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-107325-10 date august legend taxpayer state a dear ------------- ---------------------------------- ----------------------- ------ this is in response to a request for rulings dated date submitted by your authorized representative the rulings concern the interplay of the rules in subchapter_t of the internal_revenue_code concerning the taxation of cooperatives and their patrons and the calculation of the sec_199 deduction for certain cooperatives contained in sec_199 taxpayer is a farmers’ cooperative organized under state a cooperative law taxpayer is a local grain marketing and farm supply cooperative it is headquartered in state a it serves farmers through a network of --- facilities located in a ------county area in state a taxpayer was formed in ------- as a result of the merger of ------- state a cooperatives - ------------------------------------------------------------------------------------------------ --------------------- in ------- ----------------------------------------------- merged into taxpayer effective -------------------------- -------------------------------- merged into taxpayer taxpayer markets grain for its farmer members and for other patrons during its fiscal_year ending ------------------------------- taxpayer’s grain sales were approximately dollar_figure----------------- principal commodities marketed in ------- were corn dollar_figure--------------- soybeans dollar_figure--------------- and wheat dollar_figure------------- taxpayer provides a broad range of the farm supplies to its farmer members and other patrons - including principally agronomy products fertilizer farm chemicals plr-107325-10 seed energy products propane diesel_fuel gasoline etc and feed during ------- taxpayer’s farm supply sales totaled approximately dollar_figure----------------- taxpayer’s members include voting members and nonvoting members voting members are producers ie farmers and farmers’ cooperatives that do business with taxpayer nonvoting members are other persons interested in doing business with taxpayer on a patronage basis note although taxpayer calls one class nonvoting members they are in reality patrons within the meaning of sec_1_1388-1 of the income_tax regulations because member is defined in sec_1_1388-1 to mean a person who is entitled to participate in the management of the cooperative organization on ---------------------- ---------- had --------voting members and ----- nonvoting members taxpayer pays patronage_dividends to both voting and nonvoting members other participating patrons taxpayer does not pay patronage_dividends to nonmembers taxpayer is organized and operated on a cooperative basis state a has a special law for the incorporation of cooperative associations in state a revised code chapter ------- state a cooperative law state a cooperative law provides that associations organized under the act shall be corporations that are deemed nonprofit because they are not organized for the purpose of making a profit for themselves as such or for the purpose of making a profit for their members as such but for their members as patrons section --------------- state a cooperative law provides that cooperative associations shall distribute their earnings on a patronage basis a an association may pay dividends annually on its capital stock all of its other net_income from business with or for members and other eligible patrons less reserves which shall be provided for in the bylaws or other written agreements shall be distributed to its members and other eligible patrons on the basis of patronage as provided in the bylaws or other written agreements section --------------- taxpayer’s articles of incorporation in sec_3_2 provide that t he association is a corporation organized as a cooperative association under chapter ------- of state a cooperative law the articles of incorporation describe taxpayer’s purpose purpose the primary purpose of the association is to associate producers and others to provide them economic benefit through joint action in procuring supplies services and equipment and in marketing products they produce the specific purpose of the association and the general nature of its business is to market grain procure crop and livestock production inputs distribute petroleum fuels and to provide related_services supplies and equipment for its members and other persons the association may engage in any other lawful business or plr-107325-10 activity for which an association may be organized under the state a cooperative law sec_3_1 taxpayer is organized with capital stock it has one class of common_stock and five classes of preferred_stock preferred a preferred b preferred c preferred and d preferred sec_4 no shares of d preferred are issued and outstanding the common_stock and the b preferred_stock are membership stock each has a par_value of dollar_figure per share and neither is entitled to receive dividends sec_4 c and e taxpayer has two classes of members - voting members and nonvoting members each voting member owns one share of common_stock and each nonvoting member owns one share of b preferred voting membership in limited to producers and farmers’ cooperatives sec_4 a and a for this purpose producer means a person engaged in the production of agricultural products for the market including lessors of property used for the production of agricultural products for the market who receive as rent part of the agricultural product cooperative means a producer-controlled entity that is operated on a cooperative basis sec_4 a other persons who are interested in actively patronizing taxpayer are eligible to be nonvoting members sec_5 b the articles of incorporation provide that only voting members are entitled to vote and that each voting member has one vote voting the voting members exercise all of the voting control of the association each voting member is entitled to one vote on any matter submitted to a vote of the members membership or ownership of capital stock or other equity interests in the association does not otherwise confer upon the holder any voting rights in the association sec_5 the other classes of preferred_stock were created over the years to provide capital to support the operations of taxpayer and its predecessors and to fund special projects the dividend rights of each class of preferred_stock are specified in the articles of incorporation sec_4 preferred is entitled to a non-cumulative dividend of not less than -- percent and not more than -- percent per annum a preferred is entitled to a noncumulative dividend of not less than -- percent and not more than -- percent per annum b preferred is not entitled to dividends c preferred is issuable in series and each series is entitled to a cumulative or non-cumulative dividend not in excess of --- percent per annum there are no outstanding shares of d preferred as plr-107325-10 of ---------------------- the par_value of the outstanding dividend-bearing preferred shares was dollar_figure--------- and the maximum annual dividend payable was dollar_figure------------ taxpayer is also authorized to issue equity credits which are used as written notices of allocation for patronage_dividend purposes equity credits provide a significant source of capital used to finance taxpayer’s business sec_4 at ------- ---------------------- the stated dollar amount of outstanding equity credits was dollar_figure------------- ----------------- taxpayer’s articles of incorporation provide that taxpayer’s net_earnings shall be distributed on a cooperative basis as provided in its bylaws patronage refunds the net margins savings of the association in excess of association net margins must be distributed annually to the association’s patrons as patronage refunds on the basis of patronage transactions the calculation allocation and distribution of net margins must be defined and provided for in the bylaws sec_4 article of taxpayer’s bylaws provides a detailed description of how taxpayer computes and pays patronage refunds that computation begins with a determination of net margins from all of taxpayer’s business patronage and nonpatronage for the fiscal_year section then taxpayer is required to deduct i an amount fixed before the beginning of the year for reasonable reserves necessary to insure solvency and financial stability of the association ii the amount declared by the board_of directors as dividends on the preferred_stock and iii an amount sufficient to pay taxpayer’s taxes section a and amounts held back are subtracted out of net margins from nonpatronage sources and only if nonpatronage net margins are not sufficient are they subtracted from net margins from patronage sources section a if earnings from nonpatronage sources exceed the amounts required to be retained then any excess nonpatronage earnings are set_aside in the capital reserve section a taxpayer refers to the amounts required to be retained for reserves dividends and taxes as the association net margins taxpayer’s bylaws then provide patronage refunds the balance of net margins after deduction b of the association net margins shall be the patrons net margins the patrons net margins belong to the patrons and must be allocated to the patrons on the basis of their patronage transactions these allocated amounts are patronage refunds due and distributable to the patrons as provided in these bylaws section b plr-107325-10 this section of the bylaws goes on to provide that taxpayer may pay patronage_dividends based upon allocation units patronage refunds may be allocated on the basis of patronage transactions and the net margins that result from the operations of divisions or departments of the association allocation pools as the board considers fair to the patrons section b taxpayer allocates patronage_dividends upon the basis of four allocation units - feed energy agronomy and grain patrons net margins attributable to the grain allocation unit are allocated among members marketing their grain through taxpayer based upon bushels patrons net margins attributable to the feed energy and agronomy allocation units are allocated among the members doing business with each unit based upon their dollars of purchases from taxpayer section a of the bylaws authorizes taxpayer to pay patronage_dividends in cash capital stock or in equity credits or any combination of these patronage_dividends are normally paid in a combination of cash and equity credits in the past the equity credits distributed by taxpayer as part of its patronage_dividends have been qualified written notices of allocation as defined in subchapter_t of the code in the event of dissolution article of taxpayer’s articles of incorporation provides that after creditors have been paid amounts remaining are to be distributed first to the holders of preferred and d preferred_stock in an amount equal to par_value second to the holders of a preferred_stock in an amount equal to par_value third to the holders of c preferred in an amount equal to par_value and fourth to the holders