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 plr-122636-11 date date re request for private_letter_ruling under sec_168 re request for private_letter_ruling under sec_168 taxpayer -------------------------------------------------------------------------------------- state1 state2 a b c d e f number year1 date1 date2 date3 date4 date5 date6 ---------------- ------------- ------------------------ ------------------------ ---------- --------- ---------------------- ------------------------------------------------- ---- ------- ---------------- ------------------ ------------------- -------------------------- -------------------------- --------------------- dear ---------------- this letter responds to a letter dated date submitted by taxpayer requesting rulings under sec_168 of the internal_revenue_code facts taxpayer represents that the facts are as follows plr-122636-11 taxpayer is a corporation organized under the laws of state1 taxpayer is the parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return on a calendar_year basis taxpayer uses an accrual_method of accounting taxpayer owns inter alia all of the membership interests in a a state2 limited_liability_company a is an entity that is disregarded as an entity separate from its owner a disregarded_entity for federal_income_tax purposes a earns revenues from selling under contract or on the spot market a range of diverse products such as electricity natural_gas capacity emissions credits and a series of energy-related products used to optimize the operation of the energy grid a owns inter alia all of the membership interests in b a state2 limited_liability_company which is a disregarded_entity for federal_income_tax purposes b owns interests in more than number coal- gas- and oil-fueled electric generating plants it operates most of these plants while b is the legal owner of the assets of this subject letter_ruling request taxpayer is the owner of the assets of this subject letter_ruling request for federal_income_tax purposes because a and b are disregarded entities for federal_income_tax purposes taxpayer’s c generating station is comprised of two generating units c unit is a gas-fired unit and c unit is a coal-fired unit taxpayer’s d generating station is comprised of three generating units both d unit sec_1 and are coal-fired units in year1 taxpayer committed to federal and state environmental authorities to construct install and operate a scrubber a baghouse a selective catalytic reduction system scr and an activated carbon injection system aci at its c unit electric generating unit the c project taxpayer also committed to install and operate a scrubber and a baghouse at both its d unit and d unit electric generating units the d project the tax treatment of the assets constructed pursuant to these commitments is the subject of the requested rulings before date1 taxpayer hired e as a consultant to assist taxpayer in formulating a specific plan to discharge its environmental commitments during this consultation period taxpayer paid e for its consulting work on date2 taxpayer entered into an engineering procurement and construction management_contract epcm contract with e to assist taxpayer in the construction and installation of a baghouse a scrubber an scr and an aci for the c unit during the course of the c project taxpayer entered into numerous other contracts with various vendors who supplied goods and services necessary to complete the project on date3 taxpayer entered into an epcm contract with f to replace e on the c project under the epcm contracts taxpayer retained complete control of the c project and made all important operational and strategic decisions taxpayer directly procured all services materials and components associated with the c project e and plr-122636-11 after e’s dismissal f provided only construction management services to taxpayer in accordance with their contracts the epcm contract as well as all of the other contracts relating to the c project were completed at various times in accordance with the terms and conditions of each contract the c project included both the acquisition and self-construction of numerous components the c project was completed and placed_in_service after date4 and before date5 on date6 taxpayer entered into a written binding engineering procurement and construction_contract epc contract with e to construct a pulse jet fabric filter a type of baghouse and a spray dryer absorber a type of scrubber for each of d unit sec_1 and the epc contract was a fixed price turn-key contract generally speaking a turnkey project is one in which the contractor is responsible for turning over to its customer the subject matter of the contract in a ready-to-use condition pursuant to the epc contract taxpayer made various milestone_payments to e during its construction of the assets the epc contract was completed when taxpayer accepted the d project which occurred after date4 and before date5 the assets were placed_in_service at the time the d project was accepted rulings requested in the case of the c project for purposes of determining qualification for the 50-percent additional first year depreciation deduction a self-constructed property is acquired when construction commences if taxpayer chooses to apply the safe_harbor_rule of sec_1 k - b iii b of the income_tax regulations such safe_harbor_rule applies for determining when construction commences under that rule taxpayer must determine when costs relating to the c project have been incurred by applying the all_events_test and the economic_performance requirement of sec_461 that is costs associated with the provision of services are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the services are rendered to taxpayer and costs associated with the provision of property are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the property is provided to taxpayer ie when the property is delivered when it is accepted or when title to the property passes depending upon taxpayer’s method_of_accounting for determining when property is provided under the limited election provided under sec_3 b of revproc_2011_26 i r b plr-122636-11 a in determining whether a self-constructed component of a larger self- constructed property qualifies for the 100-percent additional_first-year_depreciation deduction taxpayer may choose to apply the safe_harbor_rule of sec_1 k - b iii b under that rule taxpayer must determine when costs relating to the self-constructed component have been incurred by applying the all_events_test and the economic_performance requirement of sec_461 that is costs associated with the provision of services are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the services are rendered to taxpayer and costs associated with the provision of component are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the component is provided to taxpayer ie when the component is delivered when it is accepted or when title to the component passes depending upon taxpayer’s method_of_accounting for determining when property is provided and b in determining whether an acquired component of a larger self-constructed property qualifies for the 100-percent additional_first-year_depreciation deduction taxpayer must determine the date of the component’s acquisition by applying the all_events_test and the economic_performance requirement of sec_461 that is taxpayer has incurred the cost of the acquired component when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the component is delivered when it is accepted or when title to the component passes depending upon taxpayer’s method_of_accounting for determining when property is provided in the case of the d project for purposes of determining qualification for the 100-percent additional first year depreciation deduction a self-constructed property is acquired when construction commences if taxpayer chooses to apply the safe_harbor_rule of sec_1 k - b iii b such safe_harbor_rule applies for determining when construction commences under that rule taxpayer must determine when costs relating to the d project epc contract have been incurred by applying the all_events_test and the economic_performance requirement of sec_461 that is costs associated with the provision of property are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the property is provided to taxpayer ie when the property is delivered when it is accepted or when title to the property passes depending upon taxpayer’s method_of_accounting for determining when property is provided law and analysis sec_168 as amended by the economic stimulus act of pub_l_no 122_stat_613 date stimulus act provides a 50-percent plr-122636-11 additional first year depreciation deduction for the taxable_year in which qualified_property is placed_in_service by a taxpayer sec_168 as amended by the tax relief unemployment insurance reauthorization and job creation act of pub_l_no 124_stat_3296 date truirjca defines the term qualified_property as meaning property i among other things to which sec_168 applies with a recovery_period of years or less ii the original_use of which commences with the taxpayer after date iii that is acquired by the taxpayer after date and before date but only if no written binding contract for the acquisition was in effect before date or that is acquired by the taxpayer pursuant to a written binding contract which was entered into after date and before date and iv that is placed_in_service by the taxpayer before date or in the case of property described in sec_168 or c before date sec_168 as amended by the truirjca provides that in the case of a taxpayer manufacturing constructing or producing property for the taxpayer’s own use the requirements of sec_168 shall be treated as met if the taxpayer begins manufacturing constructing or producing the property after date and before date with the exception of the increased amount and the revised dates the rules for determining whether depreciable_property is eligible for the 50-percent additional first year depreciation deduction are the same as the rules in sec_168 in effect before the enactment of the stimulus act accordingly rules similar to the rules in sec_1_168_k_-1 for qualified_property or