t c memo united_states tax_court rainer b and sonja d wagner petitioners v commissioner of internal revenue respondent docket no 13046-o1l filed date rainer b and sonja d wagner pro sese wendy s harris and scott hovey for respondent memorandum opinion powell special_trial_judge this matter is before the court on respondent’s motion for summary_judgment and to impose a penalty under sec_6673 filed pursuant to rule respondent contends that there is no dispute as to any material fact with respect to this levy action and that respondent’s determination to proceed with collection of petitioners’ unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure - outstanding tax_liabilities for should be sustained as a matter of law summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted with respect to all or any part of the legal issues in controversy if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule a and b 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 85_tc_527 the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment 85_tc_812 79_tc_340 as explained in detail below there is no genuine issue as to any material fact and a decision may be rendered as a matter of law accordingly we shall grant respondent’s motion for summary_judgment background a petitioners’ income_tax return for on or about date petitioners rainer b and sonja d wagner petitioners submitted to respondent a form_1040 u s individual_income_tax_return for the taxable_year on their form_1040 petitioners listed their filing_status as married filing joint_return and described their occupations as tst and clerk respectively petitioners entered zeros on applicable lines of the income portion of their form_1040 specifically including line for wages line for total income and line sec_32 and sec_33 for adjusted_gross_income petitioners also entered a zero on line for total_tax petitioners then claimed a refund in the amount of dollar_figure which amount was equal to the federal_income_tax that purportedly had been withheld from their wages petitioners attached to their form_1040 a two-page typewritten statement that stated in part as follows i am submitting this as part of my income_tax return even though i know that no section of the internal_revenue_code establishes an income_tax_liability provides that income taxes have to be paid on the basis of a return in addition to the above i am filing even though the privacy_act notice as contained in a booklet clearly informs me that i am not required to file it does so in at least two places a in one place it states that i need only file a - - return for any_tax i may be liable for since no code section makes me liable for income taxes this provision notifies me that i do not have to file an income_tax return please note that my return also constitutes a claim_for_refund pursuant to code sec_6402 it should also be noted that i had zero income according to the supreme court’s definition of income xk kek i am also putting the irs on notice that my tax_return and claim_for_refund does not constitute a frivolous_return pursuant to code sec_6702 in addition don’t notify me that the irs is changing my return since there is no statute that allows the irs to do that you might prepare a return pursuant to code sec_6020b where no return is filed but where as in this case a return has been filed no statute authorises sic irs personnel sic to change that return note the word income is not defined in the internal_revenue_code but as stated above it can only be a derivative of corporate activity b respondent’s deficiency_notice and petitioners’ response on date respondent issued a joint notice_of_deficiency to petitioners in the notice respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax and an accuracy-related_penalty under sec_6662 for negligence or disregard of rules or regulations of dollar_figure the deficiency was based principally on respondent’s determination that petitioners failed to report wage income of dollar_figure as - - reported to respondent on forms w-2 wage and tax statement dividend income of dollar_figure and interest_income of dollar_figure by letter dated date petitioners wrote to the director of respondent’s service_center in ogden utah acknowledging receipt of the notice_of_deficiency dated date but challenging the director’s authority to send such a notice petitioners sent a similar letter to charles o rossotti commissioner of internal revenue petitioners knew that they had the right to contest respondent’s deficiency determination by filing a petition for redetermination with this court however petitioners chose not to do so accordingly on date respondent assessed the determined deficiency and accuracy-related_penalty as well as statutory interest on date respondent sent petitioners a notice stating that changes were made to their account informing petitioners that they had a tax_liability for and requesting that they pay it petitioners failed to do so on date and date respondent sent petitioners in this regard the first sentence of petitioners’ letter dated date stated as follows according to your deficiency_notice of above date cover sheet attached there is an alleged deficiency with respect to my income_tax of dollar_figure sic and if i wanted to contest this deficiency before making payment i must file a petition with the united_states tax_court - - additional notices requesting that they pay the balance due for although petitioners wrote to respondent acknowledging receipt of each of the above-described notices petitioners failed to pay the amount owing cc respondent’s final notice and petitioners’ response on date respondent sent petitioners a final notice---notice of intent to levy and notice of your right to a hearing the final notice the final notice was issued in respect of petitioners’ outstanding tax_liability for on date petitioners submitted to respondent a form request for a collection_due_process_hearing petitioners requested that the appeals_office demonstrate that petitioners are required to pay federal income taxes petitioners also asserted that they were challenging the amount of tax listed as due in the final notice on the grounds that they did not receive a valid notice_and_demand for payment or a valid notice_of_deficiency for d the appeals_office hearing prior to an appeals_office hearing appeals officer richard j sigler the appeals officer provided petitioners with a transcript of their account for the record in this case includes an imf mcc transcript of account dated date regarding petitioners’ taxable_year on date the appeals officer conducted an appeals_office hearing that petitioner rainer wagner attended according to a purported transcript of the hearing prepared by petitioners petitioner rainer wagner offered to pay the amount due for only if the appeals officer would show him the internal_revenue_code provisions making petitioners liable for federal income taxes the appeals officer terminated the hearing when petitioner failed to raise any valid issue ke respondent’s notice_of_determination on date respondent sent petitioners a notice_of_determination concerning collection action s under sec_6320 and or the notice stated that the appeals_office had determined that it was appropriate for respondent to proceed with the collection of petitioners’ outstanding tax_liability for f petitioners’ petition on date petitioners filed with the court a petition for lien or levy action seeking review of respondent’s notice_of_determination the petition includes allegations imf mcc stands for individual master file-martinsburg computing center at the time the petition was filed petitioners resided continued --- - that the appeals officer failed to obtain verification from the secretary that the requirements of any applicable law or administrative procedure were met as required under sec_6330 petitioners never received a notice_and_demand for payment and petitioners were denied the opportunity to challenge a the appropriateness of the collection action and b the existence or amount of their underlying tax_liability g respondent’s motion for summary_judgment after filing an answer to the petition respondent filed a motion for summary_judgment and to impose a penalty under sec_6673 asserting that there is no dispute as to a material fact and that respondent is entitled to judgment as a matter of law in particular respondent contends that because petitioners received the notice_of_deficiency dated date they cannot challenge the existence or amount of their underlying tax_liability for in this proceeding the appeals officer’s review of the imf mcc transcript of account with regard to petitioners’ account for satisfied the verification requirement imposed under sec_6330 the record shows that petitioners were issued a notice_and_demand for payment and petitioners’ behavior warrants the imposition of a penalty under sec_6673 continued in las vegas nev --- - petitioners filed an objection to respondent’s motion thereafter pursuant to notice respondent’s motion was called for hearing at the court's motions session in washington d c discussion sec_6331 provides that if any person liable to pay any_tax neglects or refuses to pay such tax within days after notice_and_demand for payment the secretary is authorized to collect such tax by levy on the person’s property sec_6331 provides that at least days before enforcing collection by levy on the person's property the secretary is obliged to provide the person with a final notice_of_intent_to_levy including notice of the administrative appeals available to the person sec_6330 generally provides that the commissioner cannot proceed with collection by levy until the taxpayer has been given notice and the opportunity for an administrative review of the matter in the form of an appeals_office hearing and if dissatisfied with judicial review of the administrative determination 115_tc_35 114_tc_176 sec_6330 provides that a person may raise collection issues such as spousal defenses the appropriateness of the commissioner's intended collection actions and possible alternative means of collection sec_6330 b provides -- - that the existence and amount of the underlying tax_liability can be contested at an appeals_office hearing only if the person did not receive a notice_of_deficiency for the taxes in question or did not otherwise have an earlier opportunity to dispute the tax_liability 114_tc_604 goza v commissioner supra pincite sec_6330 provides for judicial review of the administrative determination in the tax_court or a federal district_court as may be appropriate a summary_judgment