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-108086-10 date date internal_revenue_service number release date index number ------------------------------------------------- ----------------------------------- -------------------------- -------------------------------------------- legend legend taxpayer ----------------------------------- ----------------------- state a ------ dear ----------------- this is in response to a request for rulings dated date submitted by your authorized representative the rulings concern the interplay of the rules in subchapter_t of the internal_revenue_code concerning the taxation of cooperatives and their patrons and the calculation of the sec_199 deduction for certain cooperatives contained in sec_199 taxpayer is a farmers’ cooperative organized under state a cooperative law taxpayer is a local grain marketing and farm supply cooperative headquartered in state a taxpayer serves farmers through a network of --- facilities located in a ---------- county area taxpayer was formed as a result of the consolidation effective ------------------------ ------- of two state a cooperatives - ------------------------------------------------ --------- headquartered in ---------------------- state a and ------------------------------------ headquartered in ---------- state a since the two cooperatives consolidated rather than merged taxpayer is a new cooperative corporation for federal_income_tax purposes and thus has a new taxpayer_identification_number taxpayer is the legal successor to both ------ and ----------------------------- and continues the businesses each conducted together ------ and ------------------------------are sometimes referred to in this ruling as taxpayer’s predecessors taxpayer markets grain for its farmer members and for other patrons during the fiscal_year ended ---------------------- - the year before the consolidation the grain sales plr-108086-10 of taxpayer’s predecessors totaled approximately dollar_figure----------------- principal commodities marketed in ------- were corn soybeans and wheat taxpayer also provides its members and patrons with a broad range of supplies used in farming - including principally agronomy products fertilizer farm chemicals seed energy products propane diesel_fuel gasoline etc feed and general farm supplies during -- ------- the farm supply sales of taxpayer’s predecessors totaled approximately dollar_figure---------- --------- taxpayer’s members include voting members and nonvoting members voting members are producers ie farmers and farmer’s cooperatives that do business with taxpayer nonvoting members are other persons interested in doing business with taxpayer on a patronage basis note although taxpayer calls one class nonvoting members they are in reality patrons within the meaning of sec_1_1388-1 of the income_tax regulations because member is defined in sec_1_1388-1 to mean a person who is entitled to participate in the management of the cooperative organization taxpayer currently has approximately -------- voting members and -------- nonvoting members taxpayer pays patronage_dividends to both voting members and nonvoting members other participating patrons taxpayer does not pay patronage_dividends to nonmembers taxpayer is organized and operated on a cooperative basis state a has a special law for the incorporation of cooperative associations known as the state a cooperative law state a revised code chapter ------- the state a cooperative law provides that associations organized under the act shall be corporations that are deemed nonprofit because they are not organized for the purpose of making a profit for themselves as such or for the purpose of making a profit for their members as such but for their members as patrons section --------------- the state a cooperative law provides that cooperative associations shall distribute their earnings on a patronage basis a an association may pay dividends annually on its capital stock all its other net_income from business with or for members and other eligible patrons less reserves which shall be provided for in the bylaws or other written agreements shall be distributed to its members and other eligible patrons on the basis of patronage as provided in the bylaws or other written agreements -------------------------- taxpayer’s articles of incorporation provide that t he association is a corporation organized as a cooperative association under chapter ------- of the state a revised code the ‘ taxpayer cooperative law’ sec_3_2 they describe taxpayer’s purpose purpose the primary purpose of the association is to associate producers and others to provide them economic benefit through joint plr-108086-10 action in procuring supplies services and equipment and in marketing products they produce the specific purpose of the association and the general nature of its business is to market grain procure crop and livestock production inputs distribute petroleum fuels and to provide related_services supplies and equipment for its members and other persons the association may engage in any other lawful business or activity for which an association may be organized under the state a cooperative law sec_3_1 taxpayer is organized with capital stock it has one class of common_stock and six classes of preferred_stock a preferred b preferred c preferred d preferred e preferred and f preferred sec_4 no shares of f preferred are issued and outstanding the common_stock and the d preferred are membership stock the common_stock has a par_value of dollar_figure per share and the d preferred has a par_value of dollar_figure per share sec_4 neither is entitled to receive dividends sec_4 e each voting member owns one share of common_stock and each nonvoting member owns one share of d preferred sec_5 a and b voting membership is limited to producers and farmers’ cooperatives sec_4 a and a for this purpose ’producer’ means a person engaged in the production of agricultural products for the market including lessors of property used for the production of agricultural products for the market who received as rent part of the agricultural product ‘cooperative means a producer- controlled_entity that is operated on a cooperative basis sec_4 a other persons who are interested in actively patronizing taxpayer are eligible to be nonvoting members sec_5 b the articles of incorporation provide that only voting members are entitled to vote and that each voting member has one vote voting the voting members exercise all of the voting control of the association each voting member is entitled to one vote on any matter submitted to a vote of the members membership or ownership of capital stock or other equity interests in the association does not otherwise confer upon the holder any voting rights in the association sec_5 the other classes of preferred_stock were created to be exchanged in the consolidation for comparable stock in each of taxpayer’s predecessors the par_value plr-108086-10 and dividend rights of each class of preferred_stock are specified in the articles of incorporation sec_4 and a preferred dollar_figure par_value is entitled to a non- cumulative dividend of not less than percent and not more than percent per annum b preferred dollar_figure par_value is entitled to a noncumulative dividend of not less than percent and not more than percent per annum c preferred dollar_figure par_value is entitled to noncumulative percent dividends d preferred dollar_figure par_value and e preferred dollar_figure par_value are not entitled to dividends f preferred dollar_figure par_value is issuable in series and each series is entitled to a cumulative annual dividend not in excess of percent per annum after the consolidation the par_value of the outstanding dividend-bearing preferred shares a preferred b preferred and c preferred was dollar_figure------------- and the maximum annual dividend payable was approximately dollar_figure--------- taxpayer is also authorized to issue capital credits taxpayer issued capital credits in exchange for equity credits and letters of advice issued by taxpayer’s predecessors as part of their patronage_dividends taxpayer plans to use capital credits as part of its patronage_dividends capital credits provide a significant source of capital used to finance taxpayer’s business sec_4 as of --------------------------- after the consolidation occurred the stated dollar amount of outstanding capital credits was dollar_figure--------------- taxpayer’s articles of incorporation provide that its net_earnings shall be distributed on a cooperative basis as provided in its bylaws patronage refunds the net margins savings of the association in excess of association net margins must be distributed annually to the association’s patrons as patronage refunds on the basis of patronage transactions the calculation allocation and distribution of net margins must be defined and provided for in the bylaws sec_4 article of taxpayer’s bylaws provides a detailed description of how taxpayer computes and pays patronage refunds that computation begins with a determination of net margins from all of taxpayer’s business patronage and nonpatronage for the fiscal_year section then taxpayer is required to deduct i an amount fixed before the beginning of the year for reasonable reserves necessary or desirable to insure