for 30-percent additional first year depreciation deduction apply see section dollar_figure of revproc_2008_54 2008_2_cb_722 sec_1_168_k_-1 provides the rules relating to sec_168 the acquisition requirement and sec_1_168_k_-1 provides the rules relating to sec_168 self-constructed property for purposes of the 50-percent additional first year depreciation deduction sec_1_168_k_-1 provides that depreciable_property will meet the requirements of sec_1_168_k_-1 if the property is acquired by the taxpayer after date and before date but only if no written binding contract for the acquisition of the property was in effect before date or acquired by the taxpayer pursuant to a written binding contract that was entered into after date and before date sec_1_168_k_-1 defines a binding contract sec_1_168_k_-1 provides that if a taxpayer manufactures constructs or produces property for use by the taxpayer in its trade_or_business or for its production_of_income the acquisition rules in sec_1_168_k_-1 are treated plr-122636-11 as met for qualified_property if the taxpayer begins manufacturing constructing or producing the property after date and before date this regulation further provides that property that is manufactured constructed or produced for the taxpayer by another person under a written binding contract as defined in sec_1_168_k_-1 that is entered into prior to the manufacture construction or production of the property for use by the taxpayer in its trade_or_business or for its production_of_income is considered to be manufactured constructed or produced_by_the_taxpayer sec_1_168_k_-1 provides that for purposes of sec_1 k - b iii manufacture construction or production of property begins when physical work of a significant nature begins physical work does not include preliminary activities such as planning or designing securing financing exploring or researching the determination of when physical work of a significant nature begins depends on the facts and circumstances sec_1_168_k_-1 provides that for purposes of sec_1 k - b iii b a taxpayer may choose to determine when physical work of a significant nature begins in accordance with the safe_harbor_rule provided in sec_1_168_k_-1 under this safe_harbor_rule physical work of a significant nature will not be considered to begin before the taxpayer incurs in the case of an accrual basis taxpayer or pays in the case of a cash_basis taxpayer more than percent of the total cost of the property excluding the cost of any land and preliminary activities such as planning or designing securing financing exploring or researching when property is manufactured constructed or produced for the taxpayer by another person this safe_harbor_rule must be satisfied by the taxpayer a taxpayer chooses to apply sec_1_168_k_-1 by filing an income_tax return for the placed-in- service year of the property that determines when physical work of a significant nature begins consistent with sec_1_168_k_-1 sec_1_168_k_-1 provides the rules relating to components of self- constructed property if such component is acquired by the taxpayer the rules in sec_1_168_k_-1 apply to the acquired component if the component is self-constructed the rules in sec_1_168_k_-1 apply to the self- constructed component sec_1_168_k_-1 provides that if a binding contract as defined in sec_1_168_k_-1 to acquire a component does not satisfy the requirements of sec_1_168_k_-1 the component does not qualify for the 50-percent additional first year depreciation deduction a binding contract to acquire one or more components of a larger self-constructed property will not preclude the larger self- constructed property from satisfying the acquisition rules in sec_1 k - b iii a accordingly the unadjusted depreciable basis of the larger self- constructed property that is eligible for the 50-percent additional first year depreciation plr-122636-11 deduction must not include the unadjusted depreciable basis of any component that does not satisfy the requirements of sec_1_168_k_-1 if the manufacture construction or production of the larger self-constructed property begins before date the larger self-constructed property and any acquired components related to the larger self-constructed property do not qualify for the 50-percent additional first year depreciation deduction sec_1_168_k_-1 provides that if the manufacture construction or production of a component does not satisfy the requirements of sec_1 k - b iii a the component does not qualify for the 50-percent additional first year depreciation deduction however if the manufacture construction or production of component does not satisfy the requirements of sec_1_168_k_-1 but the manufacture construction or production of the larger self-constructed property satisfies the requirements of sec_1_168_k_-1 the larger self-constructed property qualifies for the 50-percent additional first year depreciation deduction assuming all other requirements in sec_168 are met accordingly the unadjusted depreciable basis of the larger self-constructed property that is eligible for the percent additional first year depreciation deduction must not include the unadjusted depreciable basis of any component that does not qualify for the 50-percent additional first year depreciation deduction if the manufacture construction or production of the larger self-constructed property began before date the larger self- constructed property and any self-constructed components related to the larger self- constructed property do not qualify for the 50-percent additional first year depreciation deduction sec_168 provides that in the case of qualified_property acquired by the taxpayer under rules similar to the rules of sec_168 and iii after date and before date and which is placed_in_service by the taxpayer before date date in the case of property described in sec_168 or c a 100-percent additional first year depreciation deduction for the taxable_year in which such qualified_property is placed_in_service by the taxpayer is allowable section dollar_figure of revproc_2011_26 provides that depreciable_property is eligible for the 100-percent additional first year depreciation deduction if the property is qualified_property as defined in sec_168 and also meets the additional requirements in section dollar_figure of revproc_2011_26 further it provides that for purposes of determining whether depreciable_property is qualified_property rules similar to the rules in sec_1_168_k_-1 for qualified_property or for 30-percent additional first year depreciation deduction apply sec_3 of revproc_2011_26 provides that for purposes of sec_168 qualified_property is eligible for the 100-percent additional first year depreciation deduction if the property meets all of the following requirements in the first plr-122636-11 taxable_year in which the property is subject_to depreciation by the taxpayer whether or not depreciation_deductions for that property are allowable a the taxpayer acquires the qualified_property after date and before date before date in the case of qualified_property described in sec_168 or c solely for purposes of sec_168 and sec_3 a of revproc_2011_26 a taxpayer acquires the qualified_property when the taxpayer pays or incurs the cost of the property qualified_property that a taxpayer manufactures constructs or produces as defined under sec_1 k - b iii a and modified by sec_3 a of this revenue_procedure solely for purposes of sec_168 for use in its trade_or_business or for its production_of_income is acquired by the taxpayer for purposes of sec_168 and sec_3 a of revproc_2011_26 when the taxpayer begins constructing manufacturing or producing that property as determined under sec_1_168_k_-1 b the taxpayer places the qualified_property in service after date and before date before date in the case of qualified_property described in sec_168 or c c the original_use of the qualified_property commences with the taxpayer after date sec_3 a of revproc_2011_26 provides in relevant part that if a taxpayer manufactures constructs or produces qualified_property for use by the taxpayer in its trade_or_business or for its production_of_income rules similar to the self- constructed property rules in sec_1_168_k_-1 apply for determining whether this property meets the acquisition requirement of sec_3 a of revproc_2011_26 sec_3 b of revproc_2011_26 however provides a limited exception to sec_1_168_k_-1 and for certain components of a larger self- constructed property solely for purposes of sec_168 and sec_3 a of revproc_2011_26 if before date a taxpayer begins the manufacture construction or production of the larger self-constructed property that is qualified_property for use in its trade_or_business or for its production_of_income but this larger self-constructed property meets the requirements of sec_3 b and c of revproc_2011_26 the taxpayer may elect to treat any acquired or self-constructed component of that larger self-constructed property as being eligible for the 100-percent additional first year depreciation deduction if the component is qualified_property and is acquired or self-constructed by the taxpayer after date and before date before date in the case of qualified_property described in sec_168 or c the taxpayer may make this election for one or more components that are described in sec_3 b of revproc_2011_26 plr-122636-11 sec_461 provides in part that a deduction shall be taken for the taxable_year which is the proper taxable_year under the method_of_accounting used in computing taxable_income sec_461 and sec_1_461-1 provides in part that under an accrual_method of accounting a liability as defined in sec_1_446-1 is incurred and generally is taken into account for federal_income_tax purposes in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability the first two requirements are commonly referred to as the all_events_test and the third requirement is called the economic_performance requirement see also sec_1_446-1 sec_1_446-1 defines the term liability as including any item allowable as a deduction cost or expense for federal_income_tax purposes in addition to allowable deductions the term includes any amount otherwise allowable as a capitalized cost as a cost taken into account in computing