of common_stock b preferred and equity credits in an amount equal to par_value or stated dollar value as the case may be any residual assets then remaining are then to be shared by the members on the basis of their respective aggregate patronage transactions over the previous ten years as shown by the records of the association the ruling_request relates to taxpayer’s grain marketing activities taxpayer operates ------ grain elevators located strategically across the territory it serves taxpayer purchases grain from its members at the elevators for marketing on a cooperative basis from the elevators grain can be shipped by truck or rail collectively the elevators have the capacity to store approximately -------------bushels of grain taxpayer also purchases some grain from its members and others for sale directly to several large customers that grain is delivered by members directly to customers’ facilities taxpayer sells grain to livestock and poultry producers for feed to grain processors to be used to produce ethanol high-fructose corn sweetener and other products to soybean processors to be crushed and sold as soybean meal oil and other plr-107325-10 further refined products and to others for resale both domestically and in the export market taxpayer’s grain business consists of buying grain from members and others handling and storing the grain at its elevators and then selling the grain to terminal grain elevators grain processors feed lots grain exporters and others the issue in this ruling relates to the characterization for purposes of subchapter_t of the code and sec_199 of payments referred to in this ruling as grain payments that taxpayer makes to members eligible to share in patronage_dividends when it acquires their grain for marketing on a patronage basis thus any payments to persons not eligible to share in patronage_dividends are not grain payments as that term is used in the ruling_request in ------- approximately ---- percent of the grain taxpayer marketed was acquired from persons not entitled to share in patronage_dividends for purposes of this ruling the term grain payments also does not include patronage_dividends paid to members of taxpayer with respect to grain marketed for them taxpayer does not operate on a pooling basis thus taxpayer’s grain marketing proceeds are not shared equally on the basis of patronage and are distributed in the form of harvest advances and progress payments with a final settlement after the pool closes as they would be if taxpayer pooled commodity price risk does not automatically shift from taxpayer’s members to a pool at the time of harvest rather that risk remains with members until they sell their grain to taxpayer for marketing taxpayer pays each member a market price for his or her grain the market price depends upon where when and how a member chooses to sell his or her grain to taxpayer market price is determined without regard to the actual net_proceeds realized by taxpayer from marketing the grain payments are made in cash by check and occur throughout the year as members sell grain to taxpayer for marketing and are paid pursuant to the terms of their grain contracts after purchasing grain from members taxpayer then markets each member’s grain along with the grain of all of its other members in the manner that it judges will produce the best return after year end when net_earnings for the year have been determined taxpayer pays a patronage_dividend to its members with respect to the grain they market through taxpayer grain farmers historically have retained the decision of when and how to sell their grain and to choose whether to sell their grain to a cooperative for marketing on a patronage basis or to a commercial grain company farmers have a variety of alternatives when they sell their grain to taxpayer the choices are similar to those offered farmers by commercial grain companies though commercial grain companies do not market grain on a patronage basis and do not pay patronage_dividends plr-107325-10 the basic choices available to a farmer selling grain to taxpayer for marketing on a cooperative basis are i to sell the grain for taxpayer’s current cash bid price ii to sell the grain to taxpayer using a forward_contract and iii to sell the grain to taxpayer using a deferred price or a deferred payment contract under each of these basic choices there are additional options available to farmers one way for a member to sell grain to taxpayer for marketing is to sell the grain to taxpayer and be paid the cash bid price many members sell grain to taxpayer on this basis typically a country elevator’s cash bid price for a commodity is the nearby futures price in a specified reference market where the commodity is actively_traded eg the chicago board_of trade or the minneapolis grain exchange plus or minus a fixed spread referred to as the basis set from time to time by the elevator based upon local market conditions thus the cash bid price at a country elevator reflects the condition of the overall market for grain the futures price and the condition of the local market for grain the basis an elevator’s cash bid price changes during the course of each day as the reference futures price fluctuates it also changes though not as often as the elevator adjusts the basis a member can deliver and sell grain to taxpayer at the cash bid price at the time of harvest delivering the grain directly from the field however it usually is not advantageous for farmers to sell then because prices often are lowest at harvest many farmers have the capacity to store grain on their farm and so can wait until later when they think that the cash bid price is right to deliver and sell their grain to taxpayer other farmers deliver grain to taxpayer for storage not for immediate sale the farmers retain ownership of the grain in the elevator and pay storage fees to taxpayer later when a farmer believes the cash bid price is right he or she can sell the grain to taxpayer for marketing on a cooperative basis a member has the option of entering into a forward_contract to sell his or her grain to taxpayer this is the most common way for members to sell their grain to taxpayer forward contracts call for delivery of a specified quantity and quality of grain at a specified location during a specified time period forward contracts can be entered into before the grain is planted while it is growing or after harvest while the grain is being stored on the farm or in an elevator forward contracts can be priced in a variety of ways many contracts provide for a fixed price sometimes referred to as a flat price farmers interested in entering into a forward_contract with taxpayer can determine the fixed price taxpayer is willing to pay at any time at any of its locations for delivery at various times in the future from taxpayer’s bid schedules for grain for future delivery typically a country elevator’s bid price for future delivery is determined in a manner similar to the way the cash bid price is determined however when the bid price is for future delivery it is based upon the nearby futures price for the time specified for delivery plus or minus the basis set by the country elevator for that delivery plr-107325-10 month the bid price for future delivery changes during the course of each day as the specified reference_price fluctuates it also changes as the country elevator adjusts its basis farmers also can enter into forward contracts where the pricing is left open for future determination for instance the contracts may fix the basis and leave the futures price open to be determined based upon the futures price at the time chosen by the farmer before a specified date in the future a farmer who believes that basis levels are strong but that future prices could improve might use this kind of pricing alternatively the contracts may specify the futures price and leave the basis open to be determined based upon the elevator’s basis for delivery during the future month at the time chosen by the farmer before a specified date in the future this kind of pricing would be used if the futures price met the farmer’s objective but he or she felt the basis would improve a somewhat more complicated form of contract that is offered by some cooperatives leaves the basis open and places a floor under the futures price if future prices go down the farmer is protected if future prices go up the farmer can share in the appreciation members have the option to deliver grain to taxpayer leaving the determination of the price partly or wholly open contracts of this sort are called by various names - deferred price contracts delayed price contracts credit-sale contracts etc under a delayed price contract ownership of the grain passes from the farmer to taxpayer at the time of delivery farmers are given the opportunity to wait until later to price the grain when the farmer chooses to price the contract the cooperative’s then current bid price is used to fill the open price term once the price is determined the member is paid the variety of options available to farmers for selling their grain to taxpayer and other grain companies provide farmers with a great deal of flexibility farmers can lock in prices for their crops even before they are planted or while they are growing at any time if they think that the price is right by using flat price forward contracts some farmers prefer to do so after they can estimate the costs of production to lock in a reasonable margin the simplest way to do this is to enter into a fixed price purchase contract if a farmer is happy with the futures price but not the basis the farmer can enter into a basis purchase contract if a farmer is happy with the basis but not the futures price the farmer can enter into a futures cash purchase contract if a farmer wants to lock in a minimum futures price but benefit in any strengthening of the futures price and leave the basis open the farmer can enter into a put cash purchase contract if farmers think that the cash price is low at the time of harvest they can harvest and store their crops either on the farm if they have on-farm storage or at one of taxpayer’s elevators while waiting for the price to improve they can then sell that grain to taxpayer when they think the price is right at the current cash bid price plr-107325-10 alternatively farmers can deliver the crops and enter into a delayed purchase contract keeping the price open but not having to bear the costs of storage these choices are available to all members marketing their grain on a cooperative basis through taxpayer because of these choices two neighbors that market the same quantity and quality of a particular kind of grain through taxpayer during any year will receive different grain payments depending upon where when and how they sell their grain to taxpayer however they will receive the same patronage_dividends for the fiscal_year ended ---------------------- taxpayer made grain payments to members of over dollar_figure-------------- taxpayer paid patronage_dividends to members with