internal_revenue_service number release date index number ----------------------------- ------------------------------ ----------------------- ------------------------------------ legend legend 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 b6 plr-114400-12 date june ------------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------- ----------------------------- --------------------------------------------------- --------------------------------------------- --------------------------------- ----------------------------------------------------------- ----------------------------- ------------- ------------ -------------------- -------------------------- ----------------------------------------------- ----------------------------- --------------------------- --------------------------------------------------------------------- ----------------- taxpayer -------------------------------------------------- company a company b company c company d company e company f company g county a state a state b state c technology manager location a location b business a business b a b c d e ------ ------ ---- ------ -------- plr-114400-12 testing center ------------------------------------------------------------------------------------------------------------------- generating station --------------------------------------------------------------------------------- ---------------------------- dear --------------------- this is in response to your request for rulings submitted by your authorized representative concerning the federal_income_tax consequences of the transaction described below background taxpayer operating company is a limited_liability_company organized under the laws of the state of state a operating company has not elected and will not elect to be classified as an association_taxable_as_a_corporation and accordingly operating company is classified as a partnership for federal_income_tax purposes operating company’s annual_accounting_period ends on december of each year and its overall_method_of_accounting is the accrual_method the operating company owns the refined_coal facility the facility located adjacent to the generating station owned by company a generating station operating company in county a state b the operating company is owned as follows i company b a state a limited_liability_company as a member holding a of the outstanding membership interests and ii company c a state a corporation seller as a member holding b of the outstanding membership interests manager acts as the non-member manager of the operating company the only material asset of company b is its interest in the operating company and another similar operating company company b is owned as follows i seller as a member holding c of the outstanding membership interests and ii company d a state a limited_liability_company buyer as a member holding d of the outstanding membership interests company e a state a corporation seller parent owns e of the stock of seller seller parent is a publicly traded corporation buyer is owned by company f a state a limited_liability_company buyer parent buyer is treated as a disregarded_entity for federal_income_tax purposes and as a division of buyer parent buyer parent is classified as an association taxable as a plr-114400-12 corporation for u s federal tax purposes and has in effect an election under sec_1362 to be an s_corporation buyer parent is the holding_company for a business b firm buyer is a special purpose entity created for the purpose of entering into the transactions described herein and related transactions pursuant to a an agreement between seller and buyer seller sold to buyer a d membership interest in company b in exchange for a purchase_price closely approximating buyer’s proportionate share of the total cost of constructing and installing the facility the facility the operating company entered into a site lease with generating station owner that allows operating company to construct and locate the facility at the generating station pursuant to the terms of the lease the operating company has rights of ingress and egress as appropriate the operating company has constructed and installed the facility and has commercially deployed the technology described below at the generating station the operating company entered into a supply agreement whereby it will purchase coal feedstock from generating station owner at the generating station under the coal supply agreement the operating company will buy all of its feedstock coal from generating station owner except that the operating company may buy feedstock coal from third parties to the extent generating station owner fails to provide the operating company with sufficient feedstock coal to operate the facility in an economical manner the feedstock coal purchased by the operating company from generating station owner will be coal that generating station owner itself purchased from third party vendors consistent with its coal procurement specifications the coal currently burned at the generating station consists of location a coal and location b coal each of which is classified by the american society of testing materials astm as a bituminous coal the operating company or a subcontractor will buy feedstock coal from generating station owner as described and apply the technology to the coal feedstock in this regard the operating company has entered into an operation and maintenance agreement with company g operator to operate and maintain the facilities as an agent on behalf of the operating company the operator is not related to generating station owner the operating company company b or any of the members of company b thereafter the operating company will sell the resulting refined_coal to generating station owner pursuant to an agreement pursuant to this agreement generating station owner will purchase from the operating company all refined_coal plr-114400-12 produced by the facility except that to the extent that the operating company produces refined_coal at the facility from third party supplied coal the generating station owner has the right but not the obligation to purchase such refined_coal if generating station owner declines to purchase any refined_coal produced from third party coal suppliers then the operating company has the right to sell that refined_coal to any person technology seller owns certain licensing rights to a proprietary coal-refining process referred to as technology when the technology is applied as part of an electric and steam generating facility by adding chemicals to coal prior to burning the coal in a furnace it has the effect of reducing emissions of certain pollutants from the burning of the resulting refined_coal increasing fuel efficiency and reducing boiler maintenance the by-product of this process is a valuable fly ash which can be used in a diverse array of applications in the steel mining and cement industries the technology is a dual-injection sorbent system in which separate sorbents for mercury and nox control are added to and mixed with input coal technology owner's patent-pending process starts with several chemical additives the chemical additives being added to coal prior to its combustion in a furnace the additives provide the chemical structure to create a ceramic matrix using chemical bonds to capture emissions of regulated pollutants the matrix has a certain structure of chemicals in certain positions at the interior corners of the matrix the structure will pick up and hold pollutants such as mercury arsenic or lead the structure also picks up and includes elements such as oxygen chlorides and fluorides which are freely available in a boiler's gas stream when they have been released from the coal during combustion but become locked up in the ceramic matrix as the gas stream starts to cool the chemical bonds form into a very strong matrix in short the technology converts coal into a refined_coal refined_coal that is used as a clean fuel to be fired in boilers to raise steam the emissions from burning the clean refined_coal produced by this technology are significantly less than the emissions otherwise produced by burning unprocessed coal this is true not only for the emissions of mercury and nox seller has entered into an agreement to sub-license the technology to the operating company as the operating company utilizes the technology to produce refined_coal the operating company