solvency and financial stability of the association ii the amount declared by the board_of directors as dividends on the preferred_stock and iii an amount sufficient to pay taxpayer’s taxes section a and amounts held back are subtracted out of net margins from nonpatronage sources and only if nonpatronage net margins are not sufficient are they subtracted from net margins from patronage sources section a if earnings from nonpatronage sources exceed the amounts required to be retained then any excess nonpatronage earnings are set_aside plr-108086-10 in the capital reserve section a taxpayer refers to the amounts required to be retained for reserves dividends and taxes as the association net margins taxpayer’s bylaws then provide b patronage refunds the balance of net margins after deduction of the association net margins shall be the patrons net margins the patrons net margins belong to the patrons and must be allocated to the patrons on the basis of their patronage transactions these allocated amounts are patronage refunds due and distributable to the patrons as provided in these bylaws section b this section of the bylaws goes on to provide that taxpayer may pay patronage_dividends based upon allocation units patronage refunds may be allocated on the basis of patronage transactions and the net margins that result from the operations of divisions or departments of the association as the board considers fair to the patrons section b since it is newly formed taxpayer has not yet paid any patronage_dividends to its members taxpayer intends to allocate patronage_dividends upon the basis of four allocation units - feed energy agronomy and grain patrons net margins attributable to the grain allocation unit are allocated among members marketing their grain through taxpayer based upon bushels patrons net margins attributable to the feed energy and agronomy allocation units are allocated among the members doing business with each unit based upon their dollars of purchases from taxpayer because the net margins earned on direct business are significantly lower than the net margins earned on other business taxpayer separately figures patronage_dividends for grain direct and for agronomy direct business the patronage_dividends for grain direct business are allocated based on bushels the patronage_dividends for agronomy direct business are allocated based upon dollars of purchases section a of the bylaws authorizes taxpayer to pay patronage_dividends in cash capital stock or in capital credits or any combination of these taxpayer expects that its patronage_dividends will be paid in a combination of cash and capital credits and that the capital credits will be qualified written notices of allocation as defined in subchapter_t of the code taxpayer also has the authority to pay patronage_dividends in nonqualified written notices of allocation bylaws sec_1 in the event of dissolution article of taxpayer’s articles of incorporation provides that after creditors have been paid amounts remaining are to distributed first to the holders of a preferred b preferred c preferred and d preferred_stock in an amount equal to par_value second to the holders of f preferred_stock in an amount equal to pay plr-108086-10 value third to the holders of common_stock e preferred and capital credits in an amount equal to par_value or stated dollar value as the case may be any residual assets then remaining are then to be shared by the members on the basis of their respective aggregate patronage transactions over the previous ten years as shown by the records of the association this ruling relates to taxpayer’s grain marketing activities taxpayer operates --- --- grain elevators located strategically across the territory it serves it purchases grain from its members at the elevators for marketing on a cooperative basis from the elevators grain can be shipped by truck or rail the storage capacity of taxpayer’s grain elevators is approximately --------------bushels taxpayer also purchases some grain from its members and other for sale directly to several large customers the grain is delivered by members directly to the customers’ facilities taxpayer sells grain to livestock producers for feed to grain processors to be use to produce ethanol high-fructose corn sweetener and other products to soybean processors to be crushed and sold as soybean meal oil and other further refined products and to others for resale both domestically and in the export market taxpayer’s grain business consists of buying grain from members and others handling and storing the grain at its elevators and then selling the grain to terminal grain elevators grain processors feed lots grain exporters and others the issue in this ruling relates to the characterization for purposes of subchapter_t of the code and sec_199 of payments referred to in this ruling as grain payments that taxpayer makes to members when it acquires their grain for marketing on a patronage basis for purposes of this ruling grain payments do not include any amounts paid to persons not entitled to share in patronage_dividends based on the past operations of taxpayer’s predecessors taxpayer anticipates that approximately --- to --- percent of the grain it markets will be acquired from persons not entitled to share in patronage_dividends for purposes of this ruling grain payments also do not include patronage_dividends paid to members with respect to grain marketed for them taxpayer does not operate on a pooling basis thus taxpayer’s grain marketing proceeds are not shared equally on the basis of patronage and distributed in the form of harvest advances and progress payments with a final settlement after the pool closes as they would be if taxpayer pooled commodity price risk does not automatically shift from taxpayer’s members to a pool at the time of harvest rather that risk remains with members until they sell their grain to taxpayer for marketing taxpayer pays each member a market price for his or her grain 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 realized by taxpayer from marketing the grain payments are made in cash plr-108086-10 by check and occur throughout the year as members sell grain to taxpayer for marketing and are paid pursuant to the terms of their grain contracts after purchasing grain from members taxpayer then markets each member’s grain along with the grain of all of its other members in the manner that it judges will produce the best return after year end when net_earnings for the year have been determined taxpayer pays a patronage_dividend to its members with respect to the grain they market through taxpayer grain farmers historically have retained the decision of when and how to sell their grain and to choose whether to sell their grain to a cooperative for marketing on a patronage basis or to a commercial grain company farmers have a variety of alternatives when they sell their grain to taxpayer the choices are similar to those offered farmers by commercial grain companies though commercial grain companies do not market grain on a patronage basis and do not pay patronage_dividends the basic choices available to a farmer selling grain to taxpayer for marketing on a cooperative basis are i to sell the grain for taxpayer’s current cash bid price ii to sell the grain to taxpayer using a forward_contract and iii to sell the grain to taxpayer using a deferred price or a deferred payment contract under each of these basis choices there are additional options available to farmers one way for a member to sell grain to taxpayer for marketing is to sell the grain to taxpayer and be paid the cash bid price typically a country elevator’s cash bid price for a commodity is the nearby futures price in a specified reference market where the commodity is actively_traded eg the chicago board_of trade or the minneapolis grain exchange plus or minus a fixed spread referred to as the basis set from time to time by the elevator based upon local market conditions thus the cash bid price at a country elevator reflects the condition of the overall market for grain the futures price and the condition of the local market for grain the basis an elevator’s cash bid price changes during the course of each day as the reference futures price fluctuates it also changes though not as often as the elevator adjusts the basis the bid prices are delivered prices at the particular elevator for grain of normal merchantable quality farmers are responsible for the costs of delivering the grain to the elevator grain is tested when it is delivered the grain price is subject_to adjustment if the grain is below normal quality standards provided the grain is still full of acceptable quality for the convenience of members taxpayer’s bid schedule shows both the cash price bid and the basis bid at each delivery location this is done because some farmers like to focus on the cash bid price the futures price plus or minus the basis while others like to focus just on the basis the futures prices at the time the schedule plr-108086-10 was printed are also listed on the schedule as described above the cash price at any location at any time equals the futures price minus the basis at that particular location a member can deliver and sell grain to taxpayer at the cash bid price at the time of harvest delivering the grain directly