petitioners challenge the assessments made against them on the ground that the notice_of_deficiency dated date is invalid the record however establishes that petitioners received the notice_of_deficiency and did not file a petition for redetermination with this court see sec_6213 it follows that under sec_6330 b petitioners are barred from challenging the existence or amount of their underlying tax_liability in this collection review proceeding even if petitioners were permitted to challenge the validity of the notice_of_deficiency petitioners’ argument that the notice is invalid because respondent’s service_center director is not properly authorized to issue notices of deficiency is frivolous and groundless see 118_tc_162 goza v commissioner supra pincite further as the court_of_appeals for the fifth circuit has remarked we perceive no need to refute these arguments with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir suffice it to say that petitioners are taxpayers subject_to federal_income_tax see sec_1 a and that compensation_for labor or services rendered constitutes income subject_to federal_income_tax under sec_61 see 640_f2d_1014 9th cir we likewise reject petitioners’ argument that the appeals officer failed to obtain verification from the secretary that the requirements of all applicable laws and administrative procedures were met as required by sec_6330 the record shows that the appeals officer obtained and reviewed a transcript of account with regard to petitioners’ tax_liability for federal tax assessments are formally recorded on a record of assessment sec_6203 the summary record through supporting records shall provide identification of the taxpayer the character of the liability assessed the taxable_period if applicable and the amount of the assessment sec_301_6203-1 proced admin regs sec_6330 does not require the commissioner to rely on a particular document to satisfy the verification requirement imposed therein see 118_tc_365 ndollar_figure weishan v commissioner tcmemo_2002_88 lindsey v commissioner tcmemo_2002_87 tolotti v commissioner tcmemo_2002_86 duffield v commissioner tcmemo_2002_53 kuglin v commissioner tcmemo_2002_51 in this regard we observe that the transcript of account on which the appeals officer relied contained all the information prescribed in sec_301_6203-1 proceed admin regs see weishan v commissioner supra lindsey v commissioner supra tolotti v commissioner supra duffield v commissioner supra kuglin v commissioner supra petitioners have not alleged any irregularity in the assessment procedure that would raise a question about the validity of the assessments or the information contained in the transcript of account see davis v commissioner supra pincite mann v commissioner tcmemo_2002_48 accordingly we hold that the appeals officer satisfied the verification requirement of sec_6330 cf 117_tc_117 petitioners also contend that they never received a notice to the extent that petitioners may still be arguing that the appeals officer failed to provide them with a copy of the verification we note that sec_6330 does not require that the appeals officer provide the taxpayer with a copy of the verification at the administrative hearing 118_tc_162 in any event the record shows that the appeals officer provided petitioners with a transcript of account prior to the appeals_office hearing - - and demand for payment for the requirement that the secretary issue a notice_and_demand for payment is set forth in sec_6303 which provides in pertinent part sec_6303 notice_and_demand for tax a general_rule ----where it is not otherwise provided by this title the secretary shall as soon as practicable and within days after the making of an assessment of a tax pursuant to sec_6203 give notice to each person liable for the unpaid tax stating the amount and demanding payment thereof the record shows that respondent sent petitioners a notice of change to their account on the same date that respondent made assessments against petitioners for the tax and accuracy-related_penalty determined in the notice_of_deficiency as well as two subseguent collection notices we hold that these notices constituted notice_and_demand for payment within the meaning of sec_6303 see eg 953_f2d_531 9th cir weishan v commissioner supra see also 7_f3d_137 9th cir petitioners have failed to raise a spousal defense make a valid challenge to the appropriateness of respondent’s intended collection action or offer alternative means of collection these issues are now deemed conceded rule b in the absence of a valid issue for review we conclude that respondent is entitled to judgment as a matter of law sustaining the notice_of_determination dated date -- b imposition of a penalty under sec_6673 we turn now to that part of respondent’s motion that moves for the imposition of a penalty on petitioners under sec_6673 as relevant herein sec_6673 authorizes the tax_court to require a taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceeding is frivolous or groundless the court has indicated its willingness to impose such penalty in lien and levy cases 115_tc_576 and has in fact imposed a penalty in several such cases roberts v commissioner supra imposing a penalty in the amount of dollar_figure newman v commissioner tcmemo_2002_135 imposing a penalty in the amount of dollar_figure yacksyzn v commissioner tcmemo_2002_99 imposing a penalty in the amount of dollar_figure watson v commissioner tcmemo_2001_213 imposing a penalty in the amount of dollar_figure davis v commissioner tcmemo_2001_87 imposing a penalty in the amount of dollar_figure we are convinced that petitioners instituted the present proceeding primarily for delay in this regard it is clear that petitioners regard this proceeding as nothing but a vehicle to protest the tax laws of this country and to espouse their own -- - misguided views which we regard as frivolous and groundless in short having to deal with this matter wasted the court's time as well as respondent's and taxpayers with genuine controversies may have been delayed under the circumstances we shall grant that part of respondent’s motion that moves for the imposition of a penalty in that we shall impose a penalty of dollar_figure on petitioners pursuant to sec_6673 in order to give effect to the foregoing an appropriate order and decision will be entered


internal_revenue_service number release date index number 2032a ----------------- --------------------------------------- --------------------------- in re ----------------------------------- ------------------------------------------- ------------------------------------- --------------------------- department of the treasury washington dc person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc psi b09 - plr-169506-03 date date legend decedent ---------------------------------------------------------------------------------------------- ------------------------- ----------------- ------------ ------------ ---------------------- -------- this is in response to your letter dated date submitted on behalf date x corporation --------------------------- y state accountant ------------------------ date dear -------------- of decedent’s estate requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make an election under sec_2032a of the internal_revenue_code the facts submitted and representations made are summarized as follows decedent died on date decedent’s gross_estate included x shares of stock in corporation corporation is in the_business_of_farming and its primary asset consists of y acres of farmland located in state decedent’s form_706 united_states estate and generation-skipping_transfer_tax return accountant however was not familiar with the benefits provided by sec_2032a and the executor of decedent’s estate was unaware of the existence or applicability of sec_2032a decedent’s estate_tax_return was filed on date and no election or protective_election to specially value the farmland under sec_2032a was made on the return the executor of decedent’s estate relied on accountant to prepare and file sec_2032a provides generally that if the decedent was at the time of decedent’s estate has requested an extension of time under sec_301_9100-1 and sec_301_9100-3 to make an election under sec_2032a with respect to the farmland held indirectly by decedent through corporation his death a citizen or resident_of_the_united_states and the executor elects the application of this section and files the agreement referred to in sec_2032a then for purposes of chapter the value of qualified_real_property shall be its value for the use under which it qualifies under sec_2032a as qualified_real_property sec_2032a provides that the election under sec_2032a shall be made on the return of tax imposed by sec_2001 such election shall be made in such manner as the secretary shall by regulations prescribe such an election once made shall be irrevocable under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used 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 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of 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 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 the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government consequently an extension of time is granted until based on the facts submitted and the representations made we conclude that sec_301_9100-3 provides that a taxpayer is deemed to have acted days from the date of this letter for making an election under sec_2032a to specially value qualified_real_property however the burden is on the estate to establish to the service’s satisfaction that all of the requirements of sec_2032a are met 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 ruling_request it is subject_to verification on examination tax consequences of the transaction under the cited provisions or under any other provisions of the code of the code provides that it may not be used or cited as precedent except as specifically ruled herein we express or imply no opinion on the federal this ruling is directed only to the taxpayer who requested it sec_6110 sincerely heather c maloy associate chief_counsel passthroughs and special industries