will make royalty payments to seller testing plr-114400-12 the technology has been tested numerous times at the testing center the testing center is located at a major u s university and recognized as one of the world's leading developers of cleaner more efficient energy and environmental technologies to protect and clean air water and soil in connection with this testing an emissions monitoring system was used to measure the effect of the technology on nox sox mercury co and o2 emissions in addition the mercury weight content of the fly ash was tested to measure mercury capture by the technology during testing coal was burned in one of the boilers at the testing center's boiler house the boiler and the combustion conditions were designed to replicate the combustion and other operating conditions for the generating station moreover separate tests were conducted using samples of each of the feedstock coals that currently are burned at the generating station specifically tests were conducted on samples of location a coal location b coal each a tested coal and an equal blend of the two the combustion of each tested coal after applying the technology ie refined_coal resulted in the required emissions reduction for location a coal location b coal and for the equal blend of both in each case these reductions were measured as compared to the baselines established by the testing center when it burned the untreated sample for each tested coal on the basis of these test results the testing center concluded that it is reasonable to expect that all possible blends of these coals would also achieve the required qualifying emission reductions at full scale by using these treatment rates during production of the refined_coal going forward the operating company will regularly collect samples of feedstock coal and refined_coal consistent with applicable astm standards and pursuant to a protocol for the regular collection of sample feedstock coal and refined_coal these samples will be utilized for a number of purposes including periodically conducting laboratory tests for mercury and sulfur content and maintaining rolling averages of the results in order to comply with notice_2010_54 rulings requested based on the foregoing you have requested that we rule as follows the refined_coal produced and sold by using the technology constitutes refined_coal within the meaning of sec_45 of the code provided that such refined_coal is produced from feedstock coal that is the same source or rank as the tested coal and provided further that the refined_coal satisfies the qualified_emission_reduction test stated in sec_45 of the code plr-114400-12 provided that the feedstock coals used to produce refined_coal during any redetermination period are from the same coal source regions and of the same rank as the tested coal all feedstock coal used to produce refined_coal which is from either or both of the coal source regions of the tested coal and any blend of coal from such regions shall be treated as feedstock coal of the same source and rank for purposes of section dollar_figure of notice_2010_54 regardless of the mine from which such feedstock coal is purchased testing by the testing center for qualified emissions reduction as set forth in its test reports satisfies the requirements of notice_2010_54 with respect to the tested coals and any blend of them the pilot scale testing conducted at testing center and subsequent permitted laboratory testing as required for a redetermination described in section a or b of notice to satisfy the qualified_emission_reduction test of sec_45 of the code may be relied upon regardless of subsequent normal fluctuations in operating conditions and emissions at the generating station pursuant to section b of notice_2010_54 the redetermination requirement of section dollar_figure of notice_2010_54 may be satisfied by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal on average do not vary by more than below the bottom nor by more than percent above the top of the range of the sulfur content and range of the mercury content of the feedstock coal and the refined_coal used in the most recent determination of section dollar_figure of notice_2010_54 law and rationale sec_45 of the code generally provides a credit against federal_income_tax for_the_use_of renewable or alternative resources to produce electricity or fuel for the generation of steam sec_45 of the code provides that in the case of a producer of refined_coal the credit available under sec_45 of the code for any taxable_year shall be increased by an amount equal to dollar_figure5 per ton of qualified refined_coal i produced_by_the_taxpayer at a refined_coal_production_facility during the 10-year period beginning on the date that the facility was originally placed_in_service and which is ii sold by the taxpayer to an unrelated_person during such 10-year period and such taxable_year for purposes of sec_45 of the code section dollar_figure of notice_2010_54 provides that the term refined_coal means a fuel which - i is a liquid gaseous or solid fuel including feedstock coal mixed with an additive or additives produced from coal including lignite or high carbon fly ash including such fuel used as a feedstock ii is sold by the taxpayer with the reasonable expectation that it will be used for the purpose of producing steam and iii is certified by the taxpayer as resulting when used in the production of steam in a qualified_emission_reduction section dollar_figure of the notice provides that the term qualified_emission_reduction means in the case of refined_coal plr-114400-12 produced at a facility placed_in_service after date a reduction of at least twenty percent of the emissions of nitrogen oxide and at least forty percent of the emissions of either sulfur dioxide or mercury released when burning the refined_coal excluding any dilution caused by materials combined or added during the production process as compared to the emissions released when burning the feedstock coal or comparable coal predominantly available in the marketplace as of date sec_45 of the code generally provides that the term refined_coal_production_facility means a facility which is placed_in_service after date and before date section dollar_figure of notice_2010_54 generally provides that a qualified emissions reduction does not include any reduction attributable to mining processes or processes that would be treated as mining as defined in sec_613 a c or i if performed by the mine owner or operator accordingly in determining whether a qualified_emission_reduction has been achieved the emissions released when burning the refined_coal must be compared to the emissions that would be released when burning the feedstock coal feedstock coal is the product resulting from processes that are treated as mining and are actually applied by a taxpayer in any part of the taxpayer’s process of producing refined_coal from coal sec_613 of the code describes treatment processes that are not considered as mining unless they are provided for in sec_613 or are necessary or incidental to a process provided for in sec_613 any cleaning process such as a process that uses ash separation dewatering scrubbing through a centrifugal pump spiral concentration gravity concentration flotation application of liquid hydrocarbons or alcohol to the surface of the fuel particles or to the feed slurry provided such cleaning does not change the physical or chemical structure of the coal and drying to remove free water provided such drying does not change the physical or chemical identity of the coal will be considered as mining section of the notice provides in part that emissions reduction may be determined using continuous emission monitoring system cems field testing section a provides in part that cems field testing is testing that meets all the following requirements i the boiler used to conduct the test is coal-fired and steam-producing and is of a size and type commonly used in commercial operations ii emissions are measured using a cems iii if epa has promulgated a performance standard that applies at the time of the test to the pollutant emission being measured the cems must conform to that standard iv emissions for both the feedstock coal and the refined_coal are measured at the same operating conditions and over a period of at least hours during which the boiler is operating at a steady state at least percent