respect to their grain of approximately dollar_figure-------------- patronage_dividends were paid in cash and qualified written notices of allocation equity credits in the past taxpayer has treated grain payments made in cash to members as purchases for tax purposes and reported them on schedule a line of its form 1120-c taxpayer has not reported the grain payments made in cash as per-unit retain allocations paid in money and therefore has not reported them on schedule a line 4b of its form 1120-c taxpayer has reported the patronage_dividends paid to members as a patronage_dividend paid in money and qualified written notices of allocation on schedule h line sec_3a and sec_3b of its form 1120-c because of this reporting grain payments paid in cash have entered into the determination for tax purposes of taxpayer’s cost_of_goods_sold for tax purposes as is customary in the grain business taxpayer values its grain inventories at year end at market for financial statement and tax purposes taxpayer did not add back grain payments in its sec_199 computations for prior years taxpayer has not passed any portion of its sec_199 deduction through to members in prior years recent developments have caused taxpayer to reconsider how it should treat its grain payments for purposes of its sec_199 computation taxpayer is seeking confirmation that all grain payments to members should be classified as per-unit retain allocations paid in money taxpayer plans to disregard grain payments made to members and other patrons eligible to share in patronage_dividends for purposes of computing its qualified_production_activities_income qpai and its taxable_income beginning with its -------------- --------------------------------------------------------------------------------------------------------------------- ------- tax_return taxpayer may retain all of its sec_199 deduction pass-through all of the deduction to members or pass-through part and retain part of the deduction rulings requested plr-107325-10 grain payments to members and other participating patrons constitute per- unit retain allocations paid in money within the meaning of sec_1382 of the code for purposes of computing its sec_199 domestic_production_activities_deduction taxpayer’s qpai and taxable_income should pursuant to sec_199 of the code be computed without regard to any deduction for grain payments to members and other participating patrons nonexempt subchapter_t cooperatives are permitted to exclude or deduct distributions to patrons that qualify as per-unit retain allocations or patronage_dividends provided the distributions other meet the requirements of subchapter_t of the code sec_1388 of the code defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of subchapter_t applies to a patron with respect to products marketed for him the amount of which is fixed without reference to net_earnings of the organization pursuant to an agreement between the organization and the patron per-unit retain allocations may be made in money property or certificates per- unit retain allocations paid in money and in property are excludable or deductible under sec_1382 of the code per-unit retain allocations paid in certificates are deductible under sec_1382 if the certificates are qualified if the certificates are nonqualified the cooperative is permitted a deduction under sec_1382 or a tax_benefit figured under sec_1383 when the certificates are later redeemed sec_1388 of the code provides that the term patronage_dividend means an amount_paid to a patron by a cooperative on the basis of the quantity or value of business done with or for such patron sec_1388 provides that a patronage_dividend is an amount_paid under an obligation that must have existed before the cooperative received the amount so paid sec_1388 provides that patronage_dividend means an amount_paid to a patron that is determined by reference to the net_earnings of the cooperative from business done with or for its patrons that section further provides that a patronage_dividend does not include any amount_paid to a patron to the extent that such amount is out of earnings other than from business done with or for patrons sec_1_1382-3 of the regulations states that income derived from sources other than patronage means incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association patronage_dividends may be paid in money property or written notices of allocation patronage_dividends paid in money and in property are excludable or deductible under sec_1382 of the code patronage_dividends paid in written plr-107325-10 notices of allocation are deductible under sec_1382 if the written notices of allocation are qualified if the notices are nonqualified the cooperative is permitted a deduction under sec_1382 or a tax_benefit figured under sec_1383 when the notices are later redeemed sec_1388 of the code provides that the term written_notice_of_allocation means any capital stock revolving fund certificate retain certificate certificate of indebtedness letter of advice or other written notice which discloses to the recipient the stated dollar amount allocated to him by the organization and the portion thereof if any which constitutes a patronage_dividend for cooperatives that use pooling revrul_67_333 1967_2_cb_299 provides that pool advances are treated as per-unit retain allocations and the final pool payment made after net_earnings have been determined is treated as a patronage_dividend under sec_199 of the code patrons that receive a qualified_payment from a specified agricultural or horticultural cooperative are allowed a deduction for an amount allocable to their portion of qpai of the organization received as a qualified patronage_dividend or per-unit_retain_allocation which is paid in qualified per-unit retain_certificates in particular sec_199 requires the cooperative to be engaged in the manufacturing production growth or extraction in whole or significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products under sec_199 in the case of a cooperative engaged in the marketing of agricultural and horticultural products the cooperative is treated as having manufactured produced grown or extracted mpge in whole or significant part any qualifying_production_property marketed by the cooperative that its patrons have mpge this is known in the industry as the cooperative attribution rule in addition sec_199 requires the cooperative to designate the patron’s portion of the income allocable to the qpai of the organization in a written notice mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the tax_year under sec_1_199-6 of the regulations for purposes of determining a cooperative’s sec_199 deduction the cooperative’s qpai and taxable_income are computed without taking into account any deduction allowable under sec_1382 or c of the code relating to patronage_dividends per-unit retain allocations and nonpatronage distributions an agricultural or horticultural cooperative is permitted to pass-through to its patrons all or any portion of its sec_199 deduction for the year provided it does so in the manner and within the time limits set by sec_199 of the code when a cooperative passes-through all or any portion of the sec_199 deduction the cooperative remains entitled to claim the entire sec_199 deduction on its return but is required under sec_199 to reduce the deduction or exclusion it would plr-107325-10 otherwise claim under sec_1382 for per-unit retain allocations and patronage_dividends sec_199 of the code provides that a cooperative passes through an amount of its sec_199 deduction by identifying such amount in a written notice mailed to such person during the payment period described in sec_1382 sec_1382 provides that the payment period for a year is the period beginning with the first day of such taxable_year and ending with the fifteenth day of the ninth month following the close of such year sec_1_199-6 of the regulations provide that in order for a patron to qualify for the sec_199 deduction sec_1_199-6 requires that the cooperative identify in a written notice the patron's portion of the sec_199 deduction that is attributable to the portion of the cooperative's qpai for which the cooperative is allowed a sec_199 deduction this written notice must be mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the taxable_year the cooperative may use the same written notice if any that it uses to notify patrons of their respective allocations of patronage_dividends or may use a separate timely written notice s to comply with this section the cooperative must report the amount of the patron's sec_199 deduction on form 1099-patr taxable_distributions received from cooperatives issued to the patron while a cooperative is permitted to disregard per-unit retain allocations and patronage_dividends in its sec_199 deduction sec_1_199-6 of the regulations provide that a qualified_payment received by a patron of a cooperative is not taken into account by the patron for purposes of sec_199 sec_1_199-6 of the regulations defines the term qualified_payment to mean any amount of a patronage_dividend or per-unit_retain_allocation as described in sec_1385 or of the code received by the patron from a cooperative that is attributable to the portion of the cooperative’s qpai for which the cooperative is allowed a sec_199 deduction for this purpose patronage_dividends and per-unit retain allocations include any advances on patronage and per-unit retains paid in money during the taxable_year taxpayer is a specified agricultural or horticultural cooperative within the meaning of sec_199 of the code and sec_1_199-6 of the regulations it is an organization to which part i of subchapter_t applies ie it is a nonexempt_cooperative to which subchapter_t applies it is engaged in the marketing of agricultural or horticultural products ie grain which it markets and various farm supplies which it sells to members and other participating patrons as a specified agricultural or horticultural cooperative taxpayer is entitled to the benefit of sec_199 of the code and sec_1_199-6 of the regulations which permit such cooperatives to disregard deductions under sec_1382 and c plr-107325-10 for purposes of computing qpai and taxable_income for purposes of sec_199 sec_1382 provides deductions for per-unit retain allocations paid in money property and qualified per-unit retain_certificates as well as for patronage_dividends paid in money property and qualified written notices of allocation it also provides for deductions when nonqualified per-unit retain_certificates and nonqualified written notices of allocation are redeemed as a specified agricultural or horticultural cooperative taxpayer is entitled to the benefit of sec_199 and sec_1_199-6 which permit such cooperatives to disregard deductions under sec_1382 and c for purposes of computing qpai and taxable_income for purposes of sec_199 sec_1382 provides deductions for per-unit retain allocations paid in money property and qualified per-unit retain_certificates as well as for patronage_dividends paid in