cost_of_goods_sold as a cost allocable to a long-term_contract or as any other cost or expense sec_461 and sec_1_461-4 provide in part that in determining whether an amount has been incurred with respect to any item during the taxable_year the all_events_test shall not be treated as met any earlier than when economic_performance with respect to such item has occurred sec_461 and ii and sec_1_461-4 provide that if the liability of the taxpayer arises out of the providing of services or property to the taxpayer by another person economic_performance occurs as services or property is provided sec_1_461-4 provides the rules relating to the provision of services or property to the taxpayer for purposes of sec_1_461-4 sec_1_461-4 provides that a taxpayer is permitted to treat property as provided to the taxpayer when the property is delivered or accepted or when title to the property passes the method used by the taxpayer to determine when property is provided is a method_of_accounting that must comply with the rules of sec_1_446-1 thus the method of determining when property is provided must be used consistently from year to year and cannot be changed without the consent of the commissioner of internal revenue sec_461 provides that in the case of any other liability not specifically mentioned in sec_461 economic_performance occurs at the time determined by the internal_revenue_service in regulations sec_1_461-4 provides a list of specifically enumerated items for which economic_performance is satisfied by payment sec_1_461-4 provides that in the case of a taxpayer’s liability for which economic_performance rules are not otherwise plr-122636-11 provided elsewhere in the code or other rules economic_performance occurs as the taxpayer makes payments in satisfaction of the liability sec_1_461-4 further states that its only application is if the liability in question is not covered by rules provided elsewhere under sec_461 ruling_request sec_1 and for purposes of the 50-percent and 100-percent additional first year depreciation_deductions the determination of whether property is a self-constructed property is made under sec_1_168_k_-1 in this case the c project is self-constructed property for purposes of the percent additional first year depreciation deduction provided by sec_168 with the assistance of a construction manager e and then f taxpayer constructed the c project itself for use in its trade_or_business because the c project is self-constructed property it is acquired by taxpayer when taxpayer begins construction of the c project for purposes of the acquisition requirement of sec_168 and sec_1_168_k_-1 also the d project is self-constructed property for purposes of the 100-percent additional first year depreciation deduction provided by sec_168 the d project is constructed for taxpayer by e under an epc contract that taxpayer represents was entered into before construction of the d project because the d project is self- constructed property it is acquired by taxpayer when taxpayer begins construction of the d project for purposes of the acquisition requirement of sec_168 and sec_3 a of revproc_2011_26 for self-constructed property the acquisition requirement for purposes of the percent additional first year depreciation deduction is treated as met if taxpayer begins manufacturing constructing or producing the property after date and before date for self-constructed property that is qualified_property the acquisition requirement for purposes of the 100-percent additional first year depreciation deduction is treated as met if taxpayer begins manufacturing constructing or producing the property after date and before date before date in the case of qualified_property described in sec_168 or c for purposes of the 50-percent and 100-percent additional first year depreciation_deductions manufacture construction or production of property begins when physical work of a significant nature begins to make this determination the taxpayer may choose to apply the percent safe_harbor_rule under sec_1_168_k_-1 under this safe_harbor_rule physical work of a significant nature will not be considered to begin before an accrual basis taxpayer incurs more than percent of the plr-122636-11 total cost of the property excluding the cost of any land and preliminary activities because the term incurred is neither defined nor given any special meaning in sec_168 or its underlying regulations or legislative_history or in revproc_2011_26 the determination of when an accrual basis taxpayer has incurred more than percent of the total cost of the property is made using the all_events_test and economic_performance requirement of sec_461 which specifically governs the timing of the deductions costs and expenses at issue if taxpayer chooses the safe_harbor_rule of sec_1_168_k_-1 for the c project and the d project such rule applies for determining when taxpayer began construction of the c project and the d project under this safe_harbor_rule taxpayer an accrual basis taxpayer determines when it incurred more than percent of the total cost of the c project and when taxpayer incurred more than percent of the total cost of the d project by applying the all_events_test and economic_performance requirement of sec_461 in the case of the c project taxpayer represents that services and property were provided to taxpayer therefore costs associated with the provision of services are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the services are rendered to taxpayer costs associated with the provision of property are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the property has been provided to taxpayer ie when the property has been delivered or accepted or when title to the property passes depending upon taxpayer’s method_of_accounting for determining when property is provided and assuming sec_1_461-4 does not apply in the case of the d project taxpayer represents that it is a turnkey project where the contractor e turned over the d project to taxpayer in ready-to-use condition thus costs associated with the provision of property are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the property has been provided to taxpayer ie when the property has been delivered or accepted or when title to the property passes depending upon taxpayer’s method_of_accounting for determining when property is provided and assuming sec_1_461-4 does not apply ruling_request taxpayer represents that the c project includes both acquired components and self-constructed components if the c project and all of its components are qualified_property taxpayer intends to determine whether any component of the c project is eligible for the 100-percent additional first year depreciation deduction by applying the limited election in sec_3 b of revproc_2011_26 plr-122636-11 that election applies to a taxpayer that began manufacturing constructing or producing a larger self-constructed property that is qualified_property before date but the taxpayer placed this larger self-constructed property in service after date and before date before date in the case of qualified_property described in sec_168 or c and the original_use of the larger self-constructed property commenced with the taxpayer after date in such a case the taxpayer may elect to treat any acquired or self-constructed component of that larger self-constructed property as being eligible for the 100-percent additional first year depreciation deduction if the component is qualified_property and is acquired or self-constructed by the taxpayer after date and before date before date in the case of qualified_property described in sec_168 or c solely for purposes of sec_168 and sec_3 a of revproc_2011_26 sec_3 a of this revenue_procedure provides that a taxpayer acquires the qualified_property when the taxpayer pays or incurs the cost of the property the term pays or incurs means pays or incurs within the meaning of sec_1_461-1 and accordingly an accrual basis taxpayer acquires qualified_property solely for purposes of sec_168 when the accrual basis taxpayer incurs the cost of the property and a cash_basis taxpayer acquires qualified_property solely for purposes of sec_168 when the cash_basis taxpayer pays the cost of the property if a taxpayer manufactures constructs or produces qualified_property for use in its trade_or_business sec_3 a of revproc_2011_26 also provides that such property is acquired by the taxpayer for purposes of sec_168 and sec_3 a of this revenue_procedure when the taxpayer begins constructing manufacturing or producing that property as determined under sec_1 k - b iii b under the limited election of sec_3 b of revproc_2011_26 the component must be qualified_property and must be acquired or self-constructed by the taxpayer after date and before date before date in the case of qualified_property described in sec_168 or c the dates of this acquisition requirement are the same dates as in the acquisition requirements in sec_3 a of revproc_2011_26 although the acquisition requirements in sec_3 a of revproc_2011_26 do not specifically incorporate the limited election under sec_3 b of revproc_2011_26 the service intended to apply such acquisition requirements also for purposes of sec_3 b of revproc_2011_26 for any acquired or self-constructed component of the larger self-constructed property described in sec_3 b of revproc_2011_26 thus for purposes of sec_3 b of revproc_2011_26 a taxpayer may elect to treat any acquired component of the larger self-constructed property described in sec_3 b of revproc_2011_26 as being eligible for the 100-percent additional first year plr-122636-11 depreciation deduction if the acquired component is qualified_property and if the taxpayer incurs in the case of an accrual basis taxpayer or pays in the case of a cash_basis taxpayer the cost of the acquired component after date and before date before date in the case of property described in sec_168 or c further for purposes of sec_3 b of revproc_2011_26 a taxpayer may elect to treat any self-constructed component of the larger self-constructed property described in sec_3 b of revproc_2011_26 as being eligible for the percent additional first year depreciation deduction if the self-constructed component is