of full load and v a qualified_individual verifies the test results in a manner that satisfies the requirement of section b plr-114400-12 section of the notice provides that methods other than cems field testing may be used to determine the emission reduction the permissible methods include a testing using a demonstration pilot-scale combustion furnace if it establishes that the method accurately measures the emission reduction that would be achieved in a boiler described in section a i and a qualified_individual verifies the test results in a manner that satisfies the requirements of section c i ii v and vi of the notice and b a laboratory analysis of the feedstock coal and the refined_coal that complies with a currently applicable epa or astm standard and is permitted under section b i or ii section of the notice provides that a taxpayer may establish that a qualified_emission_reduction determined under section dollar_figure applies to production from a facility by a determination or redetermination that is valid at the time the production occurs a determination or redetermination is valid for the period beginning on the date of the determination or redetermination and ending with the occurrence of the earliest of the following events i the lapse of six months from the date of such determination or redetermination ii a change in the source or rank of the feedstock coal that occurs after the date of such determination or redetermination or iii a change in the process of producing refined_coal from the feedstock coal that occurs after the date of such determination or redetermination section of the notice provides that in the case of a redetermination required because of a change in the process of producing refined_coal from the feedstock coal the redetermination required under section dollar_figure must use a method that meets the requirements of section in any other case the redetermination requirement may be satisfied by laboratory analysis establishing that - a the sulfur s or mercury content of the amount of refined_coal necessary to produce an amount of useful energy has been reduced by at least percent percent in the case of facilities placed_in_service after date in comparison to the s or mercury content of the amount of feedstock coal necessary to produce the same amount of useful energy excluding any dilution caused by materials combined or added during the production process b the s or mercury content of both the feedstock coal and the refined_coal do not vary by more than percent from the s and mercury content of the feedstock coal and refined_coal used in the most recent determination that meets the requirements of the notice finally section dollar_figure of the notice provides that the certification requirement of sec_3 c of the notice is satisfied with respect to fuel for which the refined_coal credit is claimed only if the taxpayer attaches to its tax_return on which the credit is claimed a certification that contains the following a statement that the fuel will result in a qualified emissions reduction when used in the production of steam a statement indicating whether cems field testing was used to determine the emissions reduction if cems field testing was not used to determine the emissions reduction a description of the method used a statement that the emissions reduction was determined or redetermined within the six months preceding the production of the fuel plr-114400-12 and that there have been no changes in the source or rank of the feedstock coal used in the process of producing refined_coal from feedstock coal since the emissions reduction was most recently determined or redetermined and a declaration signed by the taxpayer in the following form under penalties of perjury i declare that i have examined this certification and to the best of my knowledge and belief it is true correct and complete with respect to the first issue the process starts with several chemical additives being added to the feedstock coal prior to its combustion in a furnace the additives provide the chemical structure that results in the reduction of emissions of nitrogen oxide and mercury during combustion section dollar_figure of the notice provides generally that a qualified emissions reduction does not include any reduction attributable to mining processes or processes that would be treated as mining if performed by the mine owner or operator in the instant case the process is not a mining process further section dollar_figure of the notice clarifies sec_45 of the code and specifically provides that refined_coal includes feedstock coal mixed with additives thus additive processes that mix certain chemicals or other additives with the coal in order to achieve emissions reductions may qualify for the refined_coal production_tax_credit additionally section dollar_figure defines comparable coal as coal that is of the same rank as the feedstock coal and that has an emissions profile comparable to the emissions profile of the feedstock coal accordingly we conclude that the refined_coal produced by using the technology constitutes a refined_coal within the meaning of sec_45 of the code provided that the refined_coal i is produced from feedstock coal that is the same source or rank as the tested coal and ii satisfies the qualified_emission_reduction test stated in sec_45 of the code with respect to the second issue the emissions profile of the refined_coal product is compared to the emissions profile of either the feedstock coal or a comparable coal predominantly available in the marketplace as of date section dollar_figure of the notice provides that a comparable coal is defined as coal that is of the same rank as the feedstock coal and that has an emissions profile comparable to the emissions profile of the feedstock coal section dollar_figure of provides that a determination or redetermination of a qualified emissions reduction is valid until the occurrence of the earliest of the following events i the lapse of six months from the date of such determination or redetermination ii a change in the source or rank of the feedstock coal that occurs after the date of such determination or redetermination or iii a change in the process of producing refined_coal from the feedstock coal that occurs after the date of such determination or redetermination accordingly we conclude that provided that the feedstock coals used to produce refined_coal during any redetermination period are from the same coal source regions and of the same rank as the tested coal all feedstock coal used to produce refined_coal which is from either or both of the coal source regions of the tested coal and any blend of coal from such regions shall be treated as feedstock coal of the same source and rank for purposes of section dollar_figure of notice_2010_54 regardless of the mine from which such feedstock coal is purchased plr-114400-12 with respect to the third issue section of the notice provides that any permissible testing method provided for in the notice can be used in emission testing for any pollutant that is a taxpayer can use different testing methods for each of nitrogen oxide sulfur dioxide or mercury provided the method used for any pollutant is a permissible method section provides that an emission test establishing a qualified_emission_reduction qualifies the refined_coal for a six-month period provided there is no change in the process for producing the refined_coal or in the source or rank of the feedstock coal therefore a taxpayer must redetermine the emission reductions to qualify for the succeeding six-month period using one or more approved methods in the instant case taxpayer will arrange for pilot-scale combustion testing and will not rely on any continuous emissions monitoring system or other field testing which is permitted under section dollar_figure of the notice specifically testing center will conduct testing including redetermination testing at its testing facility to determine the emissions reductions associated with burning the refined_coal product compared to the feedstock for purposes of qualifying the refined_coal produced at the facilities the testing center has conducted pilot-scale combustion tests and documented them in conducting such tests the testing center conducted tests on the feedstock and then mixed a separate sample of the feedstock with the additives so that it could conduct tests on the refined_coal