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b4 - plr-128133-01 date november re legend taxpayer decedent decedent’s mother trust trust date date date state dear this letter is in reply to your letter of date requesting a ruling that trust property over which decedent had powers of appointment will not be included in decedent’s gross_estate under sec_2041 of the internal_revenue_code facts decedent’s mother created an irrevocable_trust on date trust of which decedent was the sole beneficiary on date decedent’s mother created a second irrevocable_trust trust which also benefitted decedent both date and date are prior to date each of the trust instruments provides that during the life of decedent the trustees shall pay to decedent the net_income of the trust monthly or quarterly or as often as in the judgment of the trustees the needs of decedent shall require each trust instrument further provides that the trustees have no power to invade the principal of the trust plr-128133-01 paragraph of trust provides that after the death of decedent the trustees shall pay the principal of the trust estate to such person or persons as decedent shall designate by power_of_appointment to be exercised by decedent either in her will or by separate instrument should decedent fail to exercise such power_of_appointment the principal of the trust shall be paid over to decedent’s heirs-at-law paragraph of trust directs that after the death of decedent the trustees shall pay one-half the principal of the trust estate to such person or persons as decedent shall designate by power_of_appointment to be exercised by decedent either in her will or by separate instrument should decedent fail to exercise such power_of_appointment one-half the principal of the trust shall be paid over to decedent’s heirs-at- law neither trust instrument limits the power_of_appointment to any individual or group of individuals decedent died on date a resident of state and is survived by seven children decedent did not exercise or release the powers of appointment during her lifetime under article vi of decedent’s will decedent specifically refuses to and does not exercise the powers of appointment granted to her under trust and trust the assets of trust and trust over which decedent had powers of appointment will pass to decedent’s children who are her heirs-at-law you have requested the following rulings both trust and trust create in decedent a general_power_of_appointment that is a general_power_of_appointment created before date under sec_2041 failure to exercise the general powers of appointment by will or otherwise is not an exercise of the powers for purposes of sec_2041 and accordingly the assets of trust and trust will not be includible in decedent’s gross_estate law and analysis sec_2041 provides that the value of the gross_estate shall include the value of all property with respect to which a general_power_of_appointment created on or before date is exercised by the decedent -- a by will or b by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive plr-128133-01 but the failure to exercise such a power or the complete release of such a power shall not be deemed an exercise thereof sec_2041 defines a general_power_of_appointment as a power that is exercisable in favor of the decedent the decedent’s estate the decedent’s creditors or creditors of the decedent’s estate a power to consume invade or appropriate property for the benefit of the decedent that is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent is not a general_power_of_appointment a power_of_appointment created on or before date which is exercisable by the decedent only in conjunction with another person is not a general_power_of_appointment sec_20_2041-1 of the estate_tax regulations provides that a power_of_appointment is not a general power if by its terms it is either a exercisable only in favor of one or more designated persons or classes other than the decedent or his creditors or the decedent’s estate or the creditors of the decedent’s estate or b expressly not exercisable in favor of the decedent or his creditors or the decedent’s estate or the creditors of his estate sec_20_2041-1 provides that a power_of_appointment created by an inter_vivos instrument is considered as created on the date the instrument takes effect such a power is not considered as created at some future date merely because it is not exercisable on the date the instrument takes effect or because it is revocable decedent had powers exercisable by will or separate instrument to appoint the principal of trust and one-half of the principal of trust to any persons the powers given in the instant case are general powers of appointment because they were exercisable in favor of decedent decedent’s estate decedent’s creditors or the creditors of decedent’s estate and were not limited by any ascertainable_standard and were not exercisable only in conjunction with another person therefore the powers of appointment are general powers of appointment under sec_2041 the general powers of appointment were created by the trust instruments on date sec_1 and accordingly the general powers of appointment were created before date furthermore based upon the facts submitted and the representations made decedent did not exercise or release the powers of appointment during life and under decedent’s will decedent specifically refused to exercise the powers of appointment granted to her under trust and trust therefore the assets of trust and trust which were subject_to the general powers of appointment are not includible in decedent’s gross_estate under sec_2041 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 plr-128133-01 referenced in this letter 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 a copy of this letter must be attached to any income_tax return to which it is relevant lorraine e gardner sincerely acting senior technician reviewer office of associate chief_counsel passthroughs and special industries


t c summary opinion united_states tax_court bernard w evers and deborah l evers petitioners v commissioner of internal revenue respondent docket no 3151-07s filed date bernard w evers pro_se katherine lee kosar for respondent ruwe judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue after concessions the issue for decision is whether petitioners are eligible for the exception under sec_72 to the 10-percent additional tax on an early withdrawal from petitioners’ qualified retirement account in which was used to repay a loan they had obtained to pay medical_expenses in background some of the facts have been stipulated and are so found at the time their petition was filed petitioners resided in ohio petitioners are husband and wife in petitioners borrowed dollar_figure from apci federal credit_union apci to pay expenses_incurred for the treatment of infertility petitioners used part of the proceeds from the loan to pay medical_expenses of dollar_figure during to the family fertility center for in vitro fertilization procedures respondent conceded on brief that the expenses petitioners incurred for in vitro fertilization procedures were medical_expenses on the basis of the transactional journal from the family fertility center respondent agrees that petitioners paid medical_expenses of dollar_figure in likewise respondent agrees that petitioners paid dollar_figure of medical_expenses in the transactional journal from the family fertility center however clearly indicates that petitioners paid dollar_figure in and dollar_figure in there is no explanation in the record as to the method the parties used to make their calculations in petitioners withdrew dollar_figure from their qualified retirement account with cooper cameron corp to repay the loan from apci sec_72 generally provides for a 10-percent additional tax on withdrawals from qualified_retirement_plans made before the employee attains age petitioners did not contend that they met this age requirement petitioners paid dollar_figure of the dollar_figure withdrawal to apci in partial satisfaction of their loan petitioners’ decision to prematurely withdraw funds from their qualified retirement account to repay apci was made under the belief that they would qualify for an exception to the 10-percent additional tax under sec_72 because they were using the withdrawn funds to repay the loan which had been acquired to pay medical_expenses petitioners timely filed their form_1040 u s individual_income_tax_return for they reported total income of dollar_figure petitioners properly included the dollar_figure distribution in their total reported income but did not include the corresponding sec_72 10-percent additional tax as part of their taxes owed on date respondent sent to petitioners a notice_of_deficiency in which he determined a deficiency in petitioners’ federal_income_tax of dollar_figure respondent’s determination indicated that petitioners’ form_1040 failed to include interest received from apci of dollar_figure reported to respondent on form 1099-int interest_income unemployment_compensation from the commonwealth of pennsylvania of dollar_figure and tax withholding of dollar_figure reported to respondent on form 1099-g certain government payments and the 10-percent additional tax of dollar_figure under sec_72 for a premature_distribution from their qualified_retirement_plan with cooper cameron corp reported to respondent on form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc petitioners petitioned the court for redetermination of the deficiency contending that they did not receive a form 1099-int from apci they did not have unemployment_compensation in and did not receive the form 1099-g from the commonwealth of pennsylvania and they are eligible for the sec_72 exception to the 10-percent additional tax because the dollar_figure distribution from their qualified retirement account was used to cover medical_expenses at trial petitioners conceded issues and the only issue remaining for us to decide is whether petitioners are eligible for the sec_72 exception to the 10-percent additional tax under sec_72 for the dollar_figure early withdrawal from their qualified retirement account with cooper cameron corp discussion sec_72 imposes a 10-percent additional tax on early distributions from qualified_retirement_plans the fact that petitioners’ distribution was early is not in dispute the issue is whether petitioners qualify for the sec_72 exception to the 10-percent additional tax sec_72 provides that the imposition of the additional tax under sec_72 shall not apply to distributions made to the employee to the extent such distributions do not exceed the amount allowable as a deduction under sec_213 to the employee for amounts paid during the taxable_year for medical_care determined without regard to whether the employee itemizes deductions for such taxable_year sec_213 provides a deduction for expenses paid during the taxable_year not compensated by insurance or otherwise for medical_care