money property and qualified written notices of allocation it also provides for deductions when nonqualified per-unit retain_certificates and nonqualified written notices of allocation are redeemed taxpayer does not operate on a pooling basis taxpayer purchases grain from members and other participating patrons and markets that grain the amount that each member receives when he or she sells grain to taxpayer for marketing depends upon where how and when the member chooses to sell that grain to taxpayer members and other participating patrons are not required to deliver their grain to taxpayer they are free to sell as little or as much of their grain to taxpayer as they choose members and other participating patrons have a number of options for determining how and when sales are made as a result two neighbors delivering the same amount of grain to taxpayer during any year will be paid different amounts for that grain depending upon where when and how they sell the grain to taxpayer however all members and other participating patrons share in taxpayer’s net_earnings from grain operations in proportion to the number of bushels of grain they market through taxpayer those net_earnings are distributed after the end of each year in the form of patronage_dividends paid in cash and qualified written notices of allocation revolving capital the question presented in taxpayer’s ruling_request is whether the grain payments made by taxpayer to patrons for grain qualify as per-unit retain allocations paid in money within the meaning of sec_1388 of the code under sec_199 of the code and sec_1_199-6 of the regulations the answer to this question determines who gets to include the grain payments in the sec_199 computation if the grain payments to patrons are per-unit retain allocations paid in money then they should be added-back in taxpayer’s sec_199 computation and not included in the patrons’ sec_199 computations if the grain payments to patrons are not per-unit retain allocations paid in money then they should not be added-back in taxpayer’s sec_199 computation but should be included in the plr-107325-10 patrons’ sec_199 computations these results are the same whether taxpayer decides to keep or to pass-through all or a portion of its sec_199 deduction grain marketing cooperatives like taxpayer have never thought of their grain payments as per-unit retain allocations paid in money however taxpayer’s grain payments appear to meet the definition of per-unit retain allocations paid in money which are excludible or deductible under sec_1382 of the code the grain payments are made in cash so the paid in money requirement is met taxpayer’s grain payments also meet all the requirements of the definition of per-unit_retain_allocation contained in sec_1388 of the code which defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of this subchapter applies to a patron with respect to products marketed for him the amount of which is fixed without reference to the net_earnings of the organization pursuant to an agreement between the organization and the patron first taxpayer’s grain payments to a patron are paid pursuant to an agreement namely the particular agreement applicable to the method the patron uses to determine how and when his or her grain is sold to taxpayer second taxpayer’s grain payments to a patron are made with respect to products marketed for him namely the grain delivered by the patron for marketing by taxpayer as described above taxpayer markets the grain it acquires from patrons and patrons share in taxpayer’s net_earnings from its marketing activities in the form of patronage_dividends third the amount of the grain payments to each patron is fixed without reference to the net_earnings of taxpayer since at the time the payments are made taxpayer’s actual net_earnings for the year are neither known nor determinable while per-unit retains are often made on the basis of a specified amount per unit of product marketed what is important is that they not be made with respect to net_earnings revrul_68_236 1968_2_cb_236 provides that to constitute a per-unit_retain_allocation the allocation need not be made strictly on the basis of a specified amount per-unit of product marketed provided it is made with respect to products marketed for the patron and not with respect to the net_earnings of the organization whether an allocation meets the foregoing description will be a question of fact the fact that all members and other participating patrons do not receive the same payments for their grain ie that taxpayer does not pool does not mean that grain payments should not be treated as per-unit retain allocations paid in money in 619_f2d_718 8th cir the eighth circuit_court of appeals characterized payments to farm service’s poultry growers as per-unit retain allocations paid in money even though they were determined under a plr-107325-10 formula that resulted in some poultry growers receiving more than others depending upon the efficiency of their operations and the market price of chickens when they delivered their chickens to farm service the tax_court in 70_tc_145 described the formula as follows the grower was paid_by petitioner for growing chickens based on the delivery weight to the processing plant less the weight of chickens condemned by the u s department of agriculture the formula under which the grower was paid also took into account variable market rates for full grown chickens and an efficiency factor that related the number of pounds of feed to the pounds of chickens produced the efficiency factor was figured into the grower's compensation because farm service supplied all chicken feed under the contract provisions established with each of the growers there was also a guaranteed minimum amount the grower would receive from the cooperative irrespective of wholesale market variations for example the contract in effect on date provided that ‘in no event will the grower member receive less than dollar_figure cents per pound less u s d a condemnation ’ on its books petitioner treated payments to its growers as a cost of production historically taxpayer has treated its grain payments as purchases not as per- unit retain allocations paid in money however how the payments have been reported should not obscure what they really are whether or not taxpayer is pooling is a moot issue for purpose of this ruling because its grain payments meet the definition of per-unit retain allocations paid in money in any event nothing in subchapter_t of the code limits the exclusion or deduction for per-unit retain allocations to cooperatives with pools sec_1_199-6 of the regulations provides that sec_1_199-6 is the exclusive method for the cooperative and its patrons to compute the amount of the sec_199 deduction the effect of these sections is that a cooperative such as taxpayer will compute the entire sec_199 deduction at the cooperative level and that none of the distributions whether patronage_dividends or per-unit retain allocations received from the cooperative will be eligible for sec_199 in the patron’s hands that is the patron may not count the qualified_payment received from the cooperative in the patron’s own sec_199 computation whether or not the cooperative keeps or passes through the sec_199 deduction accordingly the only way that a patron can claim a sec_199 deduction for a qualified_payment received from a cooperative is for the cooperative to pass-through the sec_199 amount in accordance with the provisions of sec_199 of the code and the regulations thereunder plr-107325-10 we note that to prevent a cooperative from deducting the per-unit retain allocations made in money or qualified certificates for the second time when the associated grain is sold the cost_of_goods_sold mechanism associated with inventory must be adjusted to reflect the deductions allowable under subchapter_t of the code specifically cooperatives need to include the per-unit retain allocations in inventory cost for purposes of making inventory and sec_263a of the code computations and then adjust the ending inventory and cost_of_goods_sold to prevent double deduction of the per-unit retain allocations the adjustments can be made to either the inventory or the line item deduction for the per-unit retain allocations in other words if the per-unit retain allocations are deducted on a deduction line in the cooperative's tax_return they should be removed entirely from the ending inventory and cost_of_goods_sold computed for the tax_year alternatively if the per-unit retain allocations are not deducted on a deduction line in the tax_return the per-unit retain allocations reflected in the ending inventory should be removed and included in the cost_of_goods_sold amount for that tax_year this procedure will allow the cooperative to deduct the per-unit retain allocations once while also preserving the integrity of its sec_263a calculation for reasons described above taxpayer’s grain payments to members and other participating patrons meet the definition of per-unit retain allocations paid in money the per-unit retains must be treated as such for all purposes of the code and are reported in box of form 1099-patr taxable_distributions received from cooperatives if properly treated as per-unit retain allocations paid in money then taxpayer will be entitled to disregard such payments in determining the amount of its sec_199 deduction accordingly we rule as requested that grain payments to members and other participating patrons constitute per- unit retain allocations paid in money within the meaning of sec_1382 of the code for purposes of computing its sec_199 domestic_production_activities_deduction taxpayer’s qpai and taxable_income should pursuant to sec_199 of the code be computed without regard to any deduction for grain payments to members and other participating patrons the conclusions set forth in this ruling address only purchases that are per-unit retain allocations paid in money as they relate to grain marketed by the cooperative during the taxable_year and does not apply to purchases of grain that remain in inventory at year end no opinion is expressed or implied regarding the application of any other provision in the code or regulations plr-107325-10 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 paul f handleman chief branch office of the associate chief_counsel passthroughs special industries cc