qualified_property and if the taxpayer begins manufacturing constructing or producing the component as determined under sec_1_168_k_-1 after date and before date before date in the case of property described in sec_168 or c pursuant to sec_1_168_k_-1 manufacture construction or production of property begins when physical work of a significant nature begins to make this determination a taxpayer may choose to apply the 10-percent safe_harbor_rule under sec_1_168_k_-1 under this safe_harbor_rule physical work of a significant nature will not be considered to begin before an accrual basis taxpayer incurs more than percent of the total cost of the property excluding the cost of any land and preliminary activities as we previously discussed under ruling_request sec_1 and the term incurred is neither defined nor given any special meaning in sec_168 or its underlying regulations or legislative_history or in revproc_2011_26 accordingly our conclusion reached under ruling_request sec_1 and also applies for purposes of sec_168 and sec_3 a and b of revproc_2011_26 that is the determination of when an accrual basis taxpayer has incurred the cost of the acquired component is made using the all_events_test and economic_performance requirement of sec_461 and for purposes of the safe_harbor_rule under sec_1 k - b iii b has incurred more than percent of the total cost of a self- constructed component is made using the all_events_test and economic_performance requirement of sec_461 in the case of the c project if the larger self-constructed property is described in sec_3 b of revproc_2011_26 taxpayer may choose to apply the safe_harbor_rule under sec_1_168_k_-1 to determine when construction commences for a self-constructed component s of that larger self-constructed property under that rule taxpayer must determine when costs relating to the self-constructed component have been incurred by applying the all_events_test and the economic_performance requirement of sec_461 that is costs associated with the provision of services are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the services are rendered to taxpayer and costs associated with the provision of component are incurred when all the events have occurred that establish the fact of plr-122636-11 liability the amount of the liability can be determined with reasonable accuracy and the component is provided to taxpayer ie when the component is delivered or accepted or when title to the component passes depending upon taxpayer’s method_of_accounting for determining when property is provided and assuming sec_1 d ii does not apply further an acquired component s of that larger self-constructed property is acquired by taxpayer when it incurs the cost of the acquired component consequently taxpayer must determine the date of the component’s acquisition by applying the all_events_test and the economic_performance requirement of sec_461 that is taxpayer has incurred the cost of the acquired component when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the acquired component is provided to taxpayer ie when the acquired component is delivered or accepted or when title to the acquired component passes depending upon taxpayer’s method_of_accounting for determining when property is provided and assuming sec_1_461-4 does not apply conclusion based solely on taxpayer’s representations and the relevant law and analysis set forth above we conclude that in the case of the c project for purposes of determining qualification for the 50-percent additional first year depreciation deduction a self-constructed property is acquired when construction commences if taxpayer chooses to apply the safe_harbor_rule of sec_1_168_k_-1 such safe_harbor_rule applies for determining when construction commences under that rule taxpayer must determine when costs relating to the c project have been incurred by applying the all_events_test and the economic_performance requirement of sec_461 that is costs associated with the provision of services are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the services are rendered to taxpayer and costs associated with the provision of property are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the property is provided to taxpayer ie when the property is delivered when it is accepted or when title to the property passes depending upon taxpayer’s method_of_accounting for determining when property is provided in the case of the c project under the limited election provided under sec_3 b of rev_proc a in determining whether a self-constructed component of a larger self- constructed property qualifies for the 100-percent additional_first-year_depreciation plr-122636-11 deduction taxpayer may choose to apply the safe_harbor_rule of sec_1 k - b iii b under that rule taxpayer must determine when costs relating to the self-constructed component have been incurred by applying the all_events_test and the economic_performance requirement of sec_461 that is costs associated with the provision of services are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the services are rendered to taxpayer and costs associated with the provision of component are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the component is provided to taxpayer ie when the component is delivered when it is accepted or when title to the component passes depending upon taxpayer’s method_of_accounting for determining when property is provided and b in determining whether an acquired component of a larger self-constructed property qualifies for the 100-percent additional_first-year_depreciation deduction taxpayer must determine the date of the component’s acquisition by applying the all_events_test and the economic_performance requirement of sec_461 that is taxpayer has incurred the cost of the acquired component when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the component is delivered when it is accepted or when title to the component passes depending upon taxpayer’s method_of_accounting for determining when property is provided in the case of the d project for purposes of determining qualification for the 100-percent additional first year depreciation deduction a self-constructed property is acquired when construction commences if taxpayer chooses to apply the safe_harbor_rule of sec_1_168_k_-1 such safe_harbor_rule applies for determining when construction commences under that rule taxpayer must determine when costs relating to the d project epc contract have been incurred by applying the all_events_test and the economic_performance requirement of sec_461 that is costs associated with the provision of property are incurred when all the events have occurred that establish the fact of liability the amount of the liability can be determined with reasonable accuracy and the property is provided to taxpayer ie when the property is delivered when it is accepted or when title to the property passes depending upon taxpayer’s method_of_accounting for determining when property is provided except as specifically set forth above no opinion is expressed or implied concerning the tax consequences of the facts described above under any other provisions of the code including other subsections of sec_168 specifically if the cost of any property including any component of the larger self-constructed property subject_to this ruling_request includes interest capitalized under sec_263a no opinion is expressed or implied on whether such interest is included in the determination of the total cost of such property for purposes of the safe_harbor_rule of sec_1 k - b iii b plr-122636-11 further no opinion is expressed or implied on whether i the epc contract the epcm contract and any other contract subject_to this ruling_request are written binding contracts for purposes of sec_168 ii any property including any component of the larger self-constructed property subject_to this ruling_request is qualified_property under sec_168 iii any property including any component of the larger self- constructed property subject_to this ruling_request qualifies for the 50-percent additional first year depreciation deduction provided by sec_168 iv any property including any component of the larger self-constructed property subject_to this ruling_request qualifies for the 100-percent additional first year depreciation deduction provided by sec_168 v taxpayer’s determination of when construction of any property including any component of the larger self-constructed property subject_to this ruling_request began satisfies sec_1_168_k_-1 or vi taxpayer’s determination of the acquisition_date of any acquired component of the larger self- constructed property is correct in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s authorized representatives we are also sending a copy of this letter to the appropriate operating division director this letter_ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely kathleen reed kathleen reed branch chief branch office of associate chief_counsel income_tax and accounting enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service index nos legend fund department of the treasury washington d c person to contact telephone number refer reply to cc dom fi p - plr-111610-99 date date a o d a o d r o w o b l i u i l state date date date date date date l f t j s e e f n u y o date a date o o l date k o accountant 19xx dear this is in reply to a letter dated date and subsequent correspondence submitted on behalf of fund requesting an extension of time to make an election under sec_851 of the internal_revenue_code to be treated as company ric beginning with its initial taxable_year requests that its election be considered timely filed pursuant to sec_301_9100-1 and -3 regulations of the procedure and administration a regulated investment fund facts fund is registered with the securities_and_exchange_commission as act of an investment_company under the investment_company u s c sec_80a-1 et seq fund was created under ys plr-111610-99 state law accrual_method of accounting as year as defined in a ric it adopted a tax_year ending march and the fund intended to qualify annually sec_851 beginning with its initial taxable fund commenced operations on date fund's first taxable fund's