product in each of its reports the center reported that the test results indicated that the blend of coal and additives achieved the required emissions reductions based on the foregoing we conclude that testing by the testing center for qualified emissions reduction as set forth in its test reports satisfies the requirements of notice_2010_54 with respect to the tested coals and any blend of them the pilot scale testing conducted at testing center and subsequent permitted laboratory testing as required for a redetermination described in section a or b of notice to satisfy the qualified_emission_reduction test of sec_45 of the code may be relied upon regardless of subsequent normal fluctuations in operating conditions and emissions at the generating station with respect to the fourth issue section of notice_2010_54 provides that where a redetermination is required because of a change in the process of producing refined_coal the redetermination must use one of the general methods for satisfying the emissions reduction requirements listed in section dollar_figure of the notice however in any other case section of the notice provides that the redetermination requirement may be satisfied by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal do not vary by more than from the sulfur and mercury content of the feedstock coal and the refined_coal used in the most recent determination that meets the requirements of notice_2010_54 in the instant case periodic bench tests will be performed to confirm that the sulfur and mercury content of the coal taken from the pile and input into the facility as well as the sulfur and mercury content of the refined_coal output from the facility regardless of the actual blend of types of coal or the source of the mines will not vary by more than below the bottom range for sulfur and mercury or ten percent above the top of the range of these chemicals in the tested feedstock coals accordingly we conclude that plr-114400-12 pursuant to section of notice_2010_54 the redetermination requirement of section dollar_figure of notice_2010_54 may be satisfied by laboratory analysis establishing that the sulfur and mercury content of both the feedstock coal and the refined_coal on average do not vary by more than below nor more than above the top of the range of sulfur content and range of the mercury content of the feedstock coal and the refined_coal used in the most recent determination that meets the requirements of section dollar_figure of notice_2010_54 no opinion is expressed regarding any other issue not specifically addressed in this ruling letter in particular no opinion is expressed with respect to whether taxpayer or any of its affiliates is the producer of the refined_coal for purposes of sec_45 of the code whether there has been a sale of refined_coal to an unrelated_person or when the facility was in fact placed_in_service in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives a copy of this ruling must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides it may not be used or cited as precedent we are sending a copy of this letter_ruling to the industry director sincerely peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs special industries


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division oct co hep rats uniform no xkkkkxkkkxkkkxkkk xxxxxxxxxxxxxx xxkxxxkxkkxxkkkxxxk legend taxpayer a ira x financial advisor w individual m financial_institution e financial_institution f amount d account p account q date date date year dear xxxxxxkxkxxxxkxxxk xxxxkxkkxkkxkkxkkk xxxxxkxxkxxkkxk xxxxxxkxkxkxkxkkxkkk xxxkkkkkxkxkkkxkkk xxxxxxxxkxxkxkxk xxxkxxxxkxxxkkxkkx xxxxkxxkxkxkxkkxkk xxxkkkxxkkxkkkkkk xxkxkxkkkkkkkk xxxxxxxxkkkxkkx xxxkxkkxkkxkkxkkk xxxxxkkxkkkxkkxkk xxxxxkkxkkkxkxkxkk xxxxkxkkxkkkxkxkkkx xxxxxkkkxkkkkxkkk this is in response to a letter dated date as supplemented by correspondence dated date and date submitted on your behalf by your authorized representative requesting a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a under age represents that he received a distribution from ira x totaling amount d taxpayer a asserts that his failure to accomplish a rollover of amount d within the 60-day rollover period prescribed by sec_408 of xxxxxxxxxkxkxkx the code was due to errors committed by financial advisor w and financial_institution f taxpayer a represents that on date upon the advice of financial advisor w he requested and received a distribution of amount d from ira x maintained at financial_institution e with the intent of rolling amount d into an ira at financial_institution f on date financial_institution e issued taxpayer a a check for amount d that taxpayer a deposited into account q a non-ira account held jointly with taxpayer a’s spouse on date taxpayer a gave financial advisor w acheck drawn on account q in amount d payable to financial_institution f with the specific notation ira rollover taxpayer a instructed him to roll over amount d which he knew had been distributed from ira x to another ira taxpayer a represents that financial advisor w provided to taxpayer a a financial_institution f individual new account application financial advisor w acknowledges that he was unaware that the form that he provided was not the appropriate application to establish a rollover ira financial advisor w states that taxpayer a represents further that he noticed the discrepancy in year and on date he contacted individual m a financial_institution f representative and was informed that initially amount d was placed into an ira account but when financial_institution f realized that the check notation differed from the application it changed the account to match the application neither taxpayer a nor financial advisor w was contacted about the switch from an ira to a non- ira investment account and taxpayer a believed that the rollover had been successful until he was alerted to the problem in year taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due to errors committed by financial advisor w in completing the wrong ira application and by financial_institution f in failing to contact taxpayer a before reconciling the discrepancy between the check and the application by transferring amount d into account p a non-ira account where it still remains amount d has not been used for any other purpose based upon the foregoing facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount d from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code xxxkxxxkxkxkxkxkxkkxkkk sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if- i ii the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual received the payment or distribution or the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any the time during the 1-year period ending in the day of such receipt such individual received any other amount described in sec_408 from an ira which was not included in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occur after date are eligible for the waiver under sec_408 of the code revproc_2003_16 r b provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability or hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example xxxxxxkkxxxkxkxkkxk in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and the documentation submitted by taxpayer a is consistent with his assertions that he failed to complete a rollover of amount d within the 60-day rollover period prescribed by sec_408 because of errors committed by financial advisor w and financial_institution f therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount d from ira x taxpayer a is granted a period of days from the date of this ruling to contribute amount d to a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount d will be considered a valid rollover_contribution within the meaning of sec_408 of the code no opinion is expressed as to the tax treatment of the transactions described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this ruling is directed only to the taxpayer that 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 pursuant to a power_of_attorney on file in this office if you have any questions regarding this letter please contact xxxxxxxxx id number xxxxxxx at xxxxxxxxxxx please address all correspondence to se t ep ra t4 sincerely yours wn donzell h littlejohn manager employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose


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-100983-11 date date legend taxpayer state a area 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 as a cooperative association under the laws of state a taxpayer is a grain marketing_cooperative serving farmers located in area farmers in the area principally raise wheat and barley during its fiscal_year ended ----------- taxpayer’s grain sales were approximately dollar_figure------ million in taxpayer purchased approximately ---- million bushels of wheat and barley from its members and others taxpayer also sells seed to its members and others in seed sales totaled approximately dollar_figure---- million taxpayer’s members are producers of grain who do business with it at --------- ----------- taxpayer had ----- members plr-100983-11 taxpayer is organized and operated on a cooperative basis the state a cooperative association statute describes cooperative associations as being organized for mutual welfare and the businesses of cooperatives as being operated on the cooperative plan --------------------- more specifically the statute provides the directors may apportion the net_earnings of a cooperative association by paying dividends upon the paid-up capital stock at a rate not exceeding eight percent per annum they may set_aside reasonable reserves out of such net_earnings for any association purpose the directors may however distribute all or any portion of the net_earnings to members in proportion to the business of each with the association and they may include nonmembers at a rate not exceeding that paid to members the directors may distribute on a patronage basis such net_earnings at different rates on different classes kinds or varieties of products handled all dividends declared or other distributions made under this section may in the discretion of the directors be in the form of capital stock capital or equity certificates book credits or capital funds of the association all unclaimed dividends or distributions authorized under this chapter or funds payable on redeemed stock equity certificates book credits or capital funds shall revert to the association at the discretion of the directors at any time after one year from the end of the fiscal_year during which such distributions or redemptions have been declared ------ --------------------- taxpayer’s articles of incorporation authorize taxpayer to engage in the grain business for its members to exercise generally the powers customarily exercised by cooperative associations and to do so on a nonprofit cooperative basis as agent1 for its members articles of incorporation article sec_1 taxpayer’s bylaws repeat this stating that taxpayer shall at all times be operated on a cooperative basis for the mutual benefits of its members bylaws article sec_1 the articles of incorporation authorize taxpayer to issue a single class of common_stock articles of incorporation article sec_1 that common_stock has a par_value of dollar_figure per share and is entitled to receive a noncumulative dividend of not more than percent per share as determined by the board_of directors of the taxpayer the common_stock is membership stock each member of taxpayer is required to while the articles of incorporation refer to taxpayer as an agent taxpayer acts as a principal in its grain marketing activities purchasing grain from its members and others and bearing the benefits_and_burdens_of_ownership of the grain until it sells the grain to customers plr-100983-11 purchase one share of common_stock bylaws article sec_2 taxpayer’s bylaws limit membership to persons that are producers of agricultural products and to cooperative associations of such producers bylaws article sec_1 the bylaws provide that e ach holder of common_stock of the association shall be entitled to one vote in all matters wherein the shareholders of this association shall be entitled to vote regardless of the number of shares of common_stock owned by each such shareholder bylaws article sec_2 at ----------- there were ------shares of common_stock issued and outstanding entitled in the aggregate to a dividend of not more than dollar_figure--------- per annum taxpayer’s articles of incorporation also authorize taxpayer to establish book credits capital funds and other allocated reserves to provide funds for corporate purposes in the manner provided by the bylaws by retains from net margins or proceeds otherwise payable to the members or patrons or by other methods of collection articles of incorporation article sec_1 book credits are issued as the noncash portion of the patronage_dividends paid_by taxpayer to its members they provide a significant source of equity_capital for financing taxpayer’s business at ------- ----------- the balance of book credits outstanding was dollar_figure------------- taxpayer allocates and distributes its earnings each year from business done with or for members to its members in the form of patronage_dividends article of taxpayer’s bylaws describes how taxpayer computes and pays patronage refunds in pertinent part sec_3 provides sec_3 obligation to allocate net margins each business patronage transaction between the association and a member shall be subject_to and include as a part of its terms the obligation of the association to allocate as patronage_dividends to such member its net margin for each fiscal_year to the extent attributable to the business patronage by such members for such period all such net margins of the association from business patronage by its members shall be allocated and credited to the accounts of such members on a basis proportionate to the value of their individual business patronage with the association that section of the bylaws goes on to provide that taxpayer will allocate its net margins based on departments the net_earnings of the ‘grain trading department’ arising from business done with members shall be allocated to each such member based upon their respective pounds of grain sold through the association the net_earnings of the ‘warehouse and grain handling department’ arising from business done with members shall be allocated to each such member based upon the dollar amount of their respective storage and handling charges and the net_earnings from any other pool department or classification arising from business done with members plr-100983-11 shall be allocated to each such member based upon the quantity or value whichever is appropriate as the case may be of their marketing through or purchases from the association bylaws article sec_3 consistent with these directions taxpayer allocates patronage_dividends each year on the basis of two departments grain marketing with patronage_dividends allocated based upon pounds and warehouse and grain handling with patronage_dividends allocated based on dollars of storage and handling fees paid_by each member article sec_4 of the bylaws authorizes taxpayer to pay patronage_dividends in cash and written notices of allocation referred to by taxpayer as book credits the book credits may be qualified or nonqualified over the years taxpayer has issued both qualified and nonqualified written notices of allocation the bylaws direct taxpayer to retain any net margins attributable to business done with nonmembers not dealing with taxpayer on a patronage basis and to any nonpatronage business including any extraneous business with the federal government or its agencies bylaws article sections and since as noted above taxpayer does not do business with any nonmember patrons on a patronage basis taxpayer retains all net margins attributable to nonmember business the amount of business conducted with nonmembers varies from year to year in recent years nonmember business has constituted approximately ---- percent of taxpayer’s marketing business taxpayer’s bylaws address what is to be done in the event of a loss in general the bylaws permit losses to be netted between allocation units subject_to some limitations bylaws article section the bylaws further provide that losses in a department shall be allocated to all members who patronized such department or classification on the same basis as net margins are distributable hereunder bylaws article sec_12 in the event of dissolution the articles of incorporation provide generally that assets shall be distributed in the following order of priority first to pay all debts second to pay holders of book credits an amount equal to the stated dollar amount