department of the treasury internal_revenue_service washington d c aug rp 45h a uniform issue list ’ tax exempt and government entities ‘ division legend decedent a individual b individual c company d amount e state f court g date l date m date n date p ira x dear this is in response to your request for a private_letter_ruling submitted by your authorized representative by letter dated date concerning the page proper treatment of amounts in decedent a’s individual_retirement_account ira x under sec_401 and sec_408 of the internal_revenue_code code correspondence dated date and date supplemented the request your authorized representative has submitted the following facts and representations decedent a was born on date l and died on date m while a resident of state f at age having attained his required_beginning_date as that term is defined in sec_401 of the code decedent a is survived by three children including you individual b and individual c you the daughter of decedent a were born on date n and were alive at the date of this ruling_request decedent a died testate and his estate is being administered in accordance with his last will and testament will were appointed as executor of decedent a’s estate and were granted letters of the office on date p by court g in accordance with section seven of the will you decedent a’s non-ira estate has been distributed outright to the heirs you his daughter individual b and individual c his sons in equal shares as of his date of death decedent a was the owner of an individual_retirement_arrangement ira ira x maintained with company d as of the date of this ruling_request ira x had a value of approximately amount e decedent a did not name a beneficiary of ira x thus decedent a's estate is the beneficiary thereof in accordance with sections one and two of decedent a’s will you individual b and individual c are entitled to equal shares of decedent a’s ira x you as executor of the estate of decedent a intend to divide ira x into three equal one-third shares-one for each of decedent a’s heirs this will be accomplished by dividing ira x by means of a series of trustee-to-trustee transfers into three distinct sub-iras established as inherited ira and titled as follows decedent a deceased ira f b o your name beneficiary of estate of decedent a decedent a deceased ira f b o individual b beneficiary of estate of decedent a and decedent a deceased ira f b o individual c beneficiary of estate of decedent a each sub-ira created as a result of the division of ira x will receive a pro-rata share of all earnings and interest calculated up to the date of transfer said trustee- to-trustee transfers will occur during calendar_year the three inherited iras will make distributions intended to meet the minimum distribution_requirements of sec_401 of the code based on the remaining page life expectancy of decedent a said distributions will be made from each of the three transferee sub-iras and will commence during calendar_year as of the date of this ruling_request the funds in ira x remain undistributed except that the required minimum distributions have been made with respect to calendar years and based on the foregoing you request the following rulings that your one-third interest of decedent a's ira x can be segregated and held in a separate inherited sub-ira for purposes of determining your minimum_required_distribution under sec_401 of the code that the ira created by means of a trustee to trustee transfer which will be titled decedent a deceased f b o your name beneficiary of the estate of decedent a thereof constitutes an inherited ira under sec_408 of the code that distribution the minimum required requirement under sec_401 of the code from your sub-ira may be met by distributing amounts annually from your distinct ira calculated using decedent a’s remaining life expectancy using the age of decedent a as of his birthday in the calendar_year of his death reduced by one for each subsequent calendar_year in accordance with sec_1_401_a_9_-5 q a-5 of the income_tax regulations and that the transfer of your one-third interest in decedent a’s ira to an ira in decedent a’s name for your benefit will not constitute a distribution within the meaning of sec_408 of the code nor will it be considered an attempted rollover from ira x to your distinct ira with respect to your ruling requests sec_401 of the code provides in general that if a plan participant ira holder dies after the distribution of his interest has begun in accordance with subparagraph a ii after his required_beginning_date the remaining portion of his interest must be distributed at least as rapidly as under the method of distribution being used under subparagraph a ii as of the date of death sec_401 of the code provides in relevant part that for purposes of this paragraph the term required_beginning_date means april of the calendar_year following the calendar_year in which the ira holder attains age final income_tax regulations regulations under sec_401 and sec_408 of the code were published in the federal_register pincite federal_register date and in the internal_revenue_bulletin pincite_19_irb_852 date the preamble to the regulations in relevant part provide that the page regulations apply for determining required minimum distributions for calendar years beginning after date sec_1_401_a_9_-4 of the regulations q a-4 provides in relevant part that in order to be a designated_beneficiary an individual must be a beneficiary as of the date of the employee's or ira holder's death generally an employee's designated_beneficiary will be determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of september of the calendar_year following the calendar_year of death sec_1_401_a_9_-4 of the regulations q a-3 provides that only individuals may be designated beneficiaries for purposes of sec_401 a person who is not an individual such as the employee's estate may not be a designated_beneficiary sec_1_401_a_9_-5 of the regulations q a- a provides in summary that if an employee dies on or after his required_beginning_date without having designated a beneficiary then post-death distributions must be made over the remaining life expectancy of the employee determined in accordance with paragraph c of a-5 sec_1_401_a_9_-5 of the regulations q a- c provides in general that with respect to an employee who does not have a designated_beneficiary the applicable distribution period measured by the employee's remaining life expectancy is the life expectancy of the employee using the age of the employee as of the employee's birthday in the calendar_year of the employee's death in subsequent calendar years the applicable distribution period is reduced by one for each calendar_year that has elapsed after the calendar_year of the employee's death sec_1_401_a_9_-9 of the regulations q a-1 provides the relevant single life expectancy table sec_1_401_a_9_-8 of the regulations q a-2 a provides the separate_account rules with respect to defined contribution plans a separate_account is an account under which the beneficiary or beneficiaries differ from the beneficiary or beneficiaries of the other accounts in general if separate_accounts are set up for years subsequent to the calendar_year containing the date on which the separate_accounts were established or the date of death if later a separate_account under a plan is not aggregated with the other separate_accounts under the plan in order to determine whether the distributions from such separate_account satisfy the requirements of code sec_401 instead the rules in code sec_401 apply separately to each separate_account under the plan sec_1_401_a_9_-8 of the regulations q a-3 provides that a separate_account is a separate portion of an employee's benefit reflecting the separate interest of the employee's beneficiaries under the plan as of the date of the employee's death for which separate_accounting is maintained the separate_accounting must allocate all post-death investment gains and losses contributions and forfeitures for the period page prior to the establishment of the separate_accounts on a pro-rata basis in a consistent and reasonable manner among the separate_accounts sec_1_401_a_9_-4 of the regulations q a-5 c provides in relevant part that the separate_account rules are not available to beneficiaries of a_trust with respect to the trust's interest in an employee's benefit in like manner the separate_account rules are not available to beneficiaries of an estate with respect to the estate's interest in an employee's plan or ira interest sec_408 of the code provides generally that in accordance with the rules of sec_72 amounts paid or distributed from an ira are included in the gross_income by the payee or distributee sec_408 of the code provides generally that amounts from an inherited ira cannot be rolled over into another ira in general an inherited ira is an ira maintained by an individual who acquired said ira by reason of the death of another if the acquiring individual is not the surviving_spouse of said other individual in this case as noted above you are decedent a's daughter revrul_78_406 1978_2_cb_157 provides that the direct transfer of funds from one ira trustee to another ira trustee even if at the behest of the ira holder does not constitute a payment or distribution to a participant payee or distributee as those terms are used in code sec_408 furthermore such a transfer does not constitute a rollover_distribution finally revrul_78_406 is applicable if the trustee to trustee transfer is directed by the beneficiary of an ira after the death of the ira owner as long as the transferee ira is set up and maintained in the name of the deceased ira owner for the benefit of the beneficiary although neither the code nor the regulations promulgated under sec_401 of the code preclude the posthumous division of ira x into more than one ira the regulations do preclude separate_account treatment for code sec_401 purposes where amounts pass through an estate the issues raised in this ruling_request are whether a beneficiary-daughter of an ira holder may after the death of the ira holder transfer her one-third interest in the deceased's ira to an jra set up to solely benefit her and whether she may receive distributions from her beneficiary ira over the deceased's remaining life expectancy without regard to the distribution decisions made by the other ira beneficiaries in this case absent your decision to transfer by means of a trustee-to-trustee transfer your one-third interest in decedent a's ira x to your beneficiary ira as described above distributions of the entire ira x interest including your one-third would have to be made over decedent a's remaining life expectancy in accordance with sec_1_401_a_9_-5 of the regulations q a-5 c after the trustee to page trustee transfer you will receive required distributions over decedent a's remaining life expectancy thus the trustee to trustee transfer will have no effect on the timing or amount of minimum required distributions additionally a trustee to trustee transfer as described in revrul_78_406 does not constitute a distribution or payment as those terms are defined for purposes of code sec_408 finally since you are decedent a's daughter your one-third interest in decedent a's ira x constitutes an inherited ira as that term is defined in sec_408 of the code thus based on the specific facts and representations surrounding this ruling_request we conclude as follows that your one-third interest of decedent a's ira x can be segregated a separate ira for purposes of determining your minimum and held in required_distribution under sec_401 of the code that the ira created by means of a trustee to trustee transfer which will