensive fiber optic installation another patronage activity plr-129968-08 taxpayer’s initial investment and subsequent divestment of its cellular partnership_interest were both directly related to and facilitative of the cooperative’s overall patronage business_purpose of providing telecommunications services accordingly based solely on the foregoing we rule that the income realized by taxpayer in the sale of its general_partnership interest in state a rsa no partnership constitutes patronage-sourced income which maybe excluded from its gross_income when allocated to taxpayers’ patrons by a true patronage_dividend this ruling is directed only to the taxpayer that requested it under sec_6110 of the code it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours s paul f handleman paul f handleman chief branch office of the associate chief_counsel passthroughs special industries cc


t c memo united_states tax_court jackie h hunt petitioner v commissioner of internal revenue respondent docket no filed date hugh o mussina for petitioner audrey m morris for respondent memorandum opinion goeke judge on date respondent issued a notice of final_determination disallowing petitioner’s claim_for_abatement of interest on income_tax liabilities for petitioner timely filed a petition with this court on date for review of respondent’s failure to abate interest the issue for decision is whether petitioner is entitled to an abatement of interest under sec_6404 we hold that sec_6404 does not apply background the parties submitted this case fully stipulated the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in mason texas at the time she filed her petition on her federal_income_tax return petitioner claimed a dollar_figure loss from yuma mesa jojoba ltd the partnership this court in cactus wren jojoba ltd v commissioner tcmemo_1997_504 filed date upheld the commissioner’s determination denying research and experimental deductions of dollar_figure taken by the partnership for on date petitioner’s claimed loss was disallowed in a tax calculation which was made pursuant to the partnership level proceedings resulting in a deficiency in her federal_income_tax of dollar_figure on date respondent issued a statutory_notice_of_deficiency to petitioner for the taxable_year determining additions to tax pursuant to sec_6653 and and on date petitioner filed a claim_for_abatement of the interest with respect to the deficiency determination on date petitioner paid the dollar_figure deficiency unless otherwise indicated all section references are to the internal_revenue_code petitioner challenged the imposition of the additions to tax to this court on date the court in an opinion sustained the commissioner’s determination with respect to the additions to tax hunt v commissioner tcmemo_2001_15 on date respondent issued a notice of final_determination disallowing petitioner’s claim for interest abatement for petitioner filed a timely petition and an amended petition for review of respondent’s failure to abate interest discussion where the commissioner abuses his discretion in failing to abate interest under sec_6404 this court may order abatement sec_6404 in order to prevail a taxpayer must prove that the commissioner exercised this discretion arbitrarily capriciously or without sound basis in fact or law 112_tc_19 in her petitions petitioner’s only allegation is that respondent abused his discretion by failing to apply sec_6404 in her petitions and on brief petitioner relies solely on sec_6404 sec_6404 was added to the code by sec_6404 requires the suspension of interest if the taxpayer timely files a return and the secretary fails to notify the taxpayer of the liability and a basis for the liability before year months with respect to taxable years beginning after date and before date from the later of the date on which the return is filed or the due_date of continued sec_3305 of the internal_revenue_service restructuring and reform act of rra publaw_105_206 112_stat_685 pursuant to rra sec_6404 is effective only for tax years ending after date nerad v commissioner t c memo consequently sec_6404 does not apply because petitioner is seeking an abatement of interest on her income_tax liabilities for the taxable_year petitioner expressly states on brief that she is not seeking relief under any subsection other than sec_6404 she raises no other issues and has presented no other facts or evidence to establish that she is entitled to interest abatement if sec_6404 does not apply based on the foregoing we hold that petitioner is not entitled to an abatement of interest on the deficiency in income_tax for for respondent decision will be entered continued the return without regard to extensions since sec_6404 was enacted various subsections have been redesignated petitioner mistakenly relies on effective date language relating to current sec_6404 not sec_6404 as explained above sec_6404 is only effective for tax years ending after date


internal_revenue_service number release date index number ---------------------------- --------------- ----------------------- ---------------------------- in re ---------------------- -------------------------- ------------------------------ department of the treasury washington dc person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc intl br1 - plr-112220-03 date date --------- ty ------- ----------------------- ------------------------ a ------------------------------------------------------------------------------ date b country c date d dear ----------------- loss of u s lawful permanent residence expatriation 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 information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination lives a is subject_to country c worldwide income and estate taxation a expatriated on date d on the date of a's expatriation his net_worth exceeded the applicable_amount set forth in sec_877 a was born on date b in country c a is a citizen of country c where he now this is in response to a letter dated date requesting a ruling that a’s ------------------ d a former u s citizen whose net_worth or average tax_liability exceeds these sec_877 generally provides that a citizen who loses u s citizenship or a u s plr-112220-03 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 subject_to the special rules of 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 a former u s citizen or former u s 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 exceed certain thresholds see sec_877 sec_2107 and sec_2501 thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary's determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds 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 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 and resident fully subject_to tax in country c the country in which he was born modified by notice_98_34 including additional information requested by the service after review of the submission accordingly based solely on the facts 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 had as one of his principal purposes for expatriating the avoidance of under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a a is eligible to request a ruling pursuant to notice_98_34 because he is a citizen a submitted all of the information required to be submitted by notice_97_19 as except as expressly provided herein no opinion is expressed or implied plr-112220-03 u s taxes however because the information submitted does not clearly establish 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 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 the taxable years prior to or after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 which a obtained the ruling whether or not a is otherwise required to file a return the code provides that it may not be used or cited as precedent will be sent to a in accordance with a power_of_attorney on file in this office a copy of this letter this ruling is directed only to the taxpayer requesting it sec_6110 of a copy of this letter must be attached to a's u s income_tax return for the year in sincerely ________________ s m grace fleeman senior counsel cc intl br1