from the field however it usually is not advantageous for farmers to sell then since prices often are lowest at harvest many farmers have the capacity to store grain on their farm and so can wait until later when they think that the cash bid price is right to deliver and sell their grain to taxpayer other farmers deliver grain to taxpayer for storage not for immediate sale the farmers retain ownership of the grain in the elevator and pay storage fees to taxpayer later when a farmer believes the cash bid price is right he or she can sell the grain to taxpayer for marketing on a cooperative basis a member has the option of entering into a forward_contract to sell his or her grain to taxpayer this is the most common way for members to sell their grain to taxpayer forward contracts call for delivery of a specified quantity and quality of grain at a specified location during a specified time period forward contracts can be entered into before the grain is planted while it is growing or after harvest while the grain is being stored on the farm or in an elevator forward contracts can be priced in a variety of ways many contracts provide for a fixed price sometimes referred to as a flat price farmers interested in entering into a forward_contract with taxpayer can determine the fixed price taxpayer is willing to pay at any time at any of its locations for delivery at various times in the future from taxpayer’s bid schedules for grain for future delivery or by contacting taxpayer typically a country elevator’s bid price for future delivery is determined in a manner similar to the way the cash bid price is determined however when the bid price is for future delivery it is based upon the nearby futures price for the time specified for delivery plus or minus the basis set by the country elevator for that delivery month the bid price for future delivery changes during the course of each day as the specified reference_price fluctuates it also changes as the country elevator adjusts its basis farmers can also enter into forward_contract where the pricing is left open for future determination for instance the contracts may fix the basis and leave the futures price open to be determined based upon the futures price at the time chosen by the farmer before a specified date in the future a farmer who believes that basis levels are strong but that futures prices could improve might use this kind of pricing alternatively the contracts may specify the futures price and leave the basis open to be determined based upon the elevator’s basis for delivery during the future month at the time chosen by the farmer before a specified date in the future this kind of pricing is used if the futures price meets the farmer’s objective but he or she believes that the basis will improve a somewhat more complicated form of contract that is offered by some plr-108086-10 cooperatives leaves the basis open and places a floor under the futures price if futures prices go down the farmer is protected if futures prices go up beyond a set threshold which is higher than the minimum price the farmer can share in the appreciation members have the option to deliver grain to taxpayer leaving the determination of the price partly or wholly open contracts of this sort are called by various names - deferred price contracts delayed price contracts credit-sale contracts etc under a delayed price contract ownership of the grain passes from the farmer to taxpayer at the time of delivery farmers are given the opportunity to wait until later to price the grain when the farmer chooses to price the contract the cooperative’s then current bid price is used to full the open price term once the price is determined the member is paid 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 the variety of options available to farmers for selling their grain to taxpayer and other grain companies provide farmers with a great deal of flexibility farmers can lock in prices for their crops even before they are planted or while they are growing at any time if they think that the price is right by using fixed price forward contracts some farmers prefer to do so after they can estimate the costs of production to lock in a reasonable margin the simplest way to do this is to enter into a fixed price purchase contract if a farmer is happy with the futures price but not the basis the farmer can enter into a basis purchase contract if a farmer is happy with the basis but not the futures price the farmer can enter into a futures cash purchase contract if a farmer wants to lock in a minimum futures price but benefit in any strengthening of the futures price and leave the basis open he can enter into a put cash purchase contract if farmers think that the cash price is low at the time of harvest they can harvest and store their crops either on the farm if they have on-farm storage or at one of taxpayer’s elevators while waiting for the price to improve they can sell that grain to taxpayer when they think the price is right at the current cash bid price alternatively farmers can deliver the crops to taxpayer at the time of harvest and enter into a delayed price purchase contract keeping the pricing open but not having to bear the costs of storage these choices are available to all members marketing their grain on a cooperative basis through taxpayer because of these choices two neighbors that market the same quantity and quality of a particular kind of grain through taxpayer during any year will receive different grain payments depending upon where when and plr-108086-10 how they sell their grain to taxpayer however they will each receive the same patronage_dividend for their full fiscal years ended in ------- taxpayer’s predecessors made grain payments to members of approximately dollar_figure------ --------- they paid patronage_dividends to members with respect to that year of approximately dollar_figure-------------- of which approximately dollar_figure--------------was paid with respect to grain business taxpayer’s predecessors treated grain payments made in cash to members as purchases for tax purposes and reported them on schedule a line of their forms 1120-c they did not report grain payments made in cash as per-unit retain allocations paid in money and therefore did not report them on schedule a line 4b of their forms 1120-c they reported the patronage_dividends paid to members in money and qualified written notices of allocation on schedule h line sec_3a and sec_3b of their forms 1120-c because of this reporting grain payments paid in cash have entered into the determination of taxpayer’s predecessors’ cost_of_goods_sold for tax purposes as is customary in the grain business taxpayer’s predecessors valued inventories at year end at market for financial statement and tax purposes taxpayer’s predecessors did not add back grain payments in their sec_199 computations for prior years they did not pass any portion of their sec_199 deductions through to their members in prior years recent developments have caused taxpayer to reconsider how it should treat grain payments for purposes of its sec_199 computation taxpayer is seeking confirmation that all grain payments to members should be classified as per-unit retain allocations in money taxpayer plans to disregard grain payments made to members for purposes of computing its qualified_production_activities_income and its taxable_income beginning with its -----------------------tax return taxpayer may retain all pass through all or retain part and pass through part of its sec_199 deductions in future years based on the foregoing taxpayer requests the following rulings grain payments to members and other participating patrons constitute per-unit retain allocations paid in money within the meaning of sec_1382 of the code for purposes of computing its sec_199 domestic_production_activities_deduction taxpayer’s qualified_production_activities_income and taxable_income should pursuant to sec_199 of the code be computed without plr-108086-10 regard to any deduction for grain payments to members and other participating patrons nonexempt subchapter_t cooperatives are permitted to exclude or deduct distributions to patrons that qualify as per-unit retain allocations or patronage_dividends provided the distributions other meet the requirements of subchapter_t of the code sec_1388 of the code defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of subchapter_t applies to a patron with respect to products marketed for him the amount of which is fixed without reference to net_earnings of the organization pursuant to an agreement between the organization and the patron per-unit retain allocations may be made in money property or certificates per- unit retain allocations paid in money and in property are excludable or deductible under sec_1382 of the code per-unit retain allocations paid in certificates are deductible under sec_1382 if the certificates are qualified if the certificates are nonqualified the cooperative is permitted a deduction under sec_1382 or a tax_benefit figured under sec_1383 when the certificates are later redeemed sec_1388 of the code provides that the term patronage_dividend means an amount_paid to a patron by a cooperative on the basis of the quantity or value of business done with or for such patron sec_1388 provides that a