federal_income_tax return for its year ended on date first taxable_year was due_date fund engaged accountant in september 19xx to prepare fund's initial audit and federal_income_tax return manager assigned to fund timely filed a form_7004 application_for automatic_extension of time to file corporation income_tax return on behalf of fund extending the due_date to date the accountant tax on date fund engaged a new administrator on date the accountant tax manager assigned to fund resigned from accountant and failed to notify anyone that the fund tax_return for the initial tax_year had not yet been prepared accountant resigned as accountant for fund and was replaced by another accounting firm the internal_revenue_service that it had not received an income_tax return for fund's initial taxable_year ending date notice was forwarded to accountant income_tax return had not been filed for fund's initial tax_year accountant prepared a return which was filed by date return contained an election under sec_851 ric fund received a notice from upon concluding that an to be treated as on date on date the the a law sec_851 provides that a corporation shall not be considered a ric for any taxable_year unless it files with its return for the taxable_year an election to be a ric or has made such election for a previous taxable_year sec_1_851-2 of the income_tax regulation provides that the taxpayer shall make its election to be treated as by computing taxable_income as return for the first taxable_year for which the election is applicable a ric in its federal_income_tax a ric sec_301_9100-1 provides in part that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a sec_301_9100-1 as od plr-111610-99 taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e and i g h sec_301_9100-3 through c i set forth rules that the internal_revenue_service generally will use to determine whether under the facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 when a taxpayer applies of conclusion based on the information provided and the representations made we hold that fund has satisfied the requirements for the granting of a reasonable extension of time under sec_301_9100-1 and -3 election under sec_851 for the tax_year that ended on date therefore fund will be treated as having made a timely on its federal_income_tax return filed no opinion is expressed as to whether fund's tax_liability is not lower in the aggregate for the year to which the regulatory election applies than its tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the district director's office will determine fund's tax_liability for the year involved director's office determines fund's liability is lower office will determine the federal_income_tax effect if the district that except as specifically ruled upon herein no opinion is expressed or implied as regarding funds implied whether fund qualifies as subchapter_m part of the code to any federal_income_tax consequences in particular no opinion is expressed or a ric that is taxable under this ruling is directed only to the taxpayers who requested sec_6110 of the code provides that it may not be it used or cited as precedent sincerely yours plr-111610-99 ae assistant chief_counsel financial institutions products enclosures copy of this letter sec_6110 copy ce uf


jam 4s '999 no third party internal_revenue_service contact dollar_figure national_office technical_advice_memorandum dollar_figure district_director key district_office ep eo information copy chief ep eo division taxpayer’s name taxpayer’s address taxpayer's identification_number group exemption number years involved date of conference s t o i o i a o i e_p q o l a t u o i issues whether under the circumstances described the post meets the requirements for continued recognition of exemption as an organization described in sec_501 revenue code with deductibility of contributions under sec_170 and a of the internal if the post remains exempt under sec_501 the code whether bingo revenues bar restaurant income from nonmembers hall rental income and instant bingo revenues constitute unrelated_business_taxable_income under sec_512 a of 4k whether the post's sale of pull-tabs results in its being liable for the gambling excise_taxes under sec_4401 and sec_4411 of the code whether an arrangement between the post and two other exempt_organizations constitutes a partnership as described in sec_761 and sec_7701 of the code facts the post is a veterans’ organization which is exempt under of the code as an organization described in sec_50l1 a sec_501 and which has deductibility of contributions under sec_170 the b group exemption was issued a charter by b on c the post which was incorporated on b the post is included in and a the post follows the b national constitution the purposes as stated in the national constitution ai to uphold and defend the constitution of the united_states of america to maintain law and order to foster and perpetuate a one hundred percent americanism to preserve the memories and incidents of their association in the great wars to inculcate a sense of individual obligation to the community state and nation to combat the autocracy of both the classes and the masses to make right the master of might to promote peace and good will on earth to safeguard and transmit to posterity the principles of justice freedom and democracy and comradeship by our devotion to mutual helpfulness to consecrate and sanctify our eligibility is open to anyone who was a member of the army or who being a citizen_of_the_united_states at the time of navy marine corps coast guard or air force of the united_states and assigned to active_duty at sometime during a period of war his entry therein served on active_duty in the armed_forces of any of the governments associated with the united_states service from the armed_forces must have been terminated by honorable discharge or honorable separation active members at his discharge papers and make an application in writing and any person wishing to become a member must show a member of more than one post no person may be there are only a time during the years under examination the post had more than big_number members district_office kdo the post provided copies of the form_214 showing the dates of military service for the past five years at the time of the examination by the key the post's facility is a two story building consisting of a first floor with a bar for bingo_games and rental activities and a kitchen and office space area and a conference meeting room examination the post obtained an unsecured demand_loan for the the second floor of the facility contains a large office during the first year under a juke box and a pin ball machine a hall purpose of constructing an addition to the building and a new roof the hall is rented to members and nonmembers the rental the post's representatives and services from an outside caterer will the post reported hall rental income of dollar_figure the post provides tables and chairs sets up contract indicates that all food and alcoholic beverages will be supplied by the post not be obtained the hall and cleans up the facility stated that the post does not cater any events and only coffee and tea are available on a self-serve basis the daily cash sheets maintained by the according to the kdo post indicated that hall rentals for totaled dollar_figure one rental contract dated april other rental contracts for the period refeired to an open bar bottle of whiskey dollar_figure and keg beer dollar_figure and food at dollar_figure per person expected attendance the facility is rented to condo time share groups for their the contracts provide that the post will provide meetings the renter sets up the room coffee tea cream and sugar during the winter that is similar to on its form_990 however for the activities of the post consist of providing a bar restaurant and lounge for members guests and visitors hosting parties and banquets for members guests and visitors providing two scholarships a year sponsoring christmas parties for the needy adopt-a-vet program bull roasts sponsoring a boy scout troop blood drives contributions to area charities and other miscellaneous activities newsletter containing a commander’s report service officer's report news and a calendar community service activities while in there were big_number hours and assisting the humane society the paramedic foundation port wardens boy scout troops aarp tax help health fairs schools and assisting veterans in distress community service activities included hospital visits the post publishes a monthly big_number hours were spent on in local the post requires guests to register when entering the they are disposed of when the registers are filled facility during the examination the only guest register available covered date to date that approximately of those who signed in were members of the general_public always sign in with the guests and the date was not always indicated receipts received from members and nonmembers interviews the kdo determined that nonmembers paid for their own purchases no records were maintained by the post to show gross it was noted by the kdo that members did not a review of the register indicated through the post holds weekly bingo_games in the post hall is also a partner with two other tax-exempt organizations in the post a bingo operation called d d owns and operates a bingo hal pincite24057 the bingo operation d has its own employer d which is not a tax-exempt_organization each organization provides three members a separate location and organizes bingo_games open to the public six days a week during the summer months was formed by the post and the two other organizations approximately years ago identification_number to act as the bingo committee and to operate the games property which is jointly owned by the three organizations is staffed by paid employees who are not members of the organizations maintains separate books_and_records that are kept at the post d does not report its income and expenses but the three organizations evenly share the net profits and report the net_income on their individual forms expenses are not reported by any of the organizations wages and employment_taxes are