third to pay common stockholders an amount equal to the par_value fourth to pay current_year patronage_dividends and fifth to pay any allocated reserves to the persons to whom they are allocated if any assets then remain they shall be distributed among the members of the association in proportion equal to the amount each member’s unrefunded contributions to the common_stock book credits capital funds and allocated reserves of the association bears to the total unrefunded contributions to the common_stock book credits capital funds and allocated reserves of all plr-100983-11 members at the time of commencement of liquidation if at such time there are no unrefunded contributions or allocated reserves credited on the books of the association to members then any remaining balance shall be distributed among the members of the association in their respective proportion equal to the ratio that each member’s dollar value of combined marketing and purchasing through the association during the three year period immediately preceding the date of such distribution shall bear to the total dollar value of all members combined marketing and purchasing through the association during such period by all members at such time articles of incorporation article section this ruling relates to taxpayer’s grain marketing activities taxpayer conducts its grain marketing through --------- elevators most of the grain that taxpayer markets is destined for the bulk export market taxpayer occasionally sells barley locally for livestock feed in such instances the customer will pick up the barley by truck at taxpayer’s elevator and taxpayer will load it out for them however as in the case of wheat most of the barley that taxpayer markets is shipped to the export market taxpayer’s patronage grain business consists of buying grain from members handling and storing the grain at its elevators and selling the grain to customers the principal issue in this ruling relates to the characterization for purposes of subchapter_t of the code and sec_199 of the amounts referred to in this ruling as grain payments that taxpayer pays its members for their grain when it acquires the grain for marketing on a patronage basis for purposes of this ruling the term grain payments does not include any amounts paid to 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 marketing proceeds are not shared equally on the basis of patronage and 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 it remains with members until they sell their grain to taxpayer for marketing taxpayer pays each member a market price for his or her grain what that market price is depends upon where when and how a member chooses to sell his or her grain to taxpayer that market price is determined without regard to the actual net_proceeds from marketing 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 individual contracts plr-100983-11 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 after treating amounts paid to members for their grain as a cost of the grain taxpayer pays a patronage_dividend to its members with respect to the grain they market through taxpayer grain farmers in the united_states historically have retained the decision of to whom when and how to sell their grain the basic choices available to a member 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 fixed price contract or iii to sell the grain to taxpayer using a form of contract that leaves the price to be paid for the grain open to be determined at a later date these 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 one way for a farmer to sell grain to taxpayer for marketing is to sell the grain to taxpayer and be paid the cash bid price taxpayer’s cash bid schedule is driven by the prices for grain in ------------ taxpayer’s principal market for grain the prices that taxpayer quotes are referred to as ------------ prices since at any time they are determined by the bid prices in -------------less a differential the ------------ differential the cash bid prices are for grain that meets normal quality standards grain is weighed and tested when it is delivered by the member to one of taxpayer’s elevators if the grain includes such things as broken kernels and foreign matter the weight is adjusted if wheat is above or below certain protein standards a premium is paid or a discount is charged there are then a variety of adjustments in arriving at the net amount_paid to the farmer the first two deductions were for barge and truck fuel surcharges taxpayer’s truck and barge contracts contain an adjustment for fuel costs which it passes on to its members the third deduction was an adjustment for discounts the fourth deduction was for storage the fifth and seventh adjustments were for a special handling charge to compensate taxpayer for its interest costs involved in carrying grain that charge is made in the case of all grain purchases but then reversed for grain where the purchase_price is less than dollar_figure per bushel plr-100983-11 the sixth charge was for grain tax checkoff fee for the state a -------------- ------------------ taxpayer’s bid price schedule changes from hour to hour and day to day as the - ------------ bid prices change a farmer 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 since prices often are lowest at harvest many farmers have the capacity to store grain on 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 their 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 farmer has the option of entering into a fixed price contract to sell his or her wheat to taxpayer fixed price contracts call for delivery of a specified quantity and quality of grain at a specified location during a specified time period fixed price 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 farmers interested in entering into a fixed price contract with taxpayer for wheat can determine the price taxpayer is willing to pay for delivery at various times in the future from taxpayer’s bid schedule for grain taxpayer is able to offer fixed price purchase contracts for wheat and barley because it can hedge its price exposure by entering into corresponding fixed price contracts with its customers or can hedge by purchasing offsetting futures contracts at one of the futures exchanges taxpayer also purchases grain from members on a deferred price basis using what taxpayer refers to as a delayed price purchase agreement when taxpayer purchases grain on this basis title to the grain passes to taxpayer and it can sell the grain the member retains the right to price the grain at taxpayer’s cash bid price at a date of his or her choosing but not later than a set date the grain was not priced at the time it was delivered the farmer has until a future fixed date to decide when he or she wants to price the grain the benefit to the farmer is that he or she does not need to pay storage fees while waiting to price the grain since title to the grain passes to taxpayer some farmers prefer to sell their grain to taxpayer on a deferred payment basis grain sold on that basis might be delivered in october the price set at that time but with payment to be made in january ownership of the grain passes to taxpayer when the grain is delivered or at the time set in the agreement with payment at a later date taxpayer does not have a separate form that it uses for deferred payment arrangements when grain is purchased on that basis the deferred payment_date is specified on its normal contracts plr-100983-11 the options available to farmers for selling their grain to taxpayer provide members with a reasonable amount of flexibility farmers can lock in prices for their wheat even before the wheat is planted or while it is growing at any time if they think that the price is right by using fixed price purchase contracts if farmers think that the cash price is low at the time of harvest they can harvest and store their grain while waiting for the price to improve farmers with grain in storage on the farm or at taxpayer can then sell grain that is in storage at any time at the cooperative’s cash bid price farmers are also given the option of delivering their grain to taxpayer leaving the price open to be determined by the farmer in the future these choices are available to all farmers 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 with respect to grain marketing for the fiscal_year ended ----------- taxpayer’s grain payments to