of the taxpayer his spouse or a dependent to the extent that such expenses exceed percent of the taxpayer’s adjusted_gross_income the medical_expense_deduction under sec_213 is allowable only with respect to medical_expenses actually paid during the taxable_year regardless of when the incident or event which occasioned the expenses occurred and regardless of the method_of_accounting employed by the taxpayer in making his income_tax return see sec_1_213-1 income_tax regs in other words it is the time of payment that determines the year of the deduction 55_tc_753 petitioners contend that because dollar_figure of the early distribution from their qualified retirement account was used to repay a portion of the borrowed funds that were used to pay their medical_expenses the partial repayment of the loan in should be considered tantamount to direct payments of medical_expenses in respondent disagrees and contends that the sec_72 exception could apply only with respect to medical_expenses actually paid in respondent contends that dollar_figure of medical_expenses was paid in with the borrowed funds not in when the loan was partially repaid with the funds distributed from petitioners’ qualified retirement account and that the medical_expenses actually paid in fall well short of percent of petitioners’ adjusted_gross_income see sec_213 the clear language of sec_72 limits the scope of the exception to the amount of deductible medical_expenses paid during the taxable_year of the distribution duncan v commissioner tcmemo_2005_171 this exception does not apply to the medical_expenses that petitioners paid in because the taxable_year of the early distribution was see id the small amount of medical_expenses actually paid in is not deductible because it does not exceed percent of petitioners’ adjusted_gross_income see sec_213 we conclude that petitioners are not eligible for the sec_72 exception to the 10-percent additional tax on the early distribution from their qualified_retirement_plan in although we are sympathetic to petitioners’ situation we cannot ignore the plain language of the statute to reflect the foregoing decision will be entered for respondent


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-123391-11 date date legend taxpayer state a b c ------------------------------------------------ ------------------------- ------------- ---------------------------- ------------------------------------ association -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ ------------------------- association dear ---------------- this is in response to a request for a ruling dated date submitted by your authorized representative the ruling requests that taxpayer will continue to be a corporation operating_on_a_cooperative_basis within the meaning of sec_1381 of the internal_revenue_code after the alignment transaction described below taxpayer is a corporation operating_on_a_cooperative_basis organized under state a law taxpayer was formed in ------- it was reorganized on a cooperative basis in ------- at that time taxpayer received a private_letter_ruling plr dated date confirming its status as a nonexempt_cooperative subject_to the provisions of subchapter_t of the code plr-123391-11 taxpayer is a cooperative serving b hospitals currently the members of taxpayer are -----------------------b hospitals taxpayer’s members share data knowledge and buying power to reduce costs and improve clinical and operational performance in b hospitals the principal activities taxpayer engages in on behalf of its members are group purchasing taxpayer provides group purchasing and supply chain management services group purchasing for its members and their affiliates through taxpayer members and their affiliates have access to the c contract portfolio and to contracts that taxpayer has itself negotiated with vendors these contracts cover a broad array of medical surgical pharmaceutical and other products and services that taxpayer’s members require to operate their b hospitals during members and their affiliates purchased approximately ----------------of products and services under these contracts under the contracts taxpayer’s members typically place orders directly with the vendors the vendors ship directly to them and bill them directly and the members pay the vendors directly the contracts provide for favorable pricing they also usually require vendors to pay administrative fees to c in the case of the c contracts and to taxpayer in the case of the taxpayer contracts by virtue of the agreement that provides taxpayer’s members with access to the c contracts taxpayer shares in administrative fees paid_by vendors to c with respect to purchases made by taxpayer’s members and their affiliates under the c contracts insurance services in addition taxpayer provides insurance advisory and agency services insurance services to its members and their affiliates taxpayer is a registered insurance agent taxpayer helps members find and evaluate the insurance products that best fit their needs for instance taxpayer helps the human resources departments of members’ affiliates evaluate and purchase life_insurance long term disability insurance and other insurance products when members and their affiliates purchase insurance through taxpayer taxpayer earns agency commissions other services taxpayer also provides a variety of other services other services to its members and their affiliates these services are focused on enhancing clinical performance to improve the quality of care delivered to patients improving business processes to reduce hospital costs increase revenue and strengthen the competitive position of members and education knowledge and information sharing and leadership training taxpayer facilitates these activities for members through plr-123391-11 arranging forums for key employees -------- an active online learning management system and database sharing among members taxpayer allocates patronage_dividends by treating its activities as a single allocation unit historically taxpayer’s group purchasing and insurance services have been profitable and its other services have broken even or operated at a modest loss net_earnings are shared by group purchasing and insurance services members and their affiliates based upon patronage patronage is measured by each patron’s contribution to the group purchasing and insurance services gross revenues for the year the b hospitals have a number of unique needs and interests historically these needs and interests have been served by taxpayer and two other national organizations association nonprofit corporation which operates as a trade_association for b hospitals it is exempt from taxation under sec_501 of the code association 1’s mission is to advocate for public policies that support the ability of b hospitals to fulfill their missions of clinical care education research and advocacy association also is a nonprofit corporation it operates as a charitable_organization exempt from taxation under sec_501 of the code association provides a number of information and educational_services to its members and also develops data for association to use in its advocacy efforts there is considerable overlap in the membership of the three organizations association has ----- b hospitals as voting members including all --- members of taxpayer association 2’s voting members are the same ----- hospitals that are the voting members of association including taxpayer’s --- members association also has --- non-voting members the members and leadership of taxpayer association and association have long felt that the three organizations could more effectively serve the needs of b hospitals if their activities were more closely aligned in early the board_of directors of taxpayer and the executive committees of the boards of trustees of association and association charged a joint task force to explore an alignment between and among the organizations on --------------------------- the three organizations entered into a nonbinding memorandum of understanding setting forth the mutual intention of the parties to work together to restructure and consolidate the three organizations under a single parent trade_association for b health care providers plr-123391-11 on --------------------- taxpayer association and association entered into a consolidation agreement the consolidation agreement the consolidation agreement begins by reciting why the three organizations are taking steps to become more closely aligned whereas on --------------------------- the parties signed a memorandum of understanding signifying their intent to pursue an alignment of the three organizations that would restructure and consolidate the three organizations under a single parent trade_association with aligned governance consolidated operational leadership and a single nationwide advocacy voice for b health care providers the ‘alignment’ whereas the parties are at pivotal moments in their respective histories in which the national health care economic and political environments are in a state of substantial change and the needs and responsibilities of b health care providers are being reshaped whereas the members and owners of the parties will require effective and coordinated representation in order to respond to these challenges and to continue to improve the quality and efficiency of the care they provide while also continuously enhancing the health of all b whereas the executive leadership of the parties is in transition offering an opportunity for potential restructuring and alignment of the three organizations to better meet the challenges and needs of the future and whereas the parties have determined that the alignment will better serve the needs of their members and owners and wish to create a new organization to advance their aims through the alignment of the parties under a single fiduciary and executive leadership with streamlined operations the consolidation agreement then describes the purposes of the alignment sec_1 of the consolidation agreement provides purposes this agreement is entered into in order to improve and enhance the ability of the members and owners of the parties to achieve a number of important goals including strengthening the prospects of advancing into the future ‘------------- --------’ as a single national b organization and advocate for all b health care providers rationalizing future information_technology and related organizational investments that must be made to support continued advances in the quality safety and costs of caring for b by sharing with greater economy the