paid_by d and forms w-2 are issued the years under examination subsequently it was determined that the property is being rented to a commercial business and bingo_games are no longer held at that location reports indicates that distributions were made to various charitable organizations and or activities and one distribution was made to the post home for a new roof d also operated bingo_games at another location during gross_receipts and the a review of the bingo salaries during the examination the kdo determined that instant bingo tickets pull-tabs were sold at the bar by paid bartending staff and at weekly bingo_games that the instant bingo tickets were sold at not sold at the weekly bingo_games no records were maintained by the post on the gross revenue from the selling of pull-tabs payouts or amounts of deposits the kdo also determined that the primary activities of the post are the operation of the bar lounge and bingo activity the post’s representatives stated the bar only and were the post filed forms for the years under examination no forms 990-t were filed net_revenues were reported from some activities income was underreported and income was not segregated by activities parts vii and viii were not completed nor all schedules attached the forms were incomplete in that an auxiliary e supports the post and is separately it is included in f's group ruling chartered by the b auxiliary national constitution and by-laws the auxiliary is tax-exempt under sec_501 as membership cards to members who are permitted to use the post's facilities and participate in the programs and services of post positions as post committee auxiliary members cannot vote at post meetings hold a post officer or serve on or be appointed to of the code the e organization issues the a of f5 g is a society within the post that is separately chartered it is not recognized as tax-exempt and has a separate employer_identification_number ein the g society abides by the h constitution and bylaws and is generally considered a youth society membership cards are issued by the h organization elects its own officers uses the post's facilities and participates in programs and services of the post cannot vote at post meetings hold positions as or serve on or be appointed to a post committee has its own bank account collects its own dues and pays the h organization these dues are reported on the post’s form_990 this society is fairly inactive as there are approximately members three war veterans nine children and other members a review of the applications on file indicated that most of the applicants were over years of age a post officer the g society the g society the g members issue - law sec_501 of the code provides for the exemption from federal_income_tax of the united_states armed_forces if such post or organization is a post or organization of veterans of a organized in the united_states or any of possessions its at least percent of the members of which are b past or present members of the armed_forces_of_the_united_states and substantially_all of the other members of which are individuals who are cadets or are spouses widows or widowers of past or present members of the armed_forces_of_the_united_states or of cadets and no part of the net_earnings of which inures to the c benefit of any private_shareholder_or_individual sec_1 c -1 of the income_tax regulations provides that to be described in sec_501 of the code an organization must be operated exclusively for one or more of the purposes listed in that section l c provision of social and recreational activities for the organization’s members of the regulations lists as one of these purposes the sec_1 c - sec_1 c -1l c of the regulations provides that an organization described in sec_501 be operated exclusively for one or more of the following purposes defined in sec_1 to promote the social welfare of c -1 a of the regniations of the community as the code must ta assist disabled and needy war veterans and members of the united_states armed_forces and their dependents and the widows and orphans of deceased veterans and assistance to hospitalized veterans or members of the armed_forces_of_the_united_states perpetuate the memory of deceased veterans and members of the armed_forces and to comfort their survivors programs for religious charitable scientific literary or educational_purposes of their members or dependents of their members or both provide social and recreational activities for their members to provide insurance benefits for to sponsor or participate in activities to provide entertainment care to carry on programs to a patriotic nature to conduct or to in senate report no 92nd cong 2d sess congress stated that for purposes of sec_501 substantially_all mean sec_90 percent percent of the members that do not have to be past or present members of the armed_forces_of_the_united_states to sec_501 organization’s total membership may consist of individuals not mentioned above of the code therefore of the be cadets or spouses etc thus only percent of percent have a sec_6001 of the code provides that every person liable or for the collection thereof the treasury or for any_tax imposed by the code shall keep adequate_records as the secretary of his delegate may from time to time prescribe sec_6033 of the code provides except as provided shall file an annual return stating specifically in sec_6033 every organization exempt from tax under sec_501 the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and a statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of regulations which implement it the exempt status of the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt an organization previously held exempt on may result in the termination of the code and the issue - rationale an organization described in sec_501 of the code carries out activities in furtherance of its exempt purposes only when the activities are exclusively in furtherance of the purposes listed in sec_1 501i c -l c of the regulations among these purposes is the provision of social and recreational activities for its members organization described in sec_501 provides social and recreational activities for its members or for guests whose expenses are paid_by members it is engaged in activities in furtherance of its exempt purposes therefore when a veterans’ where goods or services are furnished to nonmembers who generally if an organization has not kept adequate provide payment for such goods or services their furnishing is outside the scope of sec_1 c -1l c regulations books_and_records concerning its financial transactions with nonmembers and more than percent of derived from sales transactions eg restaurant and bar sales the presumption will be that the organization’s exempt status should be revoked because it c activities rebutted determine whether or not the organization primarily engaged in sec_501 activities all facts and circumstances must be reviewed to however this presumption may be is not primarily engaged in section its gross_receipts are of the ’ here the post has presented evidence that during the years under examination it engaged in extensive activities that were in furtherance of exempt purposes under sec_501 code such activities include patriotic activities social activities membership meetings and various charitable and social welfare activities of the during the time of the examination there was no permanent mechanism in place to maintain records to distinguish between income from veteran members members’ families bona_fide guests auxiliary members and non-veterans in activities such as the bar lounge gambling and social activities information provided indicates that at most only visitors to the bar lounge may be considered members of general_public general_public unrelated_business_income_tax ubit but would not adversely affect the post's tax-exempt status under sec_501 under these circumstances members of if any using the post's facilities may raise an however the to see infra the code of issue the the of the whether members of the e auxiliary and the g society should be considered members of c the post for purposes of section of the code must be considered to determine if the a sec_501 auxiliary that is related to post meets the membership requirements of sec_501 the members of a post are not considered members of the post is formed and is recognized as tax-exempt and therefore e’s members are not considered members of the post the e auxiliary is separately a separate organization as the auxiliary here is members of an association and has a separate ein based upon the information presented the g b a separate organization from the post even though the g society is not recognized as tax-exempt g are it not considered members of the post under the constitution and by-laws of society is of the g society should not be considered members of the post even if the g members were treated as members of the post would not adversely impact the post's exemption under sec_501 would comprise less than of the post s total membership therefore the post would fall within the membership limitations under sec_501 as non-veteran members of the g society the code this and the members of although the post's completing of its forms for the years in question was not entirely sufficient we believe the post has generally maintained the records required under sec_6001 of the code to determine that it meets the requirements for continued recognition of exemption under sec_501 any unlike the situation described in rev failings of the post with respect to recordkeeping and filing returns do not rise to exemption under sec_501 whether an inadequate records notice may be appropriate under these circumstances a level that would support revocation of the kdo may wish to consider supra rul issue - conclusion based upon the information presented the post meets the requirements for continued recognition of exemption as organization described in sec_501 deductibility of contributions under sec_170 a an and of the code with issue - law sec_511 of the code provides for the taxation of unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code provides in part that the term unrelated_business_taxable_income means the gross_income