be titled decedent a deceased f b o your name beneficiary of the estate of decedent a thereof constitutes an inherited ira under sec_408 of the code that distribution requirement the minimum required sec_401 of the code from your sub-ira may be met by distributing amounts annually from your distinct ira calculated using decedent a’s remaining life expectancy using the age of decedent a as of his birthday in the calendar_year of his death reduced by one for each subsequent calendar_year in accordance with sec_1_401_a_9_-5 q a-5 of the income_tax regulations and under that the transfer of your one-third interest in decedent a's ira to an ira in decedent a’s name for your benefit will not constitute a distribution be within considered an attempted rollover from ira x to your distinct ira the meaning of sec_408 of the code nor will it this ruling letter is based on the assumption that ira x and the beneficiary ira created after the trustee to trustee transfer either have met are meeting or will meet the requirements of code sec_408 at all times relevant thereto pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative this ruling letter assumes that ira x either is or was qualified under code sec_408 at all times relevant thereto it also assumes that the transferee ira to be set page up to benefit you as a beneficiary of the estate of decedent a will also meet the requirements of sec_408 of the code at all times relevant thereto please note that as stated above minimum required distributions from your transferee ira must commence no later than date this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent a copy of this letter is being sent to your authorized representative in accordance with a power_of_attorney on file in this office if you have any questions please call id we _rreeey ot heh he_ eex nol toll free number sincerely yours rances v sloan employee_plans technical group cc enclosures notice of intention to disclose deleted copy of ruling


internal_revenue_service number release date index number department of the treasury washington dc person to contact telephone number refer reply to cc dom corp br4 plr-109469-99 date date distributing controlled liquidating busine sec_1 busine sec_2 services a b c investment bank d investment bank e consultant month f month g a plr-109469-99 b c d e f g h i j k l m this letter responds to your date request for rulings on the federal_income_tax consequences of a proposed transaction summary of facts publicly traded distributing is the common parent of a consolidated_group distributing wholly owns liquidating distributing engages directly and through subsidiaries and affiliates in business plr-109469-99 controlled engages directly and through subsidiaries and affiliates in busine sec_2 we have received financial information indicating that busine sec_1 and busine sec_2 each had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years distributing and controlled each needs additional capital to expand its business consultant has advised that the most efficient way to raise this capital is through public offerings of stock made in connection with the separation of distributing and controlled from one another proposed transaction to accomplish this separation distributing has proposed the following transaction i liquidating will merge under state law into its sole shareholder distributing the liquidation ii in connection with step iv below distributing will make an offering the distributing offering iii controlled will recapitalize its common_stock into two classes of controlled common_stock with identical rights except for voting power the recapitalization iv distributing will distribute its controlled class a and class b stock pro_rata to all of its shareholders the distribution v controlled will make an offering of its class a common_stock to the public the controlled offering liquidation representations the taxpayer has submitted the following representations concerning the liquidation plr-109469-99 a distributing on the date of adoption of the plan_of_liquidation and at all times until the final liquidating_distribution is completed will be the owner of at least percent of the single outstanding class of liquidating stock b no shares of liquidating stock will have been redeemed during the three years preceding the adoption of the plan of complete_liquidation of liquidating c all distributions from liquidating to distributing pursuant to the plan of complete_liquidation will be made within a single taxable_year of liquidating d as soon as the first liquidating_distribution has been made liquidating will cease to be a going concern and its activities will be limited to winding up its affairs paying its debts and distributing its remaining assets to its shareholders e liquidating will retain no assets following the final liquidating_distribution f liquidating will not have acquired assets in any nontaxable_transaction at any time except for annual contributions of working_capital and acquisitions occurring more than three years before the date of adoption of the plan_of_liquidation g no assets of liquidating have been or will be disposed of by either liquidating or distributing except for dispositions in the ordinary course of business and dispositions occurring more than years before adoption of the plan_of_liquidation h the liquidation will not be preceded or followed by the reincorporation in or transfer or sale to a recipient corporation the recipient of any of the businesses or assets of liquidating if persons holding directly or indirectly more than percent in the value of the liquidating stock also hold directly or indirectly more than percent in value of the stock in recipient for purposes of this representation ownership will be determined by applying the constructive_ownership rules of sec_318 of the internal_revenue_code as modified by sec_304 i before the adoption of the liquidation plan no assets of liquidating will have been distributed in_kind transferred or sold to distributing except for i transactions occurring in the normal course of business and ii transactions occurring more than three years before adoption of the liquidation plan j liquidating will report all earned_income represented by assets that will be distributed to its shareholders such as receivables being reported on a cash_basis unfinished construction contracts commissions due etc k the fair_market_value of the assets of liquidating will exceed its liabilities both on the date of the adoption of the plan of complete_liquidation and immediately before the time the first liquidating_distribution is made plr-109469-99 l there is no intercorporate debt existing between distributing and liquidating and none has been canceled forgiven or discounted except for transactions that occurred more than three years before the date of adoption of the plan_of_liquidation m distributing is not an organization that is exempt from federal_income_tax under sec_501 or any other provision of the code n all other transactions undertaken contemporaneously with in anticipation of in conjunction with or in any way related to the proposed liquidation have been fully disclosed recapitalization representations the taxpayer has submitted the following representations concerning the recapitalization o the fair_market_value of the controlled stock immediately following the recapitalization will approximately equal the fair_market_value of the controlled stock held by the shareholder immediately before the recapitalization p the recapitalization is a single isolated transaction and is not part of a plan to periodically increase the proportionate interest of any shareholder in the assets or earnings_and_profits of controlled q controlled and its shareholders will each pay its his or her own expenses if any incurred in connection with the recapitalization r controlled is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 s none of the controlled class a or class b common_stock received by distributing will be for services rendered or to be rendered u the recapitalization will occur under a plan_of_reorganization agreed upon before the recapitalization v at the time of the recapitalization controlled will not have outstanding any stock_options warrants convertible securities or other rights that are convertible into any class of stock_or_securities of controlled plr-109469-99 w controlled will be treated under applicable state law as the same corporation following the recapitalization and its corporate existence will continue uninterrupted x the management of controlled has no plan or intention to propose a change to the voting rights or powers of the controlled class a common_stock or controlled class b common_stock distribution representations the taxpayer has submitted the following representations concerning the distribution y no part of the consideration distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation z the five years of financial information submitted for busine sec_1 of distributing and busine sec_2 of controlled represents in each case its present operations and with regard to each business there has been no substantial operational change since the date of the last financial statements submitted aa following the transaction distributing and controlled will each continue the active_conduct of its business independently and with its separate employees except for the sharing of certain employees during a transitional period bb the distribution will be carried out to allow distributing and controlled each to acquire through a public offering the additional capital it needs to expand its business the distribution is motivated in whole or substantial part by this corporate business_purpose cc there is no plan or intention by any shareholder who owns five percent or more of the stock of distributing and the management of distributing to its best knowledge is not aware of any plan or intention on the part of any particular remaining shareholder or security holder of distributing to sell exchange transfer by gift or otherwise dispose_of any stock in or securities of either distributing or controlled after the transaction dd there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 1996_1_cb_696 ee there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of plr-109469-99 the assets of either corporation after the distribution except in the ordinary course of business ff no intercorporate debt will exist between distributing and controlled at the time of or after the distribution gg immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 of the income_tax regulations as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further any excess_loss_account distributing may have in the controlled stock will be included in income immediately before the distribution to the extent required by applicable regulations see sec_1_1502-19 hh payments made in connection with any continuing transactions between distributing and controlled including any transitional arrangement for the sharing of employees