elements of plr-123391-11 the fundamental infrastructure data capture processing and support currently in use by the parties sharing and cost rationalization of other selected services including overall executive leadership structures educational and meeting support administrative support performance improvement and quality transformation and spending on outside assistance in order to improve the ability of the new organization to increase funding in critical areas such as public policy and advocacy aligning governance in order to maximize the most efficient use of member time and resources and more effectively define and implement consolidated programs on behalf of the sponsoring membership and avoid unnecessary duplication and redundancy promoting a more effective and coordinated development of services and activities that may be sponsored or purchased by subgroups within the combined membership sec_1 of the consolidation agreement provides a general overview of the alignment transaction the alignment transaction the consolidation agreement provides that association will become the parent trade_association and that association and taxpayer will become subsidiaries of association association will continue to operate as a sec_501 trade_association conducting its current advocacy activities association will continue to operate as a sec_501 organization and will be responsible for the charitable activities of the three organizations association 2’s activities will include its current information_technology and educational_services it is envisioned that association will eventually also assume responsibility for the other services currently being provided to members by taxpayer taxpayer will continue to provide group purchasing and insurance services on a cooperative basis the consolidation agreement provides that the alignment will occur in two steps the first step in the alignment is alignment of governance of the three organizations this step which took place on ------------------ focuses on aligning the boards of the three organizations and starting a search for a person to serve as the chief_executive_officer of all three organizations as part of the alignment of governance on --------------------- the taxpayer members approved an amendment to the bylaws of taxpayer to reflect the alignment of its board_of directors with that of association and association in pertinent part sec_4 of the bylaws was amended by adding as of ------------------ the directors shall consist of those persons elected at a meeting of the stockholders held on or about --------------------- each to serve for either a one or two year term as assigned to him or her at the time of election provided that the effective date of such terms may occur plr-123391-11 at a date other than ------------------ as determined in accordance with the resolution adopted by the stockholders at such meeting in accordance with this bylaw the taxpayer members then elected new directors the members of association and association went through a similar process the same persons were elected to the boards of each of the three organizations each of the boards now has thirteen members the person serving as president of taxpayer association and association seven representatives of -------- ------------------ b hospitals four representatives of institutions that are a b hospital within a hospital or hospital system and one representative of a specialty b hospital of these directors eight are representatives of institutions that are members of taxpayer the representatives of the--------------------b hospitals and the representative of one of the b hospitals within a hospital or hospital system at the same meeting the taxpayer members also approved an amended certificate of incorporation and amended and restated bylaws for taxpayer which become effective at a final closing to be held within thirty days following this ruling as a result the amended certificate of incorporation and the amended and restated bylaws have not yet gone into effect in addition during --------- and --------------- all members of taxpayer entered into a stock transfer agreement with taxpayer and association the stock transfer agreement as described in detail below it is contemplated that the members of taxpayer will transfer their shares of common_stock of taxpayer to association making taxpayer a subsidiary of association concurrent with such transfer of shares association will grant each member of taxpayer a proxy entitling such member to vote the transferred shares at stockholders’ meetings the consummation of the stock transfers contemplated in the stock transfer agreements will occur at a final closing to be held within thirty days following this ruling so the transfers have not yet occurred the second step in the alignment process will be the final closing which will occur after this ruling see sec_1 of the consolidation agreement at that time i the amended certificate of incorporation will be filed with the secretary of state a ii the amended and restated bylaws will become effective iii the transfers of the shares of common_stock pursuant to the stock transfer agreements will occur iv the initial grant of voting proxies by association to the transferring taxpayer members will take place and v taxpayer will become a subsidiary of association the focus of this ruling is upon whether the alignment transaction will have any effect on taxpayer’s status as a nonexempt subchapter_t cooperative taxpayer believes it will not taxpayer currently operates at cost its capital is subordinated and it is controlled by its members on a one-member one-vote basis in the event of dissolution its residual assets will be distributed on a patronage basis none of these plr-123391-11 things will change as a result of the transfer by taxpayer’s members of their shares of taxpayer common_stock to association pursuant to the alignment transaction the alignment transaction is driven by a desire to achieve aligned governance among taxpayer association and association and to achieve improved efficiency for their collective members while at the same time preserving taxpayer’s status as a nonexempt subchapter_t cooperative three key documents establish taxpayer’s continuing cooperative character after the alignment transaction - namely taxpayer’s amended certificate of incorporation the certificate of incorporation taxpayer’s amended and restated bylaws the bylaws and the stock transfer agreement the pertinent portions of these documents are described below taxpayer’s articles of incorporation and bylaws continue to provide that taxpayer will be organized and operated on a cooperative basis for the benefit of the members associate members and their affiliates as patrons and not as stockholders articles of incorporation article fourth j bylaws article ii sec_2_1 historically taxpayer’s members have been --------------------b hospitals all current members will continue as taxpayer members after the alignment transaction whether or not they remain members of association certificate of incorporation article fourth j bylaws article ii sec_2 a other health care organizations may become members of taxpayer in the future in order to be eligible to become a new member of taxpayer an organization must be i a voting member of association ii committed to ------------ care education and research iii financially able to meet its commitments to taxpayer and iv in good standing under and in substantial compliance with applicable licensing and health laws in addition a prospective member’s membership application must be approved by the board_of directors of taxpayer bylaws article ii sec_2 b and c organizations interested in participating in taxpayer’s group purchasing and insurance services programs on a patronage basis that do not meet all of the requirements for membership will continue to be eligible to become associate nonvoting members bylaws article ii sec_2 historically taxpayer has not had any associate members but this category has been preserved to maintain the flexibility to be able to do business with institutions other than members on a patronage basis should the occasion arise affiliates of members and associate members will continue to be eligible to do business with taxpayer on a patronage basis for this purpose affiliate means an entity which directly or indirectly through one or more intermediaries controls is controlled by or is under common_control with a member or an associate member bylaws article ii sec_2 c taxpayer may provide services to nonmembers on a nonpatronage basis but historically its business with nonmembers has been quite limited ie less than ----- percent of its over-all business in recent years for purposes of this ruling taxpayer plr-123391-11 represents that business on a patronage basis with or for members associate members and affiliates will constitute more than percent of its overall business taxpayer continues to be required by its certificate of incorporation and bylaws to determine its net_earnings from business done with or for members associate member and affiliates its patronage_earnings and its net_earnings from other sources its nonpatronage earnings after the end of each year certificate of incorporation article fourth b i bylaws article viii section a taxpayer is then required to allocate its patronage_earnings among members associate members and affiliates on a patronage basis and to distribute and pay the amounts so allocated within eight and one-half months of year end as patronage_dividends in cash property written notices of allocation qualified or nonqualified or some combination thereof certificate of incorporation article fourth b iii and iv bylaws article viii section c and d taxpayer continues to be authorized to retain nonpatronage earnings after payment of taxes as unallocated reserves or surplus certificate of incorporation article fourth b ii bylaws article viii section b amounts not retained and not used to pay taxes are allocated among members associate members and affiliates in the same manner that patronage_earnings are allocated certificate of incorporation article fourth b iii and iv bylaws article viii section c and d while any amounts of nonpatronage earnings added to reserves or surplus may be unallocated taxpayer is required to apportion any unallocated reserves or surplus on the books on a patronage basis each year or to maintain the records to do so so that in the event of distribution of amounts from such unallocated reserves or surplus other than upon dissolution each past or present member each associate member and