derived by an organization from any unrelated_trade_or_business k e t m e e n e a as defined in sec_513 regularly carried on by it certain deductions and computed with the modifications provided in sec_512 less sec_512 b of the code excludes rents_from_real_property and all rents from personal_property leased with such property if the rents attributable to such personal_property are an incidental amount of the total rents received the exclusion does not apply if more than of the lease is attributable to personal_property or if the determination of the amount of such rent depends on the income or profits derived by any person from the property leased sec_1 b -1 c of the regulations excludes rents_from_real_property and rents from persorial property leased with real_property if the rents attributable to personal_property generally do not exceed percent of the total rents from all property leased sec_1_512_b_-1 of the regulations states that payments for the use or occupancy of rooms and other space where services are also rendered to the occupant such as for the use or occupancy of rooms or other quarters in hotels boarding houses or apartment houses furnishing hotel services or tourist camps or tourist homes motor courts or motels or for the use or occupancy of space in parking lots warehouses or storage garages do not constitute rent from real_property generally services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only the supplying of maid service furnishing of heat and light the cleaning of public entrances exits stairways and lobbies the collection of trash etc not considered as services rendered to the occupant for example constitutes such service whereas the are in sec_513 of the code provides that the term unrelated_trade_or_business means any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its charitable educational or other purpose or function constituting the basis of its exemption under sec_501 the term does not include any trade_or_business in which substantially_all the work in carrying on such trade_or_business is performed for the organization without compensation sec_513 of the code provides that for the purposes of this section the term trade_or_business includes any activity which is carried on for the production_of_income from the sale of goods or the performance of services identity as a trade_or_business merely because it within a larger aggregate of similar activities or within a larger complex of other endeavors which may be related to the exempt purposes of the organization activity carried on for profit constitutes an unrelated_trade_or_business no part of such trade_or_business shall be excluded from such classification merely because it does not result in profit an activity does not lose is carried on or may not where an sec_513 of the code provides that the term unrelated in congress passed pub law sec trade_or_business does not include the conduct of certain bingo_games subsequently clarified in by public law sec to apply the same treatment to certain sther games of chance that were then in operation and conducted under a state law enacted on date the state of north dakota this law applies only to gaming activities conducted in subsequently amended to october a announcement 1989_45_irb_41 was published by the a reminder to tax-exempt organizations that income service as from the public conduct of certain bingo_games and other gaming activities may be subject_to the unrelated_business_income_tax imposed by sec_511 of the code the rules applicable to this area conduct of charitable gaming activities other than bingo excluded from the definition of unrelated_business_taxable_income only in the state of north dakota currently income from the the announcement recaps is rev_rul 1969_1_cb_158 provides that income from a short term lease that included utilities and janitorial services was rent within the meaning of sec_512 code and should be excluded in determining unrelated_business_taxable_income of the issue - rationale although the post is exempt from federal_income_tax under it of the code sec_501 is still subject_to tax on income derived from any unrelated_trade_or_business regularly carried on by it income_tax on such income if three conditions are present the income is from a trade_or_business is regularly carried on substantially related to the exercise or performance by the post of the post is subject_to the unrelated business the trade_or_business is not its exempt_function the trade_or_business and the sale_of_goods or performance of services for the production_of_income is a trade_or_business even when undertaken -1il- by a tax-exempt_organization the post derives profits from activities such as the sale of food and beverages pull-tabs bingo and hall rentals and displays the required profit_motive such activities therefore constitute a trade_or_business for purposes of sec_513 of the code a trade_or_business is considered to be regularly carried on when the activity is conducted with sufficient frequency and continuity to indicate a continuing purpose of the post to derive some of its income from such activity occur on a very frequent basis and therefore these activities are regularly carried on the post's activities clearly the post's activities constitute a regularly the real rssue here however is carried on trade_or_business whether these activities are substantially related to the post’s exempt purposes and whether any of the exceptions contained in sec_512 activity can be considered substantially related a nexus must exist between the goods sold or the services provided and the accomplishment of the post's exempt purposes exist be treated as unrelated_business_taxable_income then the revenue generated from such activities will not of the code are applicable a nexus does before any if - sec_1 c -1 c of the regulations lists the provision of social and recreational activities for its members as one of the appropriate exempt purposes of organization restaurant for its bona_fide members recreational endeavors sponsored or facilitated by a post should firet and foremost focus on the bona_fide veteran members of be closely scrutinized a post’s facilities by those other than such veterans needs to this provision permits a post to operate a bar or any socializing or a veterans’ use with respect to sales of food and beverages gambling falling within the nontaxable category are bona_fide activities and hall rentals for purposes of sec_501 of the code revenues derived from bona_fide members are not taxable while amounts from the general_public are subject_to tax guests ie individuals who are accompanied by a bona_fide member and who do not themselves pay for food beverages or gambling family members and relatives of the bona_fide members including spouses children grandchildren parents grandparents and siblings sec_1 c -1 d of the regulations which denotes the membership requirements for auxiliary units of veterans’ organizations societies would fall within the nontaxable category in computing unrelated_business_taxable_income these categories of individuals are set forth in also members of the post's auxiliary units or also coming within the nontaxable category are certain one question presented is whether the use of the post's facilities by a member of the g society furthers the exempt_purpose of the post appropriate post function and the use of the post’s facilities in most instances would be appropriate presented income from members of the g society would meet the substantially related test as their activities are sponsored by the post and further post purposes as organized the g society is an based upon the information another nontaxable category consists of individuals who although they are not members of the local post other posts that are covered by the b group exemption accordance with this category any bona_fide member of national b organization or a local b post could partake of the social and recreational activities offered py the post any revenues resulting from such activities would not constitute unrelated_business_taxable_income because the substantially of the code would be met related test under sec_513 are members of in a state or on the other hand the substantially related test would not be met where food beverages and gambling activities are made available to nonmembers of the post paying guests members of the public and members of veterans’ organizations not part of b thus providing goods and services to the foregoing categories of individuals does not contribute importantly to the accomplishment of any exempt_purpose listed in sec_1 regulations c -1 c of the with regard to amounts derived from hall rentals the prior of the code in connection with some of the with respect to hall rentals that would analysis is also applicable to the extent that use of the hall by members and individuals in other nontaxable categories would not be subject_to tax otherwise be taxable the question presented is whether such amounts constitute rent from real_property that may be excluded from the computation of unrelated_business_taxable_income under sec_512 rental activities it appears that the post may be providing catering services food and beverages that would result in certain amounts not being treated as excludable rental payments see sec_1_512_b_-1 of the regulations rental activities such as those involving condo time share meetings where only self-service coffee and tea might be made available do meet the requirements as rent from real_property under sec_512 be similar to the organization described in rev supra which was paid only for_the_use_of space hall rentals were approximately dollar_figure in amount and the kdo a question of fact which must be resolved by the post in these instances the post appears to or ten times that whether total rul other hall is with regard to the c -1 c of the regulations the aforementioned distinction between nontaxable members et al and taxable members of the public is also applicable to amounts derived from bingo_games and so-called instant bingo thus amounts attributable to bingo and instant bingo played by members of the post would not be subject_to tax because such activities are substantially related