will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length ii the distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either d or c entitled to vote or stock possessing percent or more of the total value of all classes of stock of either d or c if stock acquisitions under i the buyback programs ii the recapitalization iii the distributing offering and iv the controlled offering were aggregated and treated as part of a plan including the distribution they would not by themselves result in a percent or greater acquisition of the stock of distributing or controlled by vote or value jj any option that has been or will be issued and exercised under an option plan of either distributing or controlled i contains customary terms and conditions ii is provided to an employee director or independent_contractor in_connection_with_the_performance_of_services for the corporation or a person related to it under sec_355 iii is not excessive by reference to the services performed iv is nontransferable within the meaning of sec_1_83-3 immediately after the distribution and within six months thereafter and v does not have a readily_ascertainable_fair_market_value as defined in sec_1_83-7 immediately after the distribution and within six months thereafter liquidation rulings based solely on the information submitted and the representations set forth above we rule as follows on the liquidation plr-109469-99 for federal_income_tax purposes the merger of liquidating into distributing will be treated as a distribution by liquidating of all its assets to distributing in complete_liquidation under sec_332 sec_1_332-2 no gain_or_loss will be recognized by distributing on the receipt of liquidating’s assets in the liquidation sec_332 no gain_or_loss will be recognized by liquidating on the distribution of its properties to distributing in the liquidation sec_336 and sec_337 the basis of each liquidating asset in the hands of distributing will equal the basis of that asset in the hands of liquidating immediately before the liquidation sec_334 the holding_period of each liquidating asset received by distributing will include the period during which liquidating held the asset sec_1223 distributing will succeed to and take into account the items of liquidating described in sec_381 subject_to the provisions and limitations of sec_381 and c and the regulations thereunder sec_381 and sec_1_381_a_-1 distributing will succeed to and take into account the earnings_and_profits of liquidating as of the date of the merger of liquidating into distributing sec_381 and sec_1_381_c_2_-1 any deficit in earnings_and_profits of distributing or liquidating will be used only to offset earnings_and_profits accumulated after the date of the merger of liquidating into distributing sec_381 recapitalization rulings based solely on the information submitted and the representations set forth above we rule as follows on the recapitalization the recapitalization will be treated as an exchange by distributing of its old controlled common_stock for new controlled class a and class b common_stock will qualify as a reorganization under sec_368 controlled will be a party to the reorganization under sec_368 no gain_or_loss will be recognized by distributing as a result of the recapitalization sec_354 the basis in controlled class a and class b common_stock received by distributing in the recapitalization will equal the basis of the controlled common plr-109469-99 stock surrendered in exchange therefor sec_358 the holding_period of controlled class a and class b common_stock received by distributing in the recapitalization will include the period during which the controlled common_stock surrendered in exchange therefor was held provided the controlled common_stock is held as a capital_asset on the date of the exchange sec_1223 no gain_or_loss will be recognized by controlled on its issuance of class a and class b common_stock in exchange for controlled common_stock sec_1032 distribution rulings based solely on the information submitted and the representations set forth above we rule as follows on the distribution no gain_or_loss will be recognized by and no amount will otherwise be included in the income of the distributing shareholders on the distribution sec_355 no gain_or_loss will be recognized by distributing on the distribution sec_355 the aggregate basis of the distributing shares and the controlled class a and class b shares in the hands of each distributing shareholder after the distribution will equal the aggregate basis of the distributing shares in the hands of the distributing shareholder immediately before the distribution sec_358 and sec_1_358-1 this basis will be allocated between the distributing shares and the controlled class a and class b shares in proportion to the fair_market_value of each in accordance with sec_1 a sec_358 and sec_358 the holding_period of the controlled class a and class b shares received by each distributing shareholder in the distribution will include the holding_period of the distributing shares on which the distribution is made provided that the distributing shares are held as capital assets on the date of the distribution sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made under sec_1_312-10 the issuance or exercise of any stock_option described above in representation jj will not be treated as an acquisition for purposes of sec_355 plr-109469-99 caveats we express no opinion on the tax effects of the transaction under any other provisions of the code or regulations or the tax effects of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above rulings procedural statements this ruling letter is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer affected by this ruling letter should attach a copy of the letter to the taxpayer’s federal_income_tax return for the taxable_year in which the transaction covered by the letter is completed under a power_of_attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely assistant chief_counsel corporate by senior technician reviewer branch


internal_revenue_service number release date index number --------------------- -------------------------- ------------------------------------------ ------------------------------- in re --------------- ------------------------------------------- ---------------------- 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 corp bo1 plr-143237-04 date date --------------------------------------------------------------------------------- ---------------- ------------------------------------- ------------------------------------------- parent ------------------------------------------------------------------- ---------------------------------------------------------- business m ------------------------------------------------------------------------------------------------------- foreign parent ------------------------------------------------------------------- subsidiary ------------------------------------------------------------------- ---------------------------------------------------------- x corp ---------------------------------------------------------------------- ---------------------------------------------------------- parent llc ------------------------------------------------------------------------------------ lender --------------------------------------- ---------------------------------------------------------------------------- bank date date date -------------------------------------------------- ----------------------------------- ---------------------- --------------------- ------------------- ------------------- ------- -------- ------------- ----------------------- plr-143237-04 n year o p q r s date dear ---------------- requesting rulings as to certain federal_income_tax consequences of a proposed transaction the following is a summary of the information in your letter and subsequent correspondence ------------------------------------------------------- ----------------------------------------------- ------------------------- summary of facts this letter replies to your letter of date submitted on behalf of parent parent is the common parent of a consolidated_group engaged in business m subsidiary is a holding_company formed by parent on date certain assets and is a subsidiary of foreign parent including the stock of corp x were contributed by members of the parent consolidated_group to subsidiary subsidiary conducted an initial_public_offering of its common_stock on date after date parent owned less than percent of the stock of subsidiary and as a result subsidiary was disaffiliated from parent’s consolidated_group subsidiary became the common parent of a separate consolidated_group thereafter the subsidiary consolidated_group had been generating and was projected to generate income while the parent consolidated_group had a substantial net_operating_loss_carryover that it wished to offset against the income generated by the subsidiary consolidated_group accordingly parent wanted to reaffiliate with subsidiary but did not want to use cash to purchase subsidiary stock parent obtained financing to purchase sufficient subsidiary common_stock to allow it to reaffiliate with parent as described below entity under sec_301_7701-3 of the income_tax regulations purchased n shares on date parent llc which is wholly owned by parent and is a disregarded parent llc pledged to lender the subsidiary stock that the notes were as a result of the purchase parent’s ownership of subsidiary stock increased to plr-143237-04 of subsidiary common_stock from lender which was affiliated with bank in exchange for two promissory notes the old notes due in year o and with an aggregate principal_amount of p the old notes included exchange rights the old options allowing lender to exchange each old note for subsidiary common_stock at a price of dollar_figureq per share which was the stock market price of subsidiary common_stock on date each old option may only be exercised during an exchange_period which for one old note is r and for the other old note is s the interest rate on the old notes is substantially less than parent’s straight-debt borrowing rate reflecting the value of the old options exchangeable into but the pledge allows parent generally to vote and receive cash distributions on the pledged subsidiary shares more than percent allowing subsidiary to reaffiliate with the parent consolidated_group parent has taken action to obtain an automatic waiver from the service from the 60-month waiting_period before reconsolidation under sec_1504 in accordance with sec_5 of revproc_2002_32 2002_1_cb_959 exercise price of the old options the exercise of the old options by lender would again disaffiliate subsidiary from parent parent now proposes that on or before date which is during the exchange_period for one of the old notes parent llc will repay both old notes using four new notes the new notes having an aggregate principal_amount equal to the fair_market_value of the aggregate amount of subsidiary stock that the old notes could have been exchanged into