each affiliate may receive its pro_rata share of such distribution certificate of incorporation article fourth c bylaws article viii section taxpayer’s certificate of incorporation authorizes it to issue two classes of capital stock - common_stock and preferred_stock certificate of incorporation article fourth currently there are no shares of preferred_stock issued and outstanding the economic rights of holders of common_stock and preferred_stock are limited neither class of shares is entitled to receive dividends certificate of incorporation article fourth a upon dissolution the right of each class of stock to share in assets is limited holders of shares of common_stock are entitled to receive an amount equal to what was paid for the shares and no more certificate of incorporation article fourth g holders of shares of preferred_stock are entitled to receive par_value per share and no more certificate of incorporation article fourth g in the event of dissolution any residual assets are shared by members associate member and affiliates on a patronage basis certificate of incorporation article fourth g the only class of stock with voting rights is the common_stock and each share has one vote certificate of incorporation article fourth e historically only members of taxpayer have been permitted to own shares of common_stock and each member plr-123391-11 of taxpayer was required to purchase five shares of common_stock certificate of incorporation article fourth f thus each member of taxpayer had an equal number of votes ie five and taxpayer effectively operated on a one-member one-vote basis this ruling refers to taxpayer as operating on a one-member one-vote basis as a short-hand for the actual system where each member has an equal five votes as part of the alignment transaction all members of taxpayer have entered into stock transfer agreements with association and taxpayer upon issuance of this ruling the members will transfer their shares of taxpayer common_stock to association making taxpayer a wholly-owned subsidiary of association because of the way taxpayer is structured and because of various provisions in the stock transfer agreement the proposed share transfers should have no impact on taxpayer’s status as a nonexempt subchapter_t cooperative first the alignment transaction will not change beneficial_ownership of the shares the limited economic rights that accompany ownership of shares of common_stock in taxpayer will remain with the members of taxpayer and thus members will continue to be the beneficial owners of the common_stock sec_1 of the stock transfer agreement provides that a member agrees to transfer legal_title and only legal_title to its five shares of common_stock to association it goes on to provide that all economic incidents_of_ownership of such shares as provided now and from time to time in article fourth of the company’s certificate of incorporation and in article viii of the company’s bylaws and elsewhere in said certificate of incorporation or bylaws shall remain in member- transferor for so long as member-transferor remains a member of company association agrees to promptly pay over to member- transferor any amounts it may hereafter receive in any capacity with respect to the shares emphasis added the economic rights of the shares of common_stock will remain limited as described above the shares of common_stock are not entitled to receive dividends holders of shares of common_stock are not under any circumstances entitled to receive more than they originally paid for the shares dollar_figure per share moreover association has agreed to promptly pay over to member-transferor any amounts it may hereafter receive in any capacity with respect to the shares thus preserving in the taxpayer members their right to their original investment in taxpayer second association will not have any patronage rights by reason of the transfer of the shares association will not become and it will not be eligible to become a member associate member or affiliate of taxpayer by reason of the transfers of shares of common_stock from members to association association will not be a patron of taxpayer plr-123391-11 the current members associate members and affiliates will continue to be the patrons of taxpayer as such they and not association will continue to be entitled to share on a patronage basis in earnings retained earnings and residual assets of taxpayer on dissolution sec_4 of the stock transfer agreement emphasizes that no rights member-transferor enjoys by reason of its status as a member patron or its historic status as a holder of shares of common_stock member of the company are being transferred or otherwise affected by virtue of the transfer of the shares including without limitation member-transfer’s patronage rights emphasis added third the members of taxpayer will continue to control taxpayer on a one- member one-vote basis as the record_owner of the transferred shares of common_stock association will have the legal right to vote the shares however association has committed in the stock transfer agreement and elsewhere to give each member referred to in the stock transfer agreement as member-transferor a proxy to vote the shares it transferred to association as a condition of member-transferor’s transfer of the shares association will grant to member-transferor immediately following the closing date and periodically thereafter so long as member-transferor continues as a member of the company in accordance with the company’s bylaws and such policies as the company’s board_of directors may from time to time approve a proxy to vote the shares on any matter submitted for a vote of the stockholders including any matters on which a vote of the stockholders is required under the state a ----------- ----------------------- the company’s bylaws or the company’s certificate of incorporation emphasis added this grant of proxies ensures that taxpayer will continue to be controlled by its member patrons on a one-member one-vote basis just as it is today this obligation to grant proxies contained in the stock transfer agreement is backstopped by a provision being added to the bylaws of association which provides sec_11 voting of shares in taxpayer during the association entered into a transaction with the taxpayer and the association designed to bring about greater alignment among the three organizations the ‘alignment transaction’ pursuant to the terms of a consolidation agreement among the parties to the alignment transaction the ‘consolidation agreement’ as part of the alignment transaction certain holders of shares of the common_stock of taxpayer agreed subject_to the terms of a stock transfer agreement executed by each such holder taxpayer and the association to transfer legal_title to their shares of common_stock to the association intending such transfer to take effect in accordance with the consolidation agreement and in furtherance of the plr-123391-11 objectives of the alignment transaction but without relinquishing any of the economic incidents_of_ownership of such shares as defined in article fourth of taxpayer ’s amended and restated certificate of incorporation in article viii of taxpayer ’s bylaws and in the stock transfer agreements the ‘stock transfer agreements’ for so long as the association is a shareholder of taxpayer the association shall in advance of each annual or special meeting of taxpayer stockholders grant to each member of taxpayer that transferred shares to the association in connection with the alignment transaction or thereafter a proxy to vote the five shares of common_stock transferred to the association by such member entitling the member to a corresponding number of votes at such meeting on any matter on which a vote of the stockholders is required under the state a ----------------------------------- the corporation’s bylaws or the corporation’s certificate of incorporation or on any other matter that may be submitted to the stockholders for a vote in accordance with the bylaws of taxpayer and further entitling each such member to the right to approve by the affirmative vote of a majority of such member any amendment or repeal of this sec_11 prior to such amendment or repeal being presented for action in accordance with article ix of these bylaws during the period in which the proxy held by such member is effective emphasis added section of the stock transfer agreement provides for an automatic retransfer of the shares to members upon the occurrence of a variety of events including among other things i the failure of association to grant a proxy to any member of taxpayer to vote the shares the member transferred to association pursuant to a stock transfer agreement ii any actual or attempted vote of any of the shares by association itself at any taxpayer stockholder meeting other than in accordance with a proxy granted by association pursuant to sec_3 of the stock transfer agreement iii any actual or attempted transfer of the shares or iv a ny change to the company’s certificate of incorporation bylaws or other governing documents that effects a change to the cooperative status of the company pursuant to sec_1381 of the code or that affects the patronage rights of members associate members and their affiliates unless such change is duly adopted and approved by the members the provisions outlining the composition of taxpayer’s board_of directors after the alignment transaction are contained in sec_4 of the bylaws while persons that are not members or representatives of members will be eligible to serve on taxpayer’s board_of directors taxpayer represents this arrangement is not unusual for cooperative organizations what is important is that taxpayer’s members and only taxpayer’s members will remain the persons who will elect the members of taxpayer’s board_of directors in addition members will continue to have the power to remove directors bylaws article iv sec_4 one new provision in the bylaws is the requirement that at least eight directors approve certain specified actions namely plr-123391-11 a the approval of candidates to serve as directors including those proposed to fill vacancies b the selection or removal of the president c the election of the chairman and the vice chairman and d the approval of each annual budget and any capital budget and e the issuance or incurrence of any significant debt this provision was added to ensure that there be a consensus on important matters among the various constituencies served by the aligned entities it was added not only to the taxpayer bylaws but also to the organizational documents