patronage_dividend is an amount_paid under an obligation that must have existed before the cooperative received the amount so paid sec_1388 provides that patronage_dividend means an amount_paid to a patron that is determined by reference to the net_earnings of the cooperative from business done with or for its patrons that section further provides that a patronage_dividend does not include any amount_paid to a patron to the extent that such amount is out of earnings other than from business done with or for patrons sec_1_1382-3 of the regulations states that income derived from sources other than patronage means incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association patronage_dividends may be paid in money property or written notices of allocation patronage_dividends paid in money and in property are excludable or deductible under sec_1382 of the code patronage_dividends paid in written 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 plr-108086-10 indebtedness letter of advice or other written notice which discloses to the recipient the stated dollar amount allocated to him by the organization and the portion thereof if any which constitutes a patronage_dividend for cooperatives that use pooling revrul_67_333 1967_2_cb_299 provides that pool advances are treated as per-unit retain allocations and the final pool payment made after net_earnings have been determined is treated as a patronage_dividend under sec_199 of the code patrons that receive a qualified_payment from a specified agricultural or horticultural cooperative are allowed a deduction for an amount allocable to their portion of qpai of the organization received as a qualified patronage_dividend or per-unit_retain_allocation which is paid in qualified per-unit retain_certificates in particular sec_199 requires the cooperative to be engaged in the manufacturing production growth or extraction in whole or significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products under sec_199 in the case of a cooperative engaged in the marketing of agricultural and horticultural products the cooperative is treated as having manufactured produced grown or extracted mpge in whole or significant part any qualifying_production_property marketed by the cooperative that its patrons have mpge this is known in the industry as the cooperative attribution rule in addition sec_199 requires the cooperative to designate the patron’s portion of the income allocable to the qpai of the organization in a written notice mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the tax_year under sec_1_199-6 of the regulations for purposes of determining a cooperative’s sec_199 deduction the cooperative’s qpai and taxable_income are computed without taking into account any deduction allowable under sec_1382 or c of the code relating to patronage_dividends per-unit retain allocations and nonpatronage distributions an agricultural or horticultural cooperative is permitted to pass-through to its patrons all or any portion of its sec_199 deduction for the year provided it does so in the manner and within the time limits set by sec_199 of the code when a cooperative passes-through all or any portion of the sec_199 deduction the cooperative remains entitled to claim the entire sec_199 deduction on its return but is required under sec_199 to reduce the deduction or exclusion it would 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 plr-108086-10 the first day of such taxable_year and ending with the fifteenth day of the ninth month following the close of such year sec_1_199-6 of the regulations provide that in order for a patron to qualify for the sec_199 deduction sec_1_199-6 requires that the cooperative identify in a written notice the patron's portion of the sec_199 deduction that is attributable to the portion of the cooperative's qpai for which the cooperative is allowed a sec_199 deduction this written notice must be mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the taxable_year the cooperative may use the same written notice if any that it uses to notify patrons of their respective allocations of patronage_dividends or may use a separate timely written notice s to comply with this section the cooperative must report the amount of the patron's sec_199 deduction on form 1099-patr taxable_distributions received from cooperatives issued to the patron while a cooperative is permitted to disregard per-unit retain allocations and patronage_dividends in its sec_199 deduction sec_1_199-6 of the regulations provide that a qualified_payment received by a patron of a cooperative is not taken into account by the patron for purposes of sec_199 sec_1_199-6 of the regulations defines the term qualified_payment to mean any amount of a patronage_dividend or per-unit_retain_allocation as described in sec_1385 or of the code received by the patron from a cooperative that is attributable to the portion of the cooperative’s qpai for which the cooperative is allowed a sec_199 deduction for this purpose patronage_dividends and per-unit retain allocations include any advances on patronage and per-unit retains paid in money during the taxable_year taxpayer is a specified agricultural or horticultural cooperative within the meaning of sec_199 of the code and sec_1_199-6 of the regulations it is an organization to which part i of subchapter_t applies ie it is a nonexempt_cooperative to which subchapter_t applies it is engaged in the marketing of agricultural or horticultural products ie grain 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 plr-108086-10 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 patrons and markets that grain the amount that each patron receives when he or she sells grain to taxpayer for marketing depends upon where how and when the patron chooses to sell that grain to taxpayer patrons are not required to deliver their grain to taxpayer they are free to sell as little or as much of their grain to taxpayer as they choose patrons have a number of options for determining how and when sales are made as a result two neighbors delivering the same amount of grain to taxpayer during any year will be paid different amounts for that grain depending upon where when and how they sell the grain to taxpayer however all patrons share in taxpayer’s net_earnings from grain operations in proportion to the number of bushels of grain they market through taxpayer those net_earnings are distributed after the end of each year in the form of patronage_dividends paid in cash and qualified written notices of allocation revolving fund credits the question presented in taxpayer’s ruling_request is whether the grain payments made by taxpayer to patrons for grain qualify as per-unit retain allocations paid in money within the meaning of sec_1388 of the code under sec_199 of the code and sec_1_199-6 of the regulations the answer to this question determines who gets to include the grain payments in the sec_199 computation if the grain payments to patrons are per-unit retain allocations paid in money then they should be added-back in taxpayer’s sec_199 computation and not included in the patrons’ sec_199 computations if the grain payments to patrons are not per-unit retain allocations paid in money then they should not be added-back in taxpayer’s sec_199 computation but should be included in the patrons’ sec_199 computations these results are the same whether taxpayer decides to keep or to pass-through all or a portion of its sec_199 deduction grain marketing cooperatives like taxpayer 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 plr-108086-10 taxpayer’s grain payments also meet all the requirements of the definition of per-unit_retain_allocation contained in sec_1388 of the code which defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of this subchapter applies to a patron with respect to products marketed for him the amount of which is fixed without reference to the net_earnings of the organization pursuant to an agreement between the organization and the patron first taxpayer’s grain payments to a patron are paid pursuant to an agreement namely the particular agreement applicable to the method the patron uses to determine how and when his or her grain is sold to taxpayer second taxpayer’s grain payments to a patron are made with respect to products marketed for him namely the grain delivered by the member or other patron eligible to share in patronage_dividends for marketing by taxpayer as described above taxpayer markets the grain it acquires from members and other participating patrons and members and other participating patrons share in taxpayer’s net_earnings from its marketing activities in the form of patronage_dividends third the amount of the grain payments to each patron is fixed without reference to the net_earnings of taxpayer since at the time the payments are made taxpayer’s actual net_earnings for the year are neither known nor determinable while per-unit retains are often made on the basis of a specified amount per unit of product marketed what is important is that they not be made with respect to net_earnings revrul_68_236 1968_2_cb_236 provides that to constitute a per-unit_retain_allocation the allocation need not be made strictly on the basis of a specified amount per-unit of product marketed provided it is made with respect to products