members exceeded dollar_figure--- million taxpayer paid patronage_dividends to members with respect to their grain sales and handling and storage of dollar_figure----------- of this amount dollar_figure--------- was paid in cash and dollar_figure----------- was paid in nonqualified written notices of allocation book credits taxpayer historically 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 treated 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 it 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 historically 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 has valued its grain inventories at year end at market for financial statement and tax purposes taxpayer has not added back grain payments in its computations of the domestic_production_activities_deduction under sec_199 of the code for prior years taxpayer passed a small amount of its sec_199 deduction through to its 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 for reasons described below taxpayer is seeking confirmation that all grain payments to members that are paid in cash should be classified as per-unit retain allocations paid in money plr-100983-11 taxpayer plans to change the reporting on its tax_return for grain payments to member reporting grain payments to members on line 4b of schedule a of its form 1120-c rather than on line the grain payments will as in the past enter into the determination for tax purposes of taxpayer’s cost_of_goods_sold for tax purposes there will be no impact on taxpayer’s grain inventories since as is customary in the grain business taxpayer will continue to value its grain inventories at year end at market for financial statement and tax purposes in addition taxpayer plans to treat grain payments as per-unit retain allocations paid in money for purposes of computing its sec_199 deduction commencing with its fiscal_year ended ----------- taxpayer does not intend to modify its articles of incorporation bylaws and grain agreements in any manner to change the labels placed upon the payments it is taxpayer’s view that such changes are not required since the definitions in the code focus on substance and not labels taxpayer will make certain that it does not exclude or deduct any grain payments twice on its tax_return or add back any grain payments twice in its sec_199 computation taxpayer may retain all or a portion of its sec_199 deduction or it may pass all or a portion of that deduction through to its members based on the foregoing taxpayer requests the following rulings grain payments to members 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 qualified_production_activities_income and taxable_income should pursuant to sec_199 of the code be computed without regard to any deduction for grain payments to members 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 otherwise 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 plr-100983-11 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 income_tax 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 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 qualified_production_activities_income 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 plr-100983-11 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 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 provides 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 plr-100983-11 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 seed which it sells to its members 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 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 markets the 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 have a number of options for determining how and when sales are made as stated above 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 share in taxpayer’s net_earnings from marketing operations in proportion to the quantity of grains they market through taxpayer those net_earnings are distributed after the end plr-100983-11 of each year in the form of patronage_dividends paid in cash and qualified written notices of allocation the question presented in this ruling is whether the grain payments made by taxpayer to members 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 members 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 members’ sec_199 computations if the grain payments to members 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 members’ 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 member are paid pursuant to an agreement namely the particular agreement applicable to the method the member uses to determine how and when his or her grain is sold to taxpayer reporting grain payments as per-unit retain allocations paid in money in box of form 1099-patr demonstrates that taxpayer and its patrons agreed to treat grain payments as per-unit retain allocations paid in money second taxpayer’s grain payments to a member are made with respect to products marketed for him namely the grain delivered by the member for marketing by taxpayer as described above taxpayer markets the grain it acquires from members and members share in taxpayer’s net_earnings from its marketing activities in the form of patronage_dividends plr-100983-11 third the amount of the grain payments to each member 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 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 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 taxpayer has treated its grain payments as purchases not as per-unit retain allocations paid in money however how the payments have been reported by taxpayer in prior years does not determine how the payments are treated prospectively in this ruling plr-100983-11 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 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 the reasons described above taxpayer’s grain payments to members 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 patr 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 plr-100983-11 we also note that payments to nonmembers who are not eligible to share in patronage_dividends ie those with whom taxpayer does not operate on a cooperative basis with do not constitute per-unit retains paid in money within the meaning of sec_1382 of the code and accordingly are treated exclusively as purchases in the cost_of_goods_sold mechanism accordingly we rule as requested that grain payments to members 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 activitie sec_2 deduction taxpayer’s qualified_production_activities_income and taxable_income should pursuant to sec_199 of the code be computed without regard to any deduction for grain payments to members the conclusions set forth in this ruling address only purchases that are per-unit retain allocations paid in money as they relate to grains 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 this ruling is directed only to the taxpayer that requested it under sec_6110 of the code it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours paul f handleman chief branch office of the associate chief_counsel passthroughs special industries cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br 1-plr-116271-00 date date legend x state d1 d2 d3 d4 property a property b property c property d property e dollar_figurea dollar_figureb this responds to your representative’s letter dated date together with subsequent correspondence submitted on behalf of x requesting a ruling that the rental income received by x from renting certain properties will not constitute passive_investment_income within the meaning of sec_1362 of the internal_revenue_code facts x was incorporated in state on d1 x anticipates making an election to be treated as an s_corporation for its taxable_year beginning d2 x owns property a property b property c property d and property e the properties all of which are commercial facilities the duties of x’s officers employees and associates include the following with respect to the leasing of most of the properties negotiate and sign leases settle tenant disputes evaluate backgrounds of prospective tenants conduct regular inspections of property negotiate and contract for insurance coverages oversee rental collections monitor overall security plr-116271-00 communicate to prospective tenants arrange for pest control inspect roofs drainage systems and exterior walls for repair perform plumbing electrical and carpentry maintenance maintain common areas and