of association and association based on the foregoing taxpayer requests a ruling that after the alignment transaction described above taxpayer will continue to be a corporation operating_on_a_cooperative_basis within the meaning of sec_1381 of the code sec_1381 of the code provides that subchapter_t shall apply to any corporation operating_on_a_cooperative_basis with certain exceptions sec_1 a of the income_tax regulations states that subchapter_t of the code applies to any corporation operating_on_a_cooperative_basis and allocating amounts to patrons on the basis of business done with or for such patrons however sec_1381 excepts from subchapter_t an organization a which is exempt from tax under chapter b which is subject_to the provisions of part ii of subchapter_h relating to mutual_savings_banks etc or subchapter_l relating to insurance_companies or c which is engaged in furnishing electric energy or providing telephone service or persons in rural areas what it means to be operating_on_a_cooperative_basis within the mean of subchapter_t of the code is not defined in the code or the regulations revrul_93_21 1993_1_cb_188 provides that the cooperative principles in 44_tc_305 acq 1966_1_cb_3 provide the basis for determining whether a corporation is operating_on_a_cooperative_basis for purposes of subchapter_t in puget sound plywood the tax_court described three principles as fundamental to cooperative operation 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 the allocation among the worker- members of all fruits and increases arising from their cooperative endeavor ie the excess of the operating revenues over the costs incurred in generating those revenues in proportion to the worker- members' active_participation in the cooperative endeavor plr-123391-11 implementation of the first of these three principles relating to the subordination of capital contributions in determining the right to the pecuniary benefits is effected through the statutes under which the cooperatives are organized and also by the charters and bylaws of the cooperatives themselves-all of which contain limitations upon the amounts that may be distributed to members in respect of the stock which represents the necessary capital that the members themselves supply indeed in the case of many cooperatives distributions in respect of the worker-members' stock are forbidden entirely also implementation of the subordination of capital as regards control_over the management and direction of the cooperative is achieved through bylaw provisions which vest in the members themselves the right and power to elect the trustees and the officers of the cooperative implementation of the second of the above principles relating to democratic control is effected by having the worker-members themselves periodically assemble in democratically conducted meetings at which each member has one vote and one vote only and at which no proxy voting is permitted and these workers there deal personally with all problems affecting the conduct of the cooperative and finally the third of the above-mentioned principles of cooperatives relating to the proportionate vesting in and allocation among the worker- members of all fruits and increases from their cooperative endeavor is achieved through statutes bylaws and contractual arrangements between the association and its members whereby the elected officers of the association are required to make periodic allocations of the same among the members in proportion to their active_participation as workers taxpayer will continue to be a corporation operating_on_a_cooperative_basis after the alignment transaction thus it will continue to be a subchapter_t cooperative unless one of the exceptions listed in sec_1381 of the code applies taxpayer represents that it does not currently and after the alignment transaction it will not fall in one of the exceptions listed in sec_1381 of the code taxpayer is not and will not be exempt from tax under chapter of the code taxpayer is not and will not be subject_to the provisions of part ii of subchapter_h of the code relating to mutual_savings_banks etc it is not involved in the banking business taxpayer is not and will not be engaged in furnishing electric energy or providing telephone service to persons in rural areas plr-123391-11 taxpayer is not and will not be a corporation subject_to the provisions of subchapter_l of the code relating to insurance_companies while taxpayer provides among other things insurance services to members and affiliates it does not act as an insurance_company assuming risks as an insurer or reinsurer taxpayer provides insurance advisory services and acts as an insurance agent but neither of those activities makes it an insurance_company subject_to the provision of subchapter_l taxpayer does not itself write insurance or annuity_contracts or reinsure the risks underwritten by insurance_companies after the alignment transaction taxpayer will continue to be a corporation operating_on_a_cooperative_basis within the meaning of sec_1381 of the code each of the puget sound plywood principles and its application to taxpayer is considered in turn below taxpayer’s certificate of incorporation and bylaws provide that it will be organized and operated on a cooperative basis for the benefit of the members associate members and their affiliates as patrons and not as stockholders the first characteristic of a cooperative identified in puget sound plywood is subordination of capital subordination of capital requires that control of the cooperative and ownership of the pecuniary benefits arising from the cooperative’s business remains in the hands of the member patrons of the cooperative rather than with nonpatron equity investors in the cooperative the purpose of this limitation is to insure that the gains that accrue to the cooperative from the business that it transacts with its patrons will largely or completely inure to the benefit of those patrons rather than to its stockholders to be operating_on_a_cooperative_basis a cooperative must limit the financial return with respect to its equity_capital puget sound plywood t c pincite stated differently a cooperative may not be operated for the purpose of paying a return on equity investments taxpayer has and will continue to have a single class of common_stock shares of common_stock are not entitled to dividends and are limited on dissolution after the alignment transaction takes place record ownership of all of the shares of common_stock will be in the hands of association however association will be required to give proxies to vote the shares to the members of taxpayer ensuring that the members of taxpayer and not association will continue to control taxpayer should association fail for any reason to grant proxies the shares will automatically be transferred back to the members of taxpayer who transferred shares to association providing a firm backstop to the requirement that association grant proxies taxpayer is authorized to issue shares of preferred_stock but there are no shares issued and outstanding the certificate of incorporation and bylaws provide that any preferred_stock that taxpayer might issue in the future will not bear dividends and will be nonvoting and that upon dissolution a holder of any shares of preferred_stock will be limited to receipt of par_value and no more thus any preferred_stock that may be issued in the future will provide fixed and limited rights to share in earnings for this reason and given the fact that the shares of preferred_stock will not be entitled plr-123391-11 to vote the tests for determining that capital is subordinated will be met thus both the common_stock and preferred_stock are subordinated to the interests of the members associate member and affiliates the second characteristic of a cooperative identified in puget sound plywood is democratic control by the worker-members democratic control of the cooperative as envisioned in puget sound plywood is typically achieved by voting on a one-member one-vote basis the only class of voting_stock will be common_stock and each member will own one and only one share of common_stock thus voting will be on a one- member one-vote basis after the alignment transaction taxpayer will continue to be democratically controlled by its members while association will own all of the shares of common_stock of taxpayer the members of taxpayer will retain beneficial_ownership of the limited economic rights of that stock in addition the stock transfer agreements require association to grant to each member of taxpayer transferring shares of common_stock a proxy to vote the shares the member transfers after granting such proxies association will have no remaining votes as a consequence at any meeting of the stockholders the members will have all of the votes and because each member will have transferred five shares of common_stock to association each member’s proxy will result in each member voting on a one-member one-vote basis article iii sec_3_8 and dollar_figure of the bylaws of taxpayer expressly contemplate and authorize this arrangement sec_3_8 transfer of legal_title to shares of common_stock to association during certain holders of shares of the common_stock of the corporation agreed subject_to the terms of a stock transfer agreement executed by each such holder the corporation and association to transfer legal_title to their shares of common_stock to association intending such transfer to take effect in accordance with the consolidation agreement and in furtherance of the objectives of the alignment transaction legal_title to any share of common_stock of the corporation issued to new members pursuant to sec_2 b shall transfer automatically to association subject_to terms and conditions substantially_similar to those of the stock transfer agreements sec_3_10 proxies it is expressly contemplated that association shall at any time be entitled to a number of votes equal to the shares of common_stock transferred to it in the manner described in article iii sec_3_8 and that association shall in advance of each annual or special meeting of the stockholders grant to each member of the corporation that has transferred shares to association a proxy to vote the five shares of common_stock transferred to association by such member entitling the member to a corresponding number of votes at that meeting on any matter on which a vote of the stockholders is required plr-123391-11 under state a ----------------------------------- the corporation’s bylaws or the corporation’s certificate of incorporation or on any other