marketed for the patron and not with respect to the net_earnings of the organization whether an allocation meets the foregoing description will be a question of fact the fact that all members and other participating patrons do not receive the same payments for their grain ie that taxpayer does not pool does not mean that grain payments should not be treated as per-unit retain allocations paid in money in 619_f2d_718 8th cir the eighth circuit_court of appeals characterized payments to farm service’s poultry growers as per-unit retain allocations paid in money even though they were determined under a 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 plr-108086-10 which the grower was paid also took into account variable market rates for full grown chickens and an efficiency factor that related the number of pounds of feed to the pounds of chickens produced the efficiency factor was figured into the grower's compensation because farm service supplied all chicken feed under the contract provisions established with each of the growers there was also a guaranteed minimum amount the grower would receive from the cooperative irrespective of wholesale market variations for example the contract in effect on date provided that ‘in no event will the grower member receive less than dollar_figure cents per pound less u s d a condemnation ’ on its books petitioner treated payments to its growers as a cost of production historically taxpayer has treated its grain payments as purchases not as per- unit retain allocations paid in money however how the payments have been reported should not obscure what they really are whether or not taxpayer is pooling is a moot issue for purpose of this ruling because its grain payments meet the definition of per-unit retain allocations paid in money in any event nothing in subchapter_t of the code limits the exclusion or deduction for per-unit retain allocations to cooperatives with pools sec_1_199-6 of the regulations provides that sec_1_199-6 is the exclusive method for the cooperative and its patrons to compute the amount of the sec_199 deduction the effect of these sections is that a cooperative such as taxpayer will compute the entire sec_199 deduction at the cooperative level and that none of the distributions whether patronage_dividends or per-unit retain allocations received from the cooperative will be eligible for sec_199 in the patron’s hands that is the patron may not count the qualified_payment received from the cooperative in the patron’s own sec_199 computation whether or not the cooperative keeps or passes through the sec_199 deduction accordingly the only way that a patron can claim a sec_199 deduction for a qualified_payment received from a cooperative is for the cooperative to pass-through the sec_199 amount in accordance with the provisions of sec_199 of the code and the regulations thereunder 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 plr-108086-10 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 crop payments to members and other participating patrons meet the definition of per-unit retain allocations paid in money the per-unit retains must be treated as such for all purposes of the code and are reported in box of form 1099-patr taxable_distributions received from cooperatives if properly treated as per-unit retain allocations paid in money then taxpayer will be entitled to disregard such payments in determining the amount of its sec_199 deduction accordingly we rule as requested that grain payments to members and other participating patrons constitute per- unit retain allocations paid in money within the meaning of sec_1382 of the code for purposes of computing its sec_199 domestic_production_activities_deduction taxpayer’s 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 and other participating patrons the conclusions set forth in this ruling address only purchases that are per-unit retain allocations paid in money as they relate to grain marketed by the cooperative during the taxable_year and does not apply to purchases of grain that remain in inventory at year end no opinion is expressed or implied regarding the application of any other provision in the code or regulations 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 plr-108086-10 power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours paul f handleman paul f handleman chief branch office of the associate chief_counsel passthroughs special industries cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-131891-02 date date x a d1 dear this letter responds to a letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 a the president of x represents that x was intended to be an s_corporation effective d1 however no form_2553 election by a small_business_corporation was timely filed for x sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective d1 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 effective d1 along with a copy of this letter with the appropriate service_center within days from the date of this letter then such election will be treated as timely made for d1 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the plr-131891-02 code including whether x was or is a small_business_corporation under sec_1361 of the code 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 pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x sincerely yours matthew lay acting chief branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury washington d c ervice rs government entities dd division may uniform issue list qe -t er e hm v7 legend taxpayer a financial_institution b ira x amount dear this is in response to your ruling_request dated date as supplemented by correspondence dated date in which you request 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 represents that he withdrew funds from his ira totaling amount taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to financial difficulties involving the loss of his job a fire in his home and a pending move as well as the downturn in the economy and the decline in the value of his retirement_funds taxpayer a represents that he was the owner of ira x a qualified_individual retirement arrangement ira established and maintained at financial_institution b under the rules of sec_408 of the code taxpayer a represents that on date he received a distribution totaling amount from ira x due to financial pressures of losing his job taxpayer a asserts that the withdrawal was made with the intent to rollover pending a new job or sale of his home or farm on date taxpayer a suffered a fire to his home which exasperated his financial situation information submitted indicates that taxpayer a utilized the proceeds from ira x until he received an insurance settlement on his home amount was subsequently re-deposited into ira x on date a -2- based on the above facts and representations taxpayer a requests a ruling that the internal_revenue_service service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount 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 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 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 receives the payment or distribution or ii 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 time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible 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 60-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 occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 r b date 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 hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example 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 in this case indicates that taxpayer a withdrew amount from ira x for use as a short term_interest free loan to cover personal living_expenses the committee report describing legislative intent indicates that congress enacted the rollover provisions to allow portability between eligible plans including iras using a distribution as a short term_loan to cover personal expenses is not consistent with the intent of congress to allow portability between eligible plans the information presented does not demonstrate circumstances that would justify a waiver of the 60-day rollover period pursuant to sec_408 of the code and revproc_2003_16 under the circumstances presented in this case the service hereby declines to waive the 60-day rollover requirement with respect to the distribution of amount from ira x and thus amount will not be considered a valid rollover_contribution within the meaning of sec_408 of the code because the 60-day rollover requirement was not satisfied amount must be included in taxpayer a’s gross_income for the taxable_year no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter 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 if you wish to inquire about this ruling please contact xxxxxxxxxxxxxxxxxxx government identification_number xx-xxxxx by phone at xxx xxx-xxxx or by fax at xxx xxx-xxxx please address all correspondence to se t ep ra t1 sincerely clo walter carlton a watkins manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date conex-104201-10 number info release date uil the honorable frank r wolf member u s house of representatives park center road suite herndon va attention ------------------ dear congressman wolf this letter responds to your inquiry dated date on behalf of your constituent ------------------------ -----------------asked whether she qualified for the newly- enacted homebuyer tax_credit for long-term homeowners sec_36 of the internal_revenue_code the effective date for sec_36 is date public law sec_11 -----------------said that she purchased her new residence in date therefore based on the facts presented --------------------purchase does not qualify for the credit the statutory effective date is specific and there are no administrative exceptions provided we have no authority to modify the effective date i am sorry my response is not more favorable if you have any questions please contact -------------------------------------at --------------------- sincerely george j blaine associate chief_counsel income_tax accounting