on that date because the subsidiary stock is projected to have appreciated as of the date the old notes are repaid the principal of the new notes is expected to be higher than that of the old notes the new notes will also have exchange rights the new options that allow the holder thereof to purchase the subsidiary stock during exchange periods each ending within months after the issuance of the new notes the exercise price of the new options will be no less than the market price of the subsidiary stock as of the issuance date of the new notes subject_to customary anti-dilution adjustments because the subsidiary stock has appreciated the exercise price of the new options will be higher than that of the old options immediately_after_the_exchange of the old notes for the new notes lender will transfer the new notes to a non-banking affiliate of the lender for fair_market_value consideration the stock market price of subsidiary stock has increased to more than the ruling based solely on the information submitted we rule that the transactions in which the new notes are issued in satisfaction of the old notes and the new notes are transferred to an affiliate of lender will not cause either the old options or the new options to be treated as exercised under sec_1_1504-4 of the regulations plr-143237-04 caveats no opinion is expressed about the tax treatment of the transaction under other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above ruling in particular no opinion is expressed about i whether subsidiary is affiliated with parent immediately before the issuance of the new notes ii the federal_income_tax consequence or characterization of any event after the issuance and transfer described above of the new notes on the affiliation of subsidiary with parent or iii the federal_income_tax consequences other than those specifically covered by the above ruling of the issuance of the new notes in satisfaction of the old notes procedural statements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer involved in the transaction should attach a copy of this ruling letter to the taxpayer's federal_income_tax return for the taxable_year in which the transaction covered by this letter is completed under a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representative sincerely _victor penico______ victor penico senior counsel branch office of associate chief_counsel corporate cc -------------------------------------------------- ------------------------ ---------------------------------------------------- ------------------------------- ---------------


department of the treasury internal_revenue_service washington d c contact person contact number identification_number employer_identification_number number release date date date uil legend you dear ------------ years in the irs began a comprehensive study of organizations offering credit counseling and debt-management services on date the irs office_of_chief_counsel released irs chief_counsel_advice cca irs cca lexi sec_22 date presenting a comprehensive legal analysis as to whether credit counseling organizations can qualify as charitable or educational organizations described in sec_501 of the internal_revenue_code we have enclosed a copy of the cca for your information under sec_501 of the internal_revenue_code as an organization described in sec_501 based on the information submitted we have concluded that you do not qualify for exemption under that section the basis for our conclusion is set forth below you were incorporated under the general not for profit corporation law your articles of incorporation and bylaws provide that you were formed to provide credit_counseling_services to individuals and families as well as other related credit or debt counseling services your board_of directors and officers include a husband and wife the father of the aforementioned husband and another individual counseling for debt payment this includes educating and assisting clients in their communication and negotiations with creditors in order to obtain discounts adjusted payment or penalty terms and other debt adjustments you will be responsible for administering and processing debt management plans dmps and negotiating with credit card you maintain that fifty percent of your time and resources will be devoted to credit we have considered your application_for recognition of exemption from federal_income_tax the market for consumer credit_counseling_services has undergone changes in the past companies creditors and will use credit counseling management software to accomplish these tasks a dmp will offer the ability to lower existing monthly debt payments by combining or consolidating all debt payments into one monthly payment you represent that the other percent of your time and resources will be devoted to financial-credit management education which consists of counseling and advising clients on the use and management of credit budget and following through with debt payments this information will be provided to clients via internet website mailings and personal conferences you maintain that your website is under construction you have submitted several documents governing your debt management program including a document on repayment terms a client agreement a client information sheet an acknowledgement letter to the consumer a sample monthly payment sheet and a sample creditors list clients who take advantage of the dmp will be asked to pay a monthly contribution of dollar_figure per creditor per month up to a maximum of dollar_figure per month there are no initial start_up fees to enter the program when asked what happens when a client misses a payment on the dmp you stated that the client’s payments would not be made to their creditors that month and that creditors may choose to raise their interest rates back up to the original level for a probationary period until the client can demonstrate the ability to pay the negotiated terms on time you state that you are just beginning operations and do not have any clients however your sources of support will include fees that you call voluntary donations from clients based on the information provided we cannot conclude that you are operated for a percent of expected donations donations from creditors-lenders aka fair share payments percent of support and general donations from other parties percent of expected donations your fundraising program includes an initial goal of collecting dollar_figure from creditors and general donors you also expect to raise funds through regular fundraising in the form of voluntary monthly donations from clients and their creditors receiving counseling services so far you have not raised any revenue charitable purpose under sec_501 of the code although you are only in the start-up phase of your debt management operations have not raised any revenue and do not have any clients yet you have outlined detailed plans for conducting a full-capacity debt management program that furthers a substantial non-exempt commercial purpose you state that at least percent of your time and resources will be devoted to administering and processing dmps and negotiating with credit card companies you also submitted a number of documents that outline and govern your debt management program entirely upon revenue earned by selling services to the public ninety percent of your support is expected to come from monthly fees from clients and creditors aside from receiving money from creditors-lenders and from your dmp clients you have not established a fundraising program to raise revenue you only expect to receive percent of your funding from general donations from other parties thus an insignificant amount of your funding is expected to come from contributions or gifts from disinterested members of the general_public your financial structure does not resemble that of a typical charity because it is based contributions to you are not deductible under sec_170 of the code in addition to operating for substantial non-exempt purposes once the debt management furthermore your directors and officers consist of the husband and wife and the father of accordingly you do not qualify for exemption as an organization described in section program is operating you will provide substantial private benefit to the credit card companies by operating as their collection agency the fair share paid_by the credit card companies would undoubtedly result in significant savings over the possible costs of not recovering any of the unpaid debt owed them these companies clearly realize substantial financial benefits through their business relationship with you the aforementioned husband rather than being representative of a broad cross-section of the community they control your operations and therefore we cannot conclude that your assets will not inure to their benefit thus the husband wife and father have a substantial interest in ensuring your success and as a result their financial success your board as presently constituted has inherent conflicts of interest c of the code and you must file federal_income_tax returns submit a statement of your views to this office with a full explanation of your reasoning this statement signed by one of your officers must be submitted within days from the date of this letter you also have a right to a conference in this office after your statement is submitted you must request the conference if you want one when you file your protest statement if you are to be represented by someone who is not one of your officers that person will need to file a proper power_of_attorney and otherwise qualify under our conference and practices requirements revenue service as a failure to exhaust available administrative remedies sec_7428 of the code provides in part that a declaratory judgement or decree under this section shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted administrative remedies available to it within the internal_revenue_service if we do not hear from you within days this ruling will become final and a copy will be forwarded to the ohio tax exempt and government entities te_ge office thereafter any questions about your federal_income_tax status should be directed to that office either by calling a toll free number or sending correspondence to internal_revenue_service te_ge customer service p o box cincinnati oh the appropriate state officials will be notified of this action in accordance with code sec_6104 you have the right to protest this ruling if you believe it is incorrect to protest you should if you do not protest this ruling in a timely manner it will be considered by the internal when sending additional letters to us with respect to this case you will expedite their if you have any questions please contact the person whose name and telephone number internal_revenue_service constitution ave n w washington d c receipt by using the following address are shown in the heading of this letter attachments irs chief_counsel_advice notice sincerely lois g lerner director exempt_organizations rulings agreements