matter that may be submitted to the stockholders for a vote including without limitation the selection of the corporation’s board_of directors any amendment or restatement of the corporation’s certificate of incorporation or bylaws any sale of the common_stock of the corporation any merger or consolidation of the corporation or any sale of all or substantially_all of the corporation’s assets in connection with the alignment transaction association has amended its bylaws to require that proxies to vote the shares it will own in taxpayer be granted to the members of taxpayer any change to that bylaw requires approval of the taxpayer members entitled to receive proxies from association further if for any reason association fails to grant proxies to any or all of the members who transferred shares to association or if association itself votes or attempts to vote any of the shares of common_stock at a taxpayer meeting all of the shares of common_stock will automatically be transferred back to the taxpayer’s members these procedures will leave control of taxpayer in the hands of its members thus ensuring that after the alignment transaction taxpayer will continue to be democratically controlled by its members the service has recognized that cooperatives may have proxy voting without jeopardizing cooperative status revrul_75_97 1975_1_cb_167 holds that an exempt sec_521 cooperative will not be denied exemption solely by reason of proxy voting in thwaites terrace house owners corp v commissioner 72_tcm_578 a housing cooperative was found to be operating_on_a_cooperative_basis notwithstanding that it permitted proxy voting in so holding the tax_court cited revrul_75_97 the proxy arrangements provided for in the association and taxpayer operative documents and in the stock transfer agreements are designed to ensure that the members of taxpayer continue to remain in control of taxpayer and that they continue to vote on a one-member one-vote basis thus the democratic control requirement will continue to be met revrul_93_21 1993_1_cb_188 provides that a cooperative that operates on a for-profit nonpatronage basis with nonmembers will not be precluded from being considered operating_on_a_cooperative_basis simply because it does less than percent in value of its business with members on a patronage basis whether a corporation is operating_on_a_cooperative_basis under sec_1381 of the code will be determined from all the facts and circumstances and the cooperative principles enunciated in puget sound plywood plr-123391-11 taxpayer is authorized to provide services to nonmembers on a nonpatronage basis however taxpayer’s focus has historically been on business done with or for members and their affiliates business with nonmembers on a nonpatronage basis has been limited less than ------percent of taxpayer’s total business in recent years taxpayer represents that after the alignment transaction over percent of its business will continue to be with members associate members and affiliates and will be conducted on a patronage basis the third characteristic of a cooperative identified in puget sound plywood is the vesting in and allocation among the members of all fruits and increases arising from their cooperative endeavor consistent with that objective the certificate of incorporation and bylaws provide that members associate members and affiliates of taxpayer will share the fruits and increases from their cooperative endeavor in the following manner each year taxpayer will determine its net_earnings or loss from business done with or for members associate members and affiliates its patronage_earnings and its net_earnings or loss from other business its nonpatronage earnings taxpayer will then allocate its patronage_earnings among members associate members and affiliates on a patronage basis and it will distribute and pay the amounts so allocated within eight and one-half months after the end of the fiscal_year as patronage_dividends in cash property and written notices of allocations qualified or nonqualified or any combination thereof as the board_of directors determines taxpayer will use any nonpatronage earnings to pay or provide for taxes all or any portion of remaining nonpatronage earnings may if the board_of directors so determines be allocated and distributed to members associate members and affiliates in the same manner that patronage_earnings are allocated amounts not so allocated and distributed will be added to unallocated reserves or surplus while the amounts of nonpatronage earnings added to reserves or surplus may be unallocated taxpayer is required to apportion any unallocated reserves or surplus on the books on a patronage basis each year or to maintain the records to do so so that if the amounts are later distributed they will be shared on a patronage basis these provisions are contained in article fourth of taxpayer’s certificate of incorporation and in article viii of taxpayer’s bylaws in addition article fourth g of taxpayer’s certificate of incorporation provides that upon dissolution any residual assets will be shared by members associate members and affiliates upon the basis of the quantity or value of business done with taxpayer as shown by the records of taxpayer these provisions provide for a strict sharing of all earnings not just plr-123391-11 patronage_earnings of taxpayer on a cooperative basis both currently and on dissolution thus taxpayer will be operating at cost in conclusion after the alignment transaction taxpayer will continue to have all of the characteristics necessary for an organization to be operating_on_a_cooperative_basis as that term is used in sec_1381 of the code taxpayer will operate at cost its capital stock will be subordinated to the patronage interests of its members associate members and affiliates and it will be democratically controlled on a one- member one-vote basis by its members in addition it will continue to do over half of its business with members associate members and affiliates on a patronage basis accordingly we rule as requested that after the alignment transaction taxpayer will continue to be a corporation operating_on_a_cooperative_basis within the meaning of sec_1381 of the code this ruling is directed only to the taxpayer that requested it under sec_6110 of the code it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours paul f handleman chief branch office of the associate chief_counsel passthroughs special industries cc


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 washington d c date cc ita genin-123314-05 office_of_chief_counsel number info release date uil ----------------- -------------------------------------- -------------------------------------------------- ------------------------------ dear -------------- this letter responds to your telephone calls and email dated date regarding the proper tax treatment of certain expenses related to a boat that is primarily for personal_use this letter calls your attention to certain general principles of the law without applying them to a specific set of facts see revproc_2005_1 sec_2 2005_1_irb_7 sec_262 of the internal_revenue_code generally denies a deduction for personal living or family_expenses sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business sec_212 in relevant part allows an individual a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year for the production_of_income sec_183 provides that in the case of an activity engaged in by an individual or an s_corporation if such activity is not engaged in for profit no deduction attributable to such activity is allowed except as provided in sec_183 sec_183 defines an activity_not_engaged_in_for_profit as an activity other than one for which deductions are allowable under sec_162 or sec_212 no deductions are allowable under sec_162 or sec_212 for activities that are carried on primarily as a sport hobby or for recreation sec_1_183-2 sec_183 provides that in relation to an activity_not_engaged_in_for_profit a taxpayer can take those deductions that would be allowable without regard to profit_motive and can take deductions that would be allowed if the activity were engaged in for profit but only to the extent that gross_income derived from such activity for the taxable_year exceeds the deductions allowable without regard to profit_motive in sum sec_183 allows deductions for expenses_incurred in an activity_not_engaged_in_for_profit but only to the extent of gross_income from that activity therefore taxpayers may not deduct losses_incurred in an activity_not_engaged_in_for_profit genin-123314-05 the regulations under sec_183 list nine factors to be considered in determining whether a taxpayer has a profit_motive in conducting a certain activity the extent to which the taxpayer carries out the activity in a businesslike manner the expertise of the taxpayer or his advisors the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in other similar or dissimilar activities the taxpayer's history of income or losses with respect to the activity the amount of occasional profits if any that are earned the ta xpayer's financial status and any elements of personal pleasure or recreation derived from the activity sec_1_183-2 - of the income_tax regulations although a taxpayer's expectation of profit need not be reasonable the facts and circumstances must indicate that the taxpayer entered into the activity or continued the activity with the actual and honest objective of making a profit 78_tc_642 sec_1_183-2 in 50_tc_164 the tax_court denied the taxpayer deductions for the cost of flying a private plane for reasons unrelated to his work or earning profits the court found that the taxpayer was not in the aircraft chartering business where he earned only minimal chartering income in the taxable years in question did not advertise or hold himself out in any manner as being in the business of chartering aircraft and devoted his time instead to performing services as an engineering consultant similarly in mccormick v commissioner t c memo the tax_court held that the taxpayer did not have a bona_fide profit objective in operating two boats even though he expected to derive some gross_receipts from the boats the primary use was for personal pleasure i hope this general information is helpful to you this letter is intended for informational purposes only and does not constitute a ruling see revproc_2005_1 sec_2 2005_1_irb_7 if you have any additional questions please contact --------------at ----------------- ------- sincerely thomas a luxner chief branch office of associate chief_counsel income_tax accounting