tax_exempt_and_government_entities_division uics department of the treasury internal revenue s ervice washington d c war se tep ra‘ ta legend taxpayer a guardian b taxpayer c taxpayer d amount amount amount year date date date date date date date page date company m tra x account y court t county w state x case dear this is in response to the request for letter rulings under sec_408 of the internal_revenue_code code submitted on your behalf by your authorized representative as supplemented by correspondence dated ’ ’ and your ruling_request the following facts and representations support taxpayer a whose date of birth was date is a resident of state x taxpayer a formerly maintained ira x with company m during year taxpayer a received a total_distribution in the amount of amount from her ira x said distribution was placed into account y a checking account on or about date year by petition dated date taxpayer c the son of taxpayer a petitioned court t county w state x to declare taxpayer a incapacitated and in need of a guardian on date person and on date as guardian of the property of taxpayer a court t in case found taxpayer a to be an incapacitated a commission of guardians was issued naming guardian b court t also appointed on date _ a geriatric care manager taxpayer d for taxpayer a an affidavit which was attached to the instant request for letter_ruling dated date is a registered nurse and a geriatric case indicates that taxpayer d page __ affidavit indicates that taxpayer d sees taxpayer a on a regular almost weekly manager it also indicates that taxpayer d has a masters degree in nursing the date basis and has had ample opportunity to interact with taxpayer a taxpayer d also indicates that she has reviewed taxpayer a’s medical records and based on her review of said records and her contact with taxpayer a taxpayer d opines that taxpayer a has been suffering from diminished cognitive ability dating back to at least 20__ taxpayer a has a diagnosis of dementia and other progressive illnesses which are indicative of her cognitive decline over the past years the affidavit continues by stating that it is my professional opinion based upon my personal knowledge of taxpayer a a review of her medical records and discussions with her treating physicians that taxpayer a has suffered from diminished capacity dating back to at least affairs and finances it is my opinion that taxpayer a would have been unable to understand the implications of a withdrawal from a qualified account and the tax ramifications of such a transaction and she would have been unable to manage her predates the year in which taxpayer a withdrew amount from ira x as of the date of this ruling_request the assets distributed from ira x which is the subject matter of this ruling_request other than amount remain in account y referenced above it has been represented that taxpayer a’s calendar_year federal form_1040 was filed on or about date thus 2c is an open tax_year based on the above facts and representations you through your authorized representative request the following letter rulings _ that pursuant to code sec_408 except as noted below guardian b on behalf of taxpayer a is granted a period not to exceed days as measured from the date of this ruling letter to contribute by means of a rollover_contribution or contributions amount the difference between amount the amount distributed from ira x during and amount the amount used by taxpayer a into one or more traditional iras set up and maintained in the name of taxpayer a with respect to your ruling requests 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 veges 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 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 60th day after the day on which the individual receives the payment or distribution or ii 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 60th 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 time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includiblé 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 code sec_408 provides in summary that this paragraph does not apply to any amount required to be distributed in accordance with subsection a or b code sec_401 required distributions code sec_401 provides in general that with respect to an ira described in code sec_408 required distributions must begin no later than april of the calendar_year following the calendar_year in which the ira holder attains age thus taxpayer a’s required_beginning_date was date 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 occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date 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 page rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred with respect to your ruling_request we note that taxpayer a’s failure to complete a timely rollover of amount distributed from her ira x referenced herein was due to her mental incapacity evidence submitted in conjunction with the instant ruling_request asserts that since at least calendar_year understand the ramifications of her actions furthermore shortly after taxpayer a withdrew amount from her ira x she was placed under a guardian which placement supports the proposition that taxpayer a did not comprehend the nature of her action when she accomplished the year withdrawal from her ira x taxpayer a lacked the capacity to thus with respect to your ruling_request we conclude as follows that pursuant to code sec_408 except as noted below guardian b on behalf of taxpayer a is granted a period not to exceed days as measured from the date of this ruling letter to contribute by means of a rollover_contribution or contributions amount the difference between amount the amount distributed from ira x during and amount the amount used by taxpayer a into one or more traditional iras set up and maintained in the name of taxpayer a this ruling letter is based on the assumption that ira x met the requirements of code sec_408 at all times relevant thereto furthermore it assumes that the ira or iras into which guardian b on behalf of taxpayer a will contribute the allowable amounts or portions thereof will also meet the requirements of code sec_408 at all times relevant thereto this letter_ruling notes that taxpayer a’s date of birth was date thus taxpayer a is over age and with respect to her ira x and any rollover ira into which allowable amounts will be rolled over has reached her required_beginning_date as that term is defined in sec_401 of the code thus this letter_ruling does not authorize the rollover into an ira or iras of amounts required to be distributed with respect to years _- through no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter 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 page a copy of this letter has been sent to your authorized representatives in accordance with a power_of_attorney on file in this office if you wish to inquire about this ruling please contact at either phone or fax please address all esquire id correspondence to se t ep ra t sincerely yours v7 frances v sloan employee_plans technical group manager enclosures deleted copy of ruling letter notice of intention to disclose