hire and monitor subcontractors as needed for repairs not all services are provided to all of the tenants in the properties in particular x does not provide significant services for property e from d3 to d4 x received or accrued dollar_figurea in rental income and paid_or_incurred dollar_figureb in relevant expenses with respect to the properties x represents that these figures are consistent with the income and expense figures for prior periods and expects the figures for future years to be comparable law and analysis except as provided in sec_1362 sec_1362 provides that a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation i has accumulated_earnings_and_profits at the close of each of three consecutive tax years and ii has gross_receipts for each of such tax years more than percent of which are passive_investment_income sec_1375 imposes a tax on the income of an s_corporation if the s_corporation has accumulated_earnings_and_profits at the close of such taxable_year and gross_receipts more than percent of which are passive_investment_income sec_1362 provides that except as otherwise provided the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation plr-116271-00 sec_1_1362-2 provides that rents do not include compensation however designated for_the_use_of or right to use any real or tangible_personal_property developed manufactured or produced_by_the_taxpayer if during the taxable_year the taxpayer is engaged in substantial development manufacturing or production of real or tangible_personal_property of the same type conclusion some of x’s rental income is net_lease income which is generally passive_investment_income however x’s net_lease income is an incidental part of x’s active rental business and will not be treated as passive_investment_income accordingly after applying the law to the facts submitted and the representations made we conclude that the rental income x receives from properties a b c d and e is not passive_investment_income under sec_1362 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts of this case under any other provision of the code specifically no opinion is expressed concerning whether x otherwise satisfies the s_corporation eligibility requirements under sec_1361 further the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 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 as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative s matthew lay sincerely assistant to the branch chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c date cc dom fs proc number release date uilc internal_revenue_service national_office field_service_advice memorandum for from assistant chief_counsel field service subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend x tax_year tax_year tax_year date date date date date date date dollar_figurea dollar_figureb dollar_figurec dollar_figured dollar_figuree dollar_figuref dollar_figureg dollar_figureh dollar_figurei issues should x’s remittance to the internal_revenue_service be treated as a refundable payment of tax on which interest accrues if there was a payment when should it be treated as having been made conclusion pursuant to revproc_84_58 1984_2_cb_501 x’s remittance remaining in its tax module should be treated as a payment of tax as of date ninety days following the issuance of a notice_of_deficiency to x facts in date the service began an examination of tax_year tax_year and tax_year of x on date x remitted to the service a check in the amount of dollar_figurea in an accompanying letter x stated the check was to cover possible deficiencies in income_tax and interest and instructed the service to hold the remitted amount to cover any period as a deposit in the nature of a cash bond under the provisions of revproc_84_58 1984_2_cb_501 the service posted dollar_figureb of the remittance as a deposit for tax_year and the remainder dollar_figurec as a deposit for tax_year on date the service issued to x a statutory_notice_of_deficiency which proposed total adjustments of dollar_figured for tax_year tax_year and tax_year on date the ninetieth day after the notice_of_deficiency was mailed x petitioned the united_states tax_court to redetermine its tax_liability from the date of the petition to date x appears not to have corresponded with the service regarding the dollar_figurea remittance on date while the tax_court case still was pending x wrote to the appeals_division regarding the remittance after acknowledging how the service had posted the remittance x requested that a portion of the remittance be applied as follows tax_year tax_year amount to be applied as a payment of tax dollar_figuree dollar_figureg amount to be applied as a payment of interest dollar_figuref dollar_figureh x further requested that dollar_figurei the balance of the original dollar_figurex remittance remain as a cash bond deposit on date x wrote the service to request that the dollar_figurei remaining balance be transferred to the consolidated_group of which it was then a part and applied as a cash bond for a designated tax_year of the consolidated_group on date the parties settled the suit pending before the united_states tax_court they agreed income_tax refunds were due for tax_year tax_year and tax_year the joint_committee on taxation subsequently approved payment of the refunds to date service transcripts of account reflect as deposits the amounts designated as payments in x’s letter of date the transcripts further reflect that the dollar_figurei balance on the original remittance was as x requested transferred to the consolidated_group of which x was then a part law and analysis under revproc_84_58 the circumstances under which a remittance is made to the service dictate whether the remittance will be treated as a payment of tax or as a deposit in the nature of a cash bond a remittance made before the mailing of a notice_of_deficiency that is designated by the taxpayer as a deposit will be treated as such by the service id at sec_4 following the mailing of a notice_of_deficiency part or all of the deposit will be posted to the taxpayer’s account as a payment of tax occurring at the expiration of the applicable_period within which a petition can be filed with the united_states tax_court provided the taxpayer has not rerequested before then that the deposit continue to be treated as a deposit after the mailing of the notice_of_deficiency id at sec_4 no interest will be allowed or paid on a deposit or any portion of a deposit returned to a taxpayer before or after assessment id at sec_5 interest will be allowed on overpayments of tax id at sec_5 in the event that a deposit is posted to a taxpayer’s account as a payment of tax interest will run on an overpayment later determined to be due but only from the date the amount was posted as a payment of tax id in this case prior to date the ninetieth day following the mailing of a notice_of_deficiency x did not request the service to continue treating its remittance as a deposit in the nature of a cash bond the language of sec_4 appears to dictate that the service should have posted x’s remittance as a payment of tax effective date and should not have continued to treat the remittance as a deposit under this analysis the service should not have honored x’s request of date to apply dollar_figurei of the original remittance as a deposit for a tax_year of the consolidated_group of which x was then a part since the total x had remitted dollar_figurea was less than the liability proposed against x dollar_figured see id at sec_4 a tax is overpaid when a taxpayer pays more than is owed 494_us_596 n on date the parties stipulated that x was entitled to refunds for the years at issue before the tax_court by remitting dollar_figurea towards its possible liabilities for those years x therefore had remitted more than was owed taxpayers are invited to rely upon revproc_84_58 in this case x appears to have misread its provisions we do not think however that x’s apparent error should dictate how interest runs in this case under the analysis above dollar_figurea would have become a payment as of date accordingly we think that it is appropriate to allow x interest on dollar_figurea the original remittance less dollar_figurei the amount transferred out of x’s tax module at x’s direction from date deborah a butler assistant chief_counsel field service division field service division by sara m coe chief procedural branch