to the accomplishment of social and recreational purposes set forth in sec_1 revenues derived by the post through d s bingo operation it appears that the exception to unrelated_trade_or_business for certain bingo_games under sec_513 of the code would be applicable definition of bingo under sec_513 a not ordinarily carried out on a commercial basis and state or local law was not violated games did not constitute an unrelated_trade_or_business under sec_513 definition set forth in sec_513 derived by the post from individuals who fall within the previously described taxable categories constitute unrelated_business_taxable_income birith no f 3d see julius m israel lodge of b'nai v commissioner t c memo aff'd in contrast instant bingo does not meet the specifically these games comport with the and therefore amounts sth cir the games were under these circumstances the bingo issue - conclusion there is no ubit on income from members of the post a members of its auxiliary and society bona_fide guests members of other b posts bingo_games covered by sec_513 and hall rentals that do not include catering or other services of the code restaurant bar and pull-tab instant bingo income from b nonmembers paying guests members of the public and members of unrelated veterans’ organizations is subject_to ubit income from hall rentals to nonmembers where the rent c includes catering food and beverages is subject_to ubit issue - law sec_4401 of the code imposes on any wager authorized under state law a tax equal to dollar_figure percent of amount wagered and law a tax equal to percent of the amount wagered on any wager not authorized under state the sec_4411 of the code imposes a special tax of dollar_figure per year to be paid_by each person who is liable for the tax imposed under sec_4401 or who is engaged in receiving wagers for or on behalf of any person so liable sec_4411 of the code substitutes dollar_figure for dollar_figure in subsection a tax under sec_4401 is determined only under paragraph sec_4401 and any person who is engaged in receiving wagers only for or on behalf of persons described in paragraph any person whose liability for of in the case of sec_4421 of the code provides that wagers include lotteries conducted for profit but sec_4421 b excludes from the term lottery any drawing conducted by an organization exempt from tax under sec_501 and sec_521 if no part of the net_proceeds derived from such drawing inures to the benefit of any private_shareholder_or_individual tip jar and pull-tab games have been determined to be forms of lotteries rul c b drawings for purposes of the exclusion provided by sec_4421 b rul c b they are considered see rev also and rev issue - rationale amounts wagered in drawings conducted by exempt generally under the rationale of organizations are not subject_to wagering tax as long as no part of the net_proceeds inures to the benefit of any private_shareholder_or_individual 783_f2d_69 7th cir raising substantial revenue from wagering activities open to the public for a long period of time to defray organizational operating_expenses and to subsidize membership recreational and social activities constitutes private_inurement public but are limited to members and bona_fide guests the use of the proceeds to defray operating_expenses etc does not constitute inurement also see 456_f2d_152 if the wagering activities are not open to the 2a cir v to sustain an assertion of tax the facts must show the it is shown that wagers were accepted from source and disposition of the net_proceeds from wagering for example if nonmember guest sources the wagering proceeds were commingled with other bar or bingo revenue and those proceeds were applied in part for general operating_expenses or to subsidize the bar and food operations and in part for charitable purposes a proportionate amount of the wagering proceeds could be deemed to have inured to the benefit of the members hand the wagering revenue is separately accounted and is on the other if b05 -15- earmarked solely for charitable purposes no inurement can be attributed to the wagering activities and no liability for tax arises that the proceeds have not inured to the benefit of private individuals the facts as presented do not adequately demonstrate issue - conclusion based upon the above the post has not met the exception of sec_4421 of the code spent for operating_expenses inurement did not occur as it has not shown that funds were not the post has not shown that issue law sec_761 and sec_7701 of the code provide that the term partnership includes a syndicate group pool venture or other unincorporated association through or by means of which any business financial operation or venture is carried on corporation or a_trust or estate and which is not within the meaning of this title joint a sec_301_7701-1 of the procedure and administration regulations that existed prior to january the term partnership is not limited to the common-law meaning of partnership but is broader in its scope and includes groups not commonly called partnerships provided that prior to date the classification of any particular unincorporated organization was determined under the tests and standards set out in old sec_301_7701-2 sec_301_7701-3 and sec_301_7701-4 forth six major characteristics ordinarily found in corporation which organizations carry on business and divide the gains therefrom of life corporate debts limited to corporate property and transferability of interests taken together distinguish it from other old sec_301_7701-2 set centralization of management liability for an objective to associates these are a pure free continuity old sec_301_7701-2 provided that characteristics old sec_301_7701-2 provided that because common to partnerships and corporations are not material in attempting to distinguish between an association and a partnership associates and an objective to carry on a business and divide the gain therefrom are generally common to corporations and partnerships an unincorporated organization that has such characteristics will be classified as at least two of the remaining four characteristics a partnership if it lacks issue - rationale a partnership is created for income_tax purposes when a community of interest in the profits and losses persons join together their money goods labor or skill for the purposes of carrying on a trade profession or business and when there is commissioner v tower u s partnership exists depends on whether the taxpayer and others intended to join together in order to carry on a business for joint economic gain evidence of this intent the following factors none of which are conclusive are commissioner v culbertson u s whether a the agreement of the parties and their conduct in executing its terms the contributions if any hich each party has made to the venture the parties’ control_over income and capital and the right of each to make withdrawals whether each party was a principal and co-proprietor sharing a mutual proprietary interest in the net profit and having an obligation to share losses or whether one party was the agent or employee of the other receiving for his services contingent_compensation in the form of income whether business was conducted in the joint names of the parties whether the parties filed federal partnership returns or otherwise represented to persons with whom they dealt that they were joint venturers whether separate books of account were maintained for the venture and whether the parties exercised mutual control_over and assumed mutual responsibilities for the enterprise a percentage of 42_tc_1067 the arrangement between the post and the other exempt the written_agreement that discusses organizations constitutes a business_entity for federal_income_tax purposes because the organizations appear to have joined together for economic gain the relationship among the organizations with respect to their jointly-owned property shows that the post and the two other exempt_organizations had intended to establish a business venture supervision operation management and control of the bingo_games conducted on the property maintained for the bingo operations in the name selected by the organizations equally in all net profits or losses resulting from the bingo operation exempt_organizations is carries on a business or venture the arrangement between the post and the two other the organizations agreed to share equally in the in addition the organizations agreed to share an unincorporated organization that separate books_and_records were -17- the arrangement between the post and the two other exempt_organizations has associates and an objective to carry ona business and divide the gains therefrom the arrangement between the post and the two other exempt_organizations lacks two or more of the corporate characteristics of centralization of management continuity_of_life limited_liability and free_transferability_of_interests a partnership for federal_income_tax purposes under the old sec_301 regulations therefore the arrangement would be classified as because the arrangement between the post and the two other a partnership the post and the two other exempt_organizations is exempt_organizations are required to file partnership returns under sec_6031 of the code because the post and the two other exempt_organizations failed to fil a partnership return the post may be subject_to and however because the income from the organizations’ bingo operations is not unrelated_business_income and the post reported this income on form_990 for and unnecessary to impose the penalty under sec_6698 rul reporting requirements under sec_6031 or sec_6041 are not imposed if arrangement as either a joint_venture or a taxpayer in good_faith treats a certain penalties for failure to meet a penalty under sec_6698 for c b it may be a lease rev ce issue - conclusion the arrangement between the post and the two other exempt_organizations is partnership returns under sec_6031 of the code may be unnecessary to impose a penalty under sec_6698 a partnership and the post is required to file however a copy of this memorandum is sec_6110 organization may not be used or cited as precedent be given to the to of the code provides that it -end- it