department of the treasury internal_revenue_service commerce street dallas tx date date taxpayer_identification_number person to contact employee identification_number contact numbers telephone fax tax_exempt_and_government_entities_division release number release date legene org - organization name xx - date address - address org address certified mail - return receipt requested dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code code our favorable determination_letter to you dated december 20xx is hereby revoked and you are no longer exempt under sec_501 of the code effective january 20xx the revocation of your exempt status was made for the following reason s as a result of our examination of your activities and financial records for the year ending december 20xx we found that your organization has been inactive during 20xx and for several prior years we found you conducted no operations or financial activities as such you fail to meet the operational requirements for continued exemption under c we hereby revoke your organization’s exemption from federal_income_tax under sec_501 of the internal_revenue_code effective january 20xx contributions to your organization are no longer deductible under sec_170 you are required to file income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the tax years ending after december 20xx and for all tax years thereafter in accordance with the instructions of the return processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination under the declaratory_judgment provisions of sec_7428 of the code a petition to the united_states tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia must be filed befoie the day after the date this determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed publication you may write to the united_states tax_court at the following address you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at we will notify the appropriate state officials of this action as required by code sec_6104 you should contact your state officials if you have any questions about how this final_determination may affect your state responsibilities and requirements if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely nanette m downing director eo examinations enclosures publication vaytrt ratio internal_revenue_service date date org address department of the treasury te_ge - eo examinations commerce street ms4900-dal dallas tx taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code letter rev catalog number 34809f you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely nanette m downing director eo examinations enclosures publication publication report of examination form_6018 letter rev catalog number 34809f ‘ form 886-a rev date schedule number or exhibit explanation of items name of taxpayer tax identification_number year period ended december 20xx org ein __ legend org - organization name state secretary president - president co-1 co-2 co-3 - ein ein date - xx program program state -- vice president - vice president secretary -- 15t g companies issue s whether org qualifies for exemption under sec_501 of the internal_revenue_code facts when the organization applied for c status it was formed for the purpose of providing a community based day care center and the program was created to help seniors handicap and low-income families perform work related to energy conservation in their homes the organization received the advance_ruling letter dated december 20xx stating that the service has determined the organization co-1 now known as org as exempt from federal_income_tax under sec_501 of the internal_revenue_code and is further classified as a public charity under sec_509 because the organization failed to respond to and or submit form_8734 support schedule for the advance_ruling period the service classified the organization as a private non-operating foundation with a form_990-pf filing requirement the organization org has filed forms 990-ez for 20xx and 20xx with all zeroes and has filed form y90-n for 20xx no return has been filed for 20xx org filed their forms 990-ez indicating the organization is a public charity under internal_revenue_code sec_509 and sec_170 but completed the schedule a with all zeroes on august 20xx the internal revenue_agent sent letter and an information_document_request idr requesting a copy of the organization’s original tax exemption ruling letter and any subsequent correspondence received from the internal_revenue_service relating to their filing_requirements on september 20xx president president responded to the idr but failed to submit a copy of their original tax exemption ruling letter or any subsequent correspondence from the irs the agent contacted president on september 20xx to request a copy of the organization’s final_determination letter president stated he had a copy of the letter but must have forgotten to include it and had recently moved but would send a copy once he located it the agent allowed the taxpayer ten business days to provide a copy of the letter on october 20xx there was no response from the taxpayer on october 20xx after several unsuccessful attempts were made to contact president the agent sent out a letter with a second idr requesting a copy of the organization's final_determination letter and or completion of form_8734 support schedule for advance_ruling period and form_990 schedule a public charity status and public support with response due on november 20xx form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanation of items name of taxpayer org tax identification_number year period ended december 20xx ein on november 20xx there was no response from the taxpayer regarding the second idr issued the agent attempted to contact the taxpayer but only reached the organization’s voice mail on november 20xx secretary secretary left the agent a voice mail message after office hours and on november 20xx secretary called back during regular office hours secretary requested additional time to discuss the issues with his partner and how they want to proceed on december 20xx the agent contacted secretary again regarding the status of the second idr and or what the organization had decided to do regarding the private_foundation_status versus the public charity status according to secretary the organization is now a drug and alcohol program that has partnered with co-2 a 501_c_3_organization secretary indicated org co-2 are one and the same and all finances are run through co-2 for both organizations there is no public funding grants received for org the clients are on welfare and are paying their own rent secretary further indicated the support for org comes from the clients volunteers of org secretary also indicated that these volunteers work on projects for co-3 the volunteers are paid a stipend and the profits go towards the expenses of org co-3 is an organization considered to be a non-profit organization per the state of state but has failed to establish at the federal level secretary also stated there are no books_and_records kept for the organizations org and co-3 if the construction company co-3 makes a profit the profit goes to pay the expenses of org secretary indicated he would contact his attorney and have the attorney complete the forms and schedule a on february 20xx the agent contacted secretary to setup a conference call for march 20xx with group manager group manager and the agent the agent had received no response from the organization since december 20xx the agent attempted to reach secretary prior to the conference call to confirm he would be available but only reached his voice mail the agent left a voice mail the agent made a second attempt to reach secretary but was advised by person answering telephone that he was not available and did not know when secretary could be expected the agent made a third attempt to contact secretary at the time of the scheduled conference but only reached voice mail on april 20xx the agent sent out certified letters to the home addresses of the 20xx president president vice-president vice president and secretary secretary letters sent to president and secretary were unclaimed and returned to sender on 20xx and 20xx respectively return receipt card was received and signed by vice president no date of signature was indicated on may 20xx the agent resent the letters via ups next day air with a response date of xx secretary called on may 20xx and stated that he did not understand how to respond since the organization has not had any activities revenue to this point but was now working with a youth coalition and wanted to keep their exempt status the agent advised form 886-a catalog number 20810w page _ publish no irs gov department of the treasury-internal revenue service schedule number or exhibit explanation of items tax identification_number year period ended ein december 20xx form 886-a rev date name of taxpayer org secretary that because the organization does not have any revenue for their exempt_activities the organization is not operating as an exempt_organization and the service is considering revocation secretary stated he would be taking the letter and idr to the corporate attorney and to the board_of directors for their decision on whether to dissolve or not on may 20xx the agent contacted secretary and advised that since the organization has no activities the service may need to revoke unless they start cooperating secretary advised that he was washing his hands of it meaning the organization and to proceed however the agent was being advised regarding revocation secretary requested the service send his organization a letter with our decision law internal_revenue_code irc sec_501 are corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office sec_1_501_c_3_-1 of the federal tax regulations states that internal revenue sec_501 requires an organization to be both organized and operated exclusively for one or more internal_revenue_code sec_501 purposes if the organization fails either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the federal tax regulations states the organizational_test concerns the organization’s articles of organization or comparable governing document the operational_test concerns the organization’s activities a deficiency in an organization's governing document cannot be cured by the organizations actual operations likewise an organizatior whose activities are not within the statute will not qualify for exemption by virtue of a well-written charter sec_1_501_c_3_-1 of the federal tax regulations states that an organization is not organized exclusively for one or more purposes unless its assets are dedicated to an exempt_purpose s an organization’s assets will be considered dedicated to an exempt_purpose if upon dissolution such assets would by reason of a provision in the organization's articles or by operation of law be distributed for one or more exempt purposes form 886-a department of the treasury-internal revenue service catalog number 20810w _publish no irs gov page form 886-a rev date name of taxpayer org schedule number or exhibit explanation of items tax identification_number year period ended ein december 20xx sec_1_501_c_3_-1 of the federal tax regulations states that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more such exempt purposes specified in internal_revenue_code sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_organization sec_1_501_c_3_-1 of the federal tax regulations provides in part that an organization must be engaged in public activities to satisfy the operational_test the organization’s resources must be devoted to purposes that qualify as exclusively charitable within the meaning of internal_revenue_code sec_501 and the applicable regulations sec_1_6001-1 in conjunction with sec_1_6001-1 of the federal tax regulations provides that every organization exempt from tax under internal_revenue_code sec_509 and subject_to the tax imposed by internal_revenue_code sec_511 on its unrelated_business_income must keep such permanent books or accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of such tax such organization shall also keep books_and_records as are required to substantiate the information required by internal_revenue_code sec_6033 sec_1_6001-1 of the federal tax regulations states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1_6033-1 of the federal tax regulations provides that every organization which has established its right to exemption from tax whether or not it is required to file an annual return of information shall submit such additional information as may be required by the district_director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter_f sec_501 and the following chapter of the code and internal_revenue_code sec_6033 revrul_59_95 1959_1_cb_627 concerns an organization held exempt from federal_income_tax was requested to produce a financial statement as of the end of the year and a statement of its operations during such year however its records were so incomplete that the organization was unable to furnish such statements internal_revenue_code sec_6033 provides that every organization except as provided therein exempt from taxation under sec_501 of the code shall file an annual return stating specifically the items of gross_income receipts and disbursements and shall keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary_of_the_treasury or_his_delegate may from time to time prescribe held failure or inability to file the required information_return or otherwise comply with the provision of sec_6033 of the code and the regulations form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service p form 886-a rev date schedule number or exhibit explanation of items name of taxpayer org tax identification_number year period ended december 20xx ein which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for continuation of an exempt status governments position generally organizations exempt under internal_revenue_code sec_501 engage in activities that directly further the charitable or other purposes mentioned in that subparagraph these activities must be identifiable evident and justifiable on their information_return eg form_990 to satisfy the operational_test in addition to these activities being identifiable they must be supported with administrative and accounting_records their revenue and expenses measure public activities for an organization under internal_revenue_code sec_501 in accordance with the above cited revenue_ruling provisions of the internal_revenue_code and treasury regulations under sec_501 sec_6001 and sec_6033 organizations recognized as exempt from federal_income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated_business_income_tax as reflected in the conversations filed returns and returns not filed org has not and is not conducting the activities for which it was organized the result of this is the organization’s failure to pass the operational_test therefore org does not meet the requirements of internal_revenue_code sec_501 organizations position on may 20xx secretary secretary of the organization advised that he was washing his hands of it and recommended the government to proceed to however it is being advised secretary requested that the internal_revenue_service send his organization a letter with its decision conclusion the organization org has not provided any information on its activities to show that they are performing exempt_activities it is the internal revenue service’s position that the organization failed to meet the requirements under internal_revenue_code and sec_501 sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under internal_revenue_code section form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit ’ form 886-a rev date name of taxpayer org tax identification_number year period ended explanation of items ein december 20xx c accordingly the organization’s exempt status is revoked effective january 20xx form_1120 returns should be filed for the tax periods ending after december 20xx department of the treasury-internal revenue service page6 _ publish no irs gov catalog number 20810w form 886-a


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si - plr-122524-98 date date x y a b d1 d2 d3 d4 d5 x y dear this letter responds to the letter dated date and subsequent correspondence submitted by x’s authorized representative on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d3 and elected to be an s_corporation effective d4 a the president of x represents that y was incorporated on d1 and elected to be an s_corporation effective d2 on d5 a then the sole shareholder of x transferred x of x’s shares to y and y of x’s shares to b relying on x’s accountant for advice as how to properly structure the transaction however because y was not an eligible shareholder of x under sec_1361 x’s s election terminated on d5 a represents that a was unaware that the transfer of x shares to y an ineligible shareholder would terminate x’s s election a also represents that x and its shareholders including y have consistently filed form_1120s u s income_tax return for an s_corporation and form_1040 u s individual_income_tax_return consistent with x being an s_corporation a and b represent that they will transfer their interests in x to y and that y will then elect to treat x as a qualified_subchapter_s_subsidiary qsub x and its shareholders agree to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to the period specified by sec_1362 sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 of the code provides that for purposes of subchapter_s the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate and other than a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 of the code provides that a corporation which is a qualified_subchapter_s_subsidiary qsub shall not be treated as a separate corporation and all assets liabilities and items of income deduction and credit of the qsub shall be treated as assets liabilities and items of the s_corporation sec_1361 provides that the term qualified_subchapter_s_subsidiary means any domestic_corporation which is not an ineligible_corporation if of the stock of such corporation is held by the s_corporation and the s_corporation elects to treat such corporation as a qsub sec_1362 of the code provides that an election under sec_1362 will be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 of the code provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the representations made and the information submitted we conclude that x’s s_corporation_election terminated on d5 when y became a shareholder of x we further conclude that the termination of x’s s election was an inadvertent termination within the meaning of sec_1362 of the code accordingly pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation beginning d5 until the effective date of y’s qsub election for x provided that x’s s_corporation_election was valid and was not otherwise terminated under sec_1362 in addition x will be treated as a qsub of y under sec_1361 provided that y files a qsub election with the appropriate service_center within days following the date of this letter to be effective for the date on which x becomes wholly owned by y copies of this letter should be attached to the qsub election and to y’s next federal_income_tax return from d5 to the effective date of y’s qsub election for x y will continue to be treated as a x shareholder of x therefore from d5 to the effective date of y’s qsub election for x the shareholders of x must include their pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling will be null and void except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code 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 pursuant to a power_of_attorney on file with this office copies of this letter will be sent to x’s authorized representative sincerely yours j thomas hines senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes