t c summary opinion united_states tax_court vernon j nicholas iii and micki nicholas petitioners v commissioner of internal revenue respondent docket no 10398-o0s filed date vernon j nicholas iii pro_se rollin g thorley for respondent pajak special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subseguent section references are to the internal_revenue_code in effect for the years in issue respondent determined deficiencies in petitioners’ and - federal income taxes in the amounts of dollar_figure and dollar_figure respectively petitioners conceded that they had unreported income in the amounts of dollar_figure in and dollar_figure in the sole issue the court must decide is whether social_security disability payments are includable in gross_income some of the facts in this case have been stipulated and are so found petitioners resided in las vegas nevada at the time they filed their petition petitioners timely filed their joint federal tax_return return petitioners reported adjusted_gross_income of dollar_figure on their return petitioners timely filed their joint federal tax_return return petitioners reported adjusted_gross_income of dollar_figure on their return petitioner micki nicholas petitioner received social_security disability benefits in of dollar_figure portions of the amount received in included unpaid disability claims for the taxable years and petitioner also received dollar_figure in social_security disability benefits during petitioners did not report any portion of the disability benefits received in and on their respective federal_income_tax returns petitioners contend that the social_security disability benefits are not taxable and additionally that a portion of the benefits received in related to a work-related injury settlement for prior taxable years respondent contends that percent of the social_security disability benefits received by petitioner are subject_to tax under sec_86 and that dollar_figure and dollar_figure is includable in petitioner’s gross_income for the taxable years and respectively in certain circumstances sec_7491 places the burden_of_proof on respondent with regard to certain factual issues because the facts in this case are undisputed we find that sec_7491 has no bearing on the determination of the legal issues before us prior to certain disability benefits were excludable from an employee’s gross_income under sec_105 maki v commissioner tcmemo_1996_209 however this section was repealed and since social_security disability benefits have been treated in the same manner as other social_security_benefits id accord bradley v commissioner tcmemo_1991_ accordingly we hold that the social_security disability payments received by petitioner are subject_to tax in the same manner as other social_security_benefits sec_61 provides that gross_income includes all income from whatever source derived unless excludable by a specific provision of the code moreover sec_86 requires the inclusion of a portion of social_security_benefits in gross q4e- income when the sum of the recipient’s modified_adjusted_gross_income plus one-half of the social_security_benefits exceeds certain threshold amounts in the case of a joint_return when this sum exceeds dollar_figure the lesser_of such excess or percent of the social_security_benefits received during the taxable_year must be included in gross_income sec_86 c b when this sum exceeds dollar_figure in the case of a joint_return up to percent of the social_security_benefits received during the taxable_year must be included in gross_income sec_86 c b under sec_86 modified_adjusted_gross_income in general equals adjusted_gross_income with adjustments not relevant here sec_86 social_security_benefits are included in the recipient’s gross_income in the taxable_year in which the benefits are received sec_86 an election may be made by taxpayers who receive lump-sum payments of social_security_benefits during the taxable_year in which a portion of the benefits is attributable to previous taxable years sec_86 sec_86 provides that if the election is made the amount included in gross_income for the taxable_year of receipt must not exceed the sum of the increases in gross_income for those previous taxable years that would result from taking into account the portion of the benefits attributable to the previous taxable years accordingly if no election is made by the taxpayer under - - sec_86 lump sum distributions of social_security_benefits are includable in the taxpayer’s gross_income in the taxable_year the benefits are received petitioners did not make an election under sec_86 with respect to the lump-sum social_security disability benefits received in accordingly we sustain respondent’s determination that petitioners’ gross_income include sec_85 percent of the respective social_security disability benefits received during the years in issue reviewed and adopted as a report of the small_tax_case division decision will be entered for respondent


id office uilc cca_2012022311414856 ------------------------ number release date from --------------------------- sent thursday date am to ---------------- cc --------------------------------------- subject re retroactive pbgc payments for the hctc if this is the only issue i’d grant him the credit some other possible issues include whether he in ------ was at least age whether he was not receiving medicare or employer-subsidized coverage and whether his health coverage was qualified_health_insurance the statute requires that he receive payments from the pbgc for a month not in or during a month a retroactive payment applied to a month is a payment for that month


t c memo united_states tax_court jeffrey l and simone i rayden petitioners v commissioner of internal revenue respondent docket no filed date r determined a deficiency in income_tax for petitioners’ tax_year r claimed that only percent of ps’ residence was used exclusively for business while ps assert that the applicable figure is percent held ps used no more than percent of their residence exclusively for business and are liable for the deficiency to the extent herein decided adam l karp for petitioners nathan c johnston for respondent memorandum findings_of_fact and opinion wherry judge respondent determined that petitioners are liable for a federal_income_tax deficiency of dollar_figure for the tax_year after concessions the only issue remaining is to determine the portion of petitioners’ residence which was used exclusively on a regular basis as a principal_place_of_business by mr rayden during the tax_year findings_of_fact some of the facts have been stipulated and the stipulation of facts the supplemental stipulation of facts and the accompanying exhibits are hereby incorporated by this reference at the time they filed their petition petitioners resided in california 1at trial respondent conceded that any amount of mortgage interest and real_estate_taxes not allowed on schedule c profit or loss from business by the allocation effect of sec_280a would be claimed on schedule a itemized_deductions respondent also conceded that the rooms in petitioners’ residence designated as the library and as the garage were used exclusively by petitioners to conduct business all other issues are computational and will be determined in the rule_155_computations to be made in accordance with this opinion all section references are to the internal_revenue_code_of_1986 as amended and in effect for the tax_year at issue and all rule references are to the tax_court rules_of_practice and procedure 2at trial respondent conceded that percent of petitioners’ house was used exclusively for business petitioner contended at trial that the applicable figure i sec_71 percent and on brief that it is percent petitioner husband petitioner is the sole_proprietor of infogen and resource direct before petitioner conducted his business out of big_number square feet of commercial space until financial difficulties and family issues required petitioner to terminate the lease and move the business into his home petitioner’s home consists of big_number square feet of living space which includes the garage during the tax_year at issue petitioner resided in this residence with his wife and daughter petitioner also has two sons who during this period attended college and lived away from home 3the parties stipulated that petitioners’ home consists of big_number square feet of living space which includes the garage however at trial petitioner testified that the home was about big_number square feet including the garage petitioners’ exhibit p actually attributes big_number square feet of the home to living space we note that the garage is approximately big_number square feet perhaps the stipulation was incorrect and the big_number figure did not include the garage a stipulation shall be treated to the extent of its terms as a conclusive admission by the parties to the stipulation unless otherwise permitted by the court or agreed upon by those parties rule e courts do not lightly set_aside stipulations of fact but may exercise broad discretion to determine whether to hold a party to a stipulation 994_f2d_1542 11th cir affg tcmemo_1991_636 in instances where the stipulation is contrary to the record we are not bound by stipulations of fact that appear contrary to the facts disclosed by the record 115_tc_135 n see also blohm v commissioner supra pincite however to the extent possible we adhere to the square footage stipulated petitioners’ two-story residence consists of rooms there is additional space in the area of the vestibule hall and staircase there is also an attached three-car garage petitioner’s family put the master bedroom and master bathroom to personal_use petitioners’ daughter used the room designated on exhibit 15-p as bedroom including the sitting area bathroom and closet for personal purposes petitioners asserted at the trial that percent of the use of bedroom was for business the room designated as the guest room consists of square feet and was used by petitioner wife in connection with her travel agency business petitioner and his family frequently ate out but used the kitchen some each week for eating meals and occasional cooking the subcontractors who worked for petitioner’s business in petitioner’s home also used the kitchen for breaks and lunches petitioner’s family used the service room for laundry petitioner explained that he used the den with the adjoining bar and vestibule to entertain family members one to two times a year about three times a year petitioner and his family used the dining room for family dinners petitioner and petitioners’ daughter occasionally had meals in the breakfast area as its name would imply petitioner and his family did not use the living room for personal purposes on a rare occasion someone other than a business_associate might walk through the room otherwise it was used only for business the maid’s room was used for staging and preparing projects for petitioner’s business and not for personal purposes bedroom was used as a graphic and video studio and bedroom was used as a programming and survey office both of these bedrooms were used solely for business the 186-square-foot hall area led only to bedroom sec_3 and and thus also was used only for business the garage comprised approximately big_number square feet of the first floor it was used primarily for storage and as a shop and studio petitioners filed a form_1040 u s individual_income_tax_return for the tax_year the tax_return included a schedule c for petitioner’s marketing consultant business with respect to which he claimed a rent expense of dollar_figure it also included a schedule c for petitioner’s infogen computer_software business with respect to which he claimed a rent expense of dollar_figure petitioners also reported rental income of dollar_figure on schedule e supplemental income and loss and claimed expenses of dollar_figure respondent issued a notice_of_deficiency on date determining a dollar_figure deficiency in petitioners’ income_tax for petitioners filed a timely petition with this court on 4this figure represents the sum of the rental deductions from both of the schedules c date denying liability for the deficiency a trial was held on date in los angeles california opinion deductions are a matter of legislative grace and a taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms 292_us_435 see also rule a as a general_rule sec_162 authorizes a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business an expense is ordinary for purposes of this section if it is normal or customary within a particular trade business or industry 308_us_488 an expense is necessary if it is appropriate and helpful for the development of the business 320_us_467 sec_262 in contrast precludes deduction of personal living or family_expenses where the expense in question relates to property that is occupied by the taxpayer as a residence sec_280a lays down the following general_rule in the case of a taxpayer who is an individual or an s_corporation no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling_unit which is used by the taxpayer during the taxable_year as a residence however an exception to this general ban is found in sec_280a which provides that sec_280a does not apply to an item of expense to the extent allocable to a portion of the taxpayer’s residence which is exclusively used on a regular basis as the taxpayer’s principal_place_of_business there is no dispute that a portion of petitioners’ home was used on a regular basis as the principal place of petitioner’s business we are however confronted with the fact-specific inquiry of whether certain rooms in petitioners’ house were used exclusively for the business the legislative_history of sec_280a dealing with exclusive use explains exclusive use of a portion of a taxpayer’s dwelling_unit means that the taxpayer must use a specific part of a dwelling_unit solely for the purpose of carrying on his trade_or_business the use of a portion of a dwelling_unit for both personal purposes and for the carrying on of a trade_or_business does not meet the exclusive use test s rept pincite 1976_3_cb_49 h rept pincite 1976_3_cb_695 emphasis added the court in hefti v commissioner tcmemo_1988_22 affd without published opinion 894_f2d_1340 8th cir discussed this legislative_history and observed that any personal_use of a room or segregated area will preclude its use in computing depreciation or other allocable expenditures unless some or all of the use of the room was for the storage of inventory petitioner contends that percent of his home was used exclusively and regularly for business during the tax_year as the court did in hefti we find it implausible that the taxpayer and his family had no social or personal life in any portion of the residence other than a few bedrooms and the kitchen id during his testimony petitioner acknowledged a few occasional uses of other rooms for personal purposes during nevertheless because personal_use was allegedly minimal compared with business use petitioners contend that they should be allowed the claimed expense deduction we appreciate petitioners’ contention but congress has made it clear that this is not the law respondent conceded that petitioner used the library and the garage exclusively for business we also find that petitioner used the living room exclusively for business although petitioner’s own exhibit claimed that the business used the living room only percent of the time at trial he credibly explained that the only reason i put down percent is that somebody who would be visiting could have possibly walked in or through that area and walked out this court has previously held that the mere nonbusiness passage from one room to the next can be classified as a de_minimis personal_use of the room and will not disqualify the room from the exclusivity requirement of sec_280a see lind v commissioner tcmemo_1985_490 that petitioners and their family members may have occasionally walked through the garage does not violate the exclusive business use rule hughes v commissioner tcmemo_1981_140 petitioner’s incidental_use of the closet to walk to and from his bathroom was de_minimis we also find credible petitioner’s testimony that the maid’s room and bedroom sec_3 and were used exclusively for business see thalacker v commissioner tcmemo_1984_488 upholding a home business deduction on the basis of a taxpayer’s credible testimony petitioner explained that the maid’s room was percent used in the business for staging and preparing projects he also explained that bedroom was used for graphic design and as a video design studio and that bedroom was used for programming customer service and surveys petitioner also proffered photographs of bedroom sec_3 and depicting their business use although as respondent pointed out at trial these photographs necessarily limited to two dimensions depict only one side of the room we find them to be reliable evidence corroborating petitioner’s testimony regarding the business use of these two rooms because we find that bedroom sec_3 and were used exclusively for business we also find that the hall area which leads only to those two rooms was also used exclusively for business the table below summarizes the rooms in petitioners’ residence that were used exclusively and regularly for petitioner’s business in and their total area in square feet room square feet library big_number garage living room maid’s room bedroom bedroom hallway to total big_number using these figures it appears that petitioner used big_number square feet for his business in which i sec_44 percent of the total area of petitioners’ house we note that this percentage was determined using the stipulated big_number total square feet had we used the total square footage from petitioners’ exhibit 15-p of big_number the percentage of his business use would have been percent of petitioners’ home respondent has done an excellent job of applying the law to the facts indeed respondent was more generous then this court would have been had we as we would be inclined to do used the total square footage from petitioners’ exhibit 15-p we therefore find that 5the square footage per room was determined by using petitioners’ exhibit 15-p as contended by respondent petitioner used percent of the home exclusively for business as we explain below the remaining rooms were not exclusively used for business and the expenses apportionable to their use do not qualify as deductible under sec_280a although petitioner first explained that he did not eat in the breakfast room in response to a question by the court he conceded that on occasion he or his family may have eaten in the breakfast area petitioner also did not use the den vestibule and adjoining bar exclusively for business petitioner explained that maybe one or two times a year the area was used sometimes by family that were visiting we do not regard as de_minimis this personal_use of the room by visiting family exclusive use is narrowly construed as discussed in the legislative_history of sec_280a above this means that ‘the taxpayer must use a specific part of a dwelling_unit solely for the purpose of carrying on his trade_or_business ’ culp v commissioner tcmemo_1993_270 quoting 88_tc_1532 petitioner also did not use the dining room exclusively for business when his family was visiting petitioner testified that one or two nights a year when his sons were in town they would have a family dinner in the dining room petitioner is not entitled to a deduction for items of expense apportionable to these rooms by his own admission normal household activities took place in those rooms see 980_f2d_1198 8th cir disallowing a business_expense deduction for a portion of the home in which household activities also took place affg tcmemo_1990_268 in conclusion petitioner used percent of the house’s total area exclusively for business and may claim business_expense deductions prorated accordingly he is not entitled to a schedule c deduction in connection with the remaining percent of the house’s total area the court has considered all of petitioner’s contentions arguments requests and statements to the extent not discussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing decision will be entered under rule 6see supra note discussing the availability of schedule a deductions with respect to this area of the house


internal_revenue_service number release date index number ----------------------- ----------------------------- ----------------------------------- ---------------------------- ----------------------------- legend department of the treasury washington dc person to contact -------------------------- id no ---------------- ---------------------------------------------------- telephone number --------------------- refer reply to cc intl - plr-154595-02 date date ----------------------------------- ------------------------ --------------- ---------------------------------------------------------- taxpayer individual a -------------------------- cpa firm date one dear ---------------- this replies to a letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to file the election agreement described in sec_1_1503-2 and to file the annual certification described in sec_1 g vi b for the entities and tax years listed on exhibit a which is attached and made a part of this ruling letter additional information was submitted in a letter dated date and in an electronic transmission dated date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process in re plr-154595-02 taxpayer filed form_7004 application_for automatic_extension of time to file corporation income_tax return in order to extend the time to file taxpayer’s consolidated_group corporation income_tax return for date one later taxpayer was notified by the irs that form_7004 was not filed by its due_date taxpayer was concerned that certain elections would be late including elections under sec_1_1503-2 which would have been filed with its tax_return by the extended due_date taxpayer requested individual a a partner with cpa firm to determine which elections if any could be affected by the late receipt of form_7004 by the irs and what protective action if any could be taken individual a determined that the election agreements required under sec_1_1503-2 and the annual certifications required under sec_1_1503-2 would be late taxpayer is requesting relief before the failure_to_file the election agreements and annual certifications has been discovered by the irs sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the election agreement and the annual certification are regulatory elections within the meaning of sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards set forth in sec_301_9100-3 in re plr-154595-02 based on the facts and circumstances of this case we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to file the election agreement described in sec_1_1503-2 and to file the annual certification described in sec_1 g vi b for the entities and tax years listed on exhibit a as provided in a the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the election agreements and the annual certifications this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling letter should be associated with the filing of the election agreements and the annual certifications as listed on exhibit a no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented nor have rulings been requested and none are expressed as to whether annual certifications described in sec_1_1503-2 are needed for any entity you have described on exhibit a as not being a hybrid_entity_separate_unit furthermore no opinion is expressed regarding the accuracy of whether an entity listed on exhibit a is or is not a hybrid_entity_separate_unit pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being furnished to your authorized representatives sincerely associate chief_counsel international by s allen goldstein allen goldstein reviewer attachments exhibit a copy for purposes legend in re plr-154595-02 hesu hybrid_entity_separate_unit - - - -------------------------------------- ---------------------n ---------------------------------------------------------------------------- ----s ------------------ - ----------------------------------------- -----------------n - ------------------ ------------------ ------------ ----------s - ------g - - -------------- --------d - - - - - ------------------ ------------------ ------------------ ------t - - --------------------- --------------b --------------------- -----------n - - ------------------------ ------------------------ ---------------n - -------------------------------------- ---y - ----------------------------------------- ----------------h - - - - - ----------u ---------7 --------s ---------d - ---0 - ----------------------------0 - - - - - -- --------------l - -------------------------------------- ------y - ----------------------------------------- -----------------o ----------------------------2 - - - - - - - -------------------------------------- ------y --------------l - ----------------------------------------- ---------------------d - ----------u -- - - - - ----------u - - - - ---------8 ---------9 ----------------- - - ---------7 ---------8 ---------9 ----------------- ------o ------o --------s - - --------s ------o ------o ------o - - - - - ---0 ---0 ---1 ---1 - - ---1 ---0 ---0 ---0 ---1 - ---------7 --------s ---------d - ---1 ---1 ---1 ---3 ---0 ---1 ---1 ---1 ---3 - - ---0 - ---------7 ---------7 ---------7 - -- ---------7 ---------7 ---------7 - ----------------------------2 - - -- - -- --------------l - - - - - -------------------------------------- ------------------------------------- - ----------------------------------------- -----------------------------h - ------------ --------u ----------------------------0 - -------------------------------------- ---y --------------l - ----------------------------------------- ---------------------------------h - - ------------ --------u ---------8 ---------9 ----------------- - - ----------------- - - ----------------- --------s --------s --------s - - --------s - - --------s ----------------------------0 --------------l - ------------l - - - - - - - - - - - - - - - - ---------d ---------d ---1 ---1 ---1 ---1 ---------7 -------------------8 ------------------------ -----9 - - - ---1 ---1 ---1 ---1 - - ---1 - - ---5 - ---3 - - ---0 - ---0 - - ---0 - ---0 - - ---9 - -


internal_revenue_service number release date index number --------------------------- ---------------------------- ---------------------------------------- re ------------ ----------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ---------------- telephone number -------------------- refer reply to cc psi plr-129309-13 date date legend decedent date spouse date dear ------------- ----------------------- -------------------------- ----------------------------------------- ---------------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the portability election under sec_2010 of the internal_revenue_code code to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations submitted are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election spouse as the executrix of decedent’s estate represents that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of the decedent’s death and that during his lifetime decedent made no taxable_gifts as plr-129309-13 executrix spouse requests an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 plr-129309-13 sec_6075 prescribes that returns made under sec_6018 relating to estate_taxes shall be filed within months after the date of the decedent’s death sec_6018 provides that in all cases where the gross_estate at the death of a citizen or resident exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death the executor shall make a return with respect to the estate_tax imposed by subtitle b of the code sec_6018 provides in part that the basic exclusion amount referred to in sec_6018 shall be reduced but not below zero by the sum of- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date sec_20_2010-2t a of the estate_tax regulations provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 sec_20_2010-2t a provides that an estate that elects portability will be considered for purposes of subtitle b and subtitle f of the code to be required to file a return under sec_6018 accordingly the due_date of an estate_tax_return required to elect portability is months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been obtained sec_20_2010-2t a provides that upon the timely filing of a complete and properly-prepared estate_tax_return an executor of an estate of a decedent survived by a spouse will have elected portability of the decedent’s dsue amount unless the executor chooses not to elect portability and satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin plr-129309-13 sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain statutory and regulatory elections sec_301_9100-3 provides for an extension of time for making regulatory elections that do not meet the requirements for an automatic_extension of time under sec_301_9100-2 a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_2010 sec_6075 and sec_6018 when construed jointly prescribe a due_date for electing portability for those estates required to file an estate_tax_return under sec_6018 accordingly with respect to those estates the portability election is a statutory election as defined in sec_301_9100-1 however when an executor is not required to file an estate_tax_return under sec_6018 the code does not specify a due_date for an estate_tax_return filed for the purpose of making a portability election rather the regulations under sec_20_2010-2t a which are applicable to all estates electing portability specify that the portability election must be made on a timely-filed form_706 accordingly with respect to estates not required to file an estate_tax_return under sec_6018 the portability election is a regulatory election as defined in sec_301_9100-1 as executrix spouse represents that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly an extension of time of days from the date of this letter is granted in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed plr-129309-13 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely james f hogan chief branch office of the associate chief_counsel passthroughs special industries enclosures cc


department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx tax_exempt_and_government_entities_division number release date date legend org - organization name xx - date address - address person to contact identification_number in reply refer to tege eo ein org address certified mail - return receipt requested dear a final adverse determination_letter as to your exempt status under section this i sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective january 20xx our adverse determination was made for the following reasons sec_501 and exempt under section organizations described in sec_501 must be both organized and operated exclusively for exempt purposes you have failed to produce documents or otherwise establish that you are operated exclusively for exempt purposes and that no part of your net_earnings inures to the benefit of private shareholders or individuals you failed to respond to repeated reasonable requests to allow the internal_revenue_service to examine your records regarding your receipts expenditures or activities as required by lr c sec_6001 sec_6033 and revrul_59_95 1959_1_cb_627 contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for the year ending december 20xx and for all years thereafter processing of income_tax returns and assessment 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 in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment however you you also have the right to contact the office_of_the_taxpayer_advocate should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and ask for taxpayer_advocate assistance or you can contact the taxpayer_advocate from the site where the tax_deficiency was determined by calling tel or write taxpayer_advocate assistance cannot be used as a substitute for established irs procedures the taxpayer_advocate is not able to reverse legal or formal appeals processes etc technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_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 we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours nanette m downing director eo examinations enclosures publication form_6018 consent to proposed adverse action envelope internal_revenue_service tax_exempt_and_government_entities_division exempt_organizations examinations fulton street - floor brooklyn ny department of the treasury date date org address 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 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 if we issue a determination_letter to you based on technical_advice no further you may also request that we refer this matter for technical_advice as explained in publication 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 itto bea 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 letter rev catalog number 34809f 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 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 letter rev catalog number 34809f form 886-a rev date schedule number or exhibit explanations of items name of taxpayer org tax identification_number year period ended december 20xx ein legend org - organization name website - website xx - date dir-1 dir-2 - state - state dir ra-1 ra issue whether org should maintain its exemption under sec_501 of the internal_revenue_code after failing to observe the conditions of its exemption in terms of not operating exclusively for exempt purposes granted under sec_501 of the internal_revenue_code whether the org should maintain its exemption under sec_501 of the internal_revenue_code after failing to respond to numerous requests from the internal_revenue_service to examine the books records and activities of the organization whether the org should maintain its exempt status after failing to observe the conditions of its exemption in terms of not filing a form_990 for the december 20xx tax_year or providing a reason as to why no return was filed facts org was granted exemption from federal_income_tax under internal_revenue_code sec_501 of the internal_revenue_code as an organization described in sec_501 according to its organizational documents its primary purpose is to solicit and obtain money or property by gift bequest or devise to invest or reinvest the same and to apply the income and the principal thereof as the board_of directors may from time to time determine either directly or through contributions to any charitable_organization or organizations exclusively for charitable scientific or educational_purposes and to engage in any all lawful activities incidental thereto except as restricted herein including without limiting the generality of the foregoing to inform the public about the problems of and reasons for homelessness to raise funds and to provide financial assistance and expertise to individuals and organizations providing shelter care and assistance to homeless men and women in the state of state provided however that nothing herein shall be construed as authorizing the corporation to undertake or carry on any of the activities set fourth in paragraph b through v of sec_404 of the not-for-profit corporation law or section 460-a of the social services law of the state of state the following is a list of the dates in which correspondence was mailed to the org in an attempt to secure an appointment to examine the books records and activities for the year ending december 20xx publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page form 886-a rey date schedule number or exhibit explanations of items name of taxpayer org tax identification_number year period ended december 20xx ein may 20xx june 20xx august 20xx __ february 20xx march 20xx letter letter letter letter letter in addition to the correspondence telephone calls were also made in attempt to schedule an examination the taxpayer would not comply with these requests to schedule an examination as the facts listed below were alleged in the complaint filed by the state of state office of the attorney general's office filed with the supreme court of the state of state county of state regarding ra-1 attorney_general of the state of state for and on behalf of the people of the state of state against org dir-1 and dir-2 e e e facts developed by newspaper articles listed below each day on the streets of state city org table workers convince sympathetic passersby to deposit cash into plastic jugs under the false pretense that their hard earned money is going to a bona_fide charity that funds services for the homeless org is a sham all of the money dropped into the org jugs is pocketed by the org table workers dir-1 dir-2 and other insiders or is used by dir-1 dir-2 to perpetuate a scheme to defraud the public as president dir-1 hides behind org’s facade of corporate legitimacy and describes org table workers as members of org donning org-branded hats identification badges aprons and other paraphernalia org table workers mislead the public that donated funds will be used for services for the homeless although assets of org dir-1 dir-2 treat the fees as their personal kitty dipping into them whenever they choose in effect dir-1 dir-2 have co-opted a tax exempt charitable corporate structure for their own personal benefit articled dated june - jul 20xx from time out state i state - page article dated december 20xx from the state post jug band’ keeps you change homeless ‘aid’ just a beg lie article dated november 20xx from website homeless organization is called a fraud - pages article dated november 20xx from website lowest scam in town org fakes helping the poorest’ - page information retrieved from the internet via wikipedia referencing the org articles state that the org claims to collect money for the homeless but pockets the funds for themselves org which claims to collect money for the homeless in an elaborate fraud publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page - page - page form 886-a rev date schedule number or exhibit explanations of items name of taxpayer org tax identification_number year period ended december 20xx ein law sec_501 provides tax exemption for corporations and foundations that are operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 states that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 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 of such exempt purposes specified in 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_purpose sec_1_501_c_3_-1 assigns the burden_of_proof to an applicant organization to show that it serves a public rather than a private interest and specifically that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests in 326_us_279 the supreme court held that the presence of a single non-exempt purposes if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes sec_1_501_c_3_-1 provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense and includes the relief of the poor and distressed or of the under privileged as well as the advancement of education sec_1_6001-1 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 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 publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page form 886-a rev date schedule number or exhibit explanations of items name of taxpayer org tax identification_number year period ended december 20xx ein administer the provisions of subchapter_f sec_501 and the following chapter of the code and sec_6033 revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 and the regulations 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 the continuation of exempt status in accordance with the above cited provisions of the code and regulations under 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 government's position taxpayer's position despite several attempts made to contact the org as stated above the eo failed to comply as stated in sec_1_501_c_3_-1 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 of such exempt purposes specified in sec_501 further in better business bureau of washington d c inc v united_states the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes again org does not accomplish any exempt purposes and therefore is not operating exclusively for exempt purposes in revrul_77_366 the organization accomplished both charitable and noncharitable purposes but lost its exemption because it was not operating exclusively for exempt purposes in this case org does not accomplish any exempt purposes and therefore is found not operating exclusively for exempt purposes publish no irs gov department of the treasury-internal revenue service form 886-a catalog number 20810w page form 886-a rev date schedule number or exhibit explanations of items name of taxpayer org tax identification_number year period ended december 20xx ein conclusion based on our review of all facts and circumstances and the legislative support referenced above it is the government's position that this organization’s exempt status should be revoked due to its failure to operate exclusively for exempt_purpose s as required by sec_501 it is the irs's position that the org failed to meet the reporting requirements under sec_6001 and sec_6033 to be recognized as exempt from federal_income_tax under sec_501 additionally it is also the position of the irs that the org failed to cooperate with the service in scheduling an examination of their books records and activities as required in the aforementioned statutes accordingly the organization's exempt status is revoked effective january 20xx accordingly the organization's exempt status is revoked effective january 20xx form_1120 us corporation income_tax return should be filed for the tax periods ending on and after january 20xx form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service


internal_revenue_service number release date index number ------------------------------------------------ ----------------------------------- ---------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no -------------- telephone number --------------------- refer reply to cc psi plr-123371-09 date date legend taxpayer ----------------------------------------------------- ------------------------------------ state year s town r g h i j k l m n o -------------- ------- --------------------------- ------ -------- ------ ------ ------ ------------- ----------- ------------------ ------ plr-123371-09 p q w x y z ----------- ------- ------------- ------------------------------------- ------ ------------------ dear -------------- this is in response to a request for a ruling dated date and subsequent correspondence submitted by your authorized representative the ruling concerns 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 pursuant to sec_199 of the internal_revenue_code taxpayer is a nonexempt farmers’ marketing and purchasing cooperative organized under the laws of state taxpayer has been in operation since year s taxpayer’s principal line_of_business is marketing q grown in the united_states by its members taxpayer also purchases commodities such as w x y and z for resale to its members taxpayer purchases x at terminals and stores x at its bulk facility located in town r taxpayer also is engaged in the manufacturing and production m n o and p taxpayer’s principal line_of_business is its purchase and resale of i particularly h j k and l grown by its members in accordance with its bylaws taxpayer enters into marketing agreements with its members pursuant to the terms of these agreements members produce q and deliver it to taxpayer at receiving and storage stations located throughout taxpayer’s trade territory in state approximately g of taxpayer’s annual inventory by volume is delivered and accepted at harvest time with the balance of the inventory delivered throughout the remainder of the year taxpayer grades its members’ q upon receipt and agrees to receive and store q to market q on its members’ behalf to account for the proceeds of its marketing activities on a non- pooling basis and to distribute those proceeds to its members taxpayer offers four alternate q delivery schedules and pricing mechanisms to its members under its written q contracts plr-123371-09 storage a member delivers q and taxpayer is obliged to store q in its facility in exchange for a fee title does not pass to taxpayer until the member and taxpayer agree on a price price later taxpayer takes delivery of and title to the q but agreement on the selling_price is deferred until the member selects a spot price published daily by taxpayer on a later date to arrive a member and taxpayer agree on a price for q to be delivered on a certain date and spot price a member arrives at one of taxpayer’s receiving facilities with q and sells the q to taxpayer at that day’s current spot price members select a particular pricing mechanism based on a number of factors including spot prices price trends and cash needs after taking delivery of its members’ q taxpayer aggregates its inventory for bulk resale by the train load at the end of the fiscal_year taxpayer closes its books with respect to business done with each member at which time it calculates its margin with respect to business done with and on behalf of members members who do business with taxpayer typically will receive distributions of the net_proceeds of taxpayer’s marketing and sales activities in two forms advances following delivery and acceptance of a member’s q based on and at the time called for by the pricing mechanism in the parties’ written contracts and patronage_dividends calculated on a patronage basis and distributed at the end of each fiscal_year based on taxpayer’s net_proceeds from its marketing and sales activities and in accordance with its bylaws advances by taxpayer to its members are made in the form of checks in accordance with the members’ agreements with taxpayer and state cooperative law these advance_payments assure that taxpayer remains competitive with non- cooperative q wholesalers and distributors which generally pay producers for their q upon receipt taxpayer does not use pooling arrangements or the completed i pool method_of_accounting pooling involves the commingling of commodity products with each producer paid the average net price received at resale of the pool non-pooling cooperatives such as taxpayer negotiate individually with each producer with respect to the purchase_price of the product in general non-pooling cooperatives divide the expenses of processing and the revenues from sales among their members non- pooling cooperatives resell their members’ products in bulk and each member is allocated a share of the sale proceeds in proportion to the amount of product the member delivered each member’s margin however depends on the price the member agreed in advance to receive from the non-pooling cooperative as a result individual plr-123371-09 members of non-pooling cooperatives bear the burden and benefits of price fluctuations instead of spreading this risk among all members historically non-pooling cooperatives have labeled advance_payments as cost_of_goods_sold and these cost_of_goods_sold are capitalized into the cooperative’s inventory taxpayer reports advances paid to producers on schedule a of form 1120-c as cost_of_goods_sold taxpayer reports amounts distributed to patrons as patronage_dividends on schedule h of such form as a deduction from gross_income for financial_accounting and bookkeeping purposes prior to its current_year taxpayer denominated such advances as cost_of_goods_sold for its current fiscal_year in taxpayer’s new accounting software such advances have been denominated as per-unit retain allocations paid in money for tax purposes taxpayer does not deduct advances made to members as per- unit retain allocations paid in money instead taxpayer removes such advances from ending inventory and includes the advances in the cost_of_goods_sold amount for its tax_year thus taxpayer does not double count such advances for purposes of computing its tax_liability or making inventory and sec_263a computations law and discussion nonexempt subchapter_t cooperatives are permitted to exclude or deduct distributions to their patrons that qualify as patronage_dividends or per-unit retain allocations provided those distributions otherwise meet the requirements of subchapter_t of the code sec_1388 of the code defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of subchapter_t applies to a patron with respect to products marketed for him the amount of which is fixed without reference to net_earnings of the organization pursuant to an agreement between the organization and the patron per-unit retain allocations may be made in money property or certificates per- unit retain allocations paid in money and in property are excludable or deductible under sec_1382 of the code per-unit retain allocations paid in certificates are deductible under sec_1382 if the certificates are qualified if the certificates are 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 plr-123371-09 dividend means an amount_paid to a patron that is determined by reference to the net_earnings of the cooperative from business done with or for its patrons that section further provides that a patronage_dividend does not include any amount_paid to a patron to the extent that such amount is out of earnings other than from business done with or for patrons sec_1_1382-3 of the income_tax regulations states that income derived from sources other than patronage means incidental income derived from sources not directly related to the marketing purchasing or service activities of the cooperative association patronage_dividends may be paid in money property or written notices of allocation patronage_dividends paid in money and in property are excludable or deductible under sec_1382 of the code patronage_dividends paid in written notices of allocation are deductible under sec_1382 if the written notices of allocation are qualified if the notices are nonqualified the cooperative is permitted a deduction under sec_1382 or a tax_benefit figured under sec_1383 when the notices are later redeemed sec_1388 of the code provides that the term written_notice_of_allocation means any capital stock revolving fund certificate retain certificate certificate of indebtedness letter of advice or other written notice which discloses to the recipient the stated dollar amount allocated to him by the organization and the portion thereof if any which constitutes a patronage_dividend for cooperatives that use pooling revrul_67_333 1967_2_cb_299 provides that pool advances are treated as per-unit retain allocations and the final pool payment made after net_earnings have been determined is treated as a patronage_dividend under sec_199 of the code patrons that receive a qualified_payment from a specified agricultural or horticultural cooperative are allowed a deduction for an amount allocable to their portion of qualified_production_activities_income qpai of the organization received as a qualified patronage_dividend or per-unit_retain_allocation which is paid in qualified per-unit retain_certificates in particular sec_199 requires the cooperative to be engaged in the manufacturing production growth or extraction in whole or significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products under sec_199 in the case of a cooperative engaged in the marketing of agricultural and horticultural products the cooperative is treated as having manufactured produced grown or 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 plr-123371-09 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 provided that it does not create or increase a patronage tax loss but is required under sec_199 to reduce the deduction or exclusion it would otherwise claim under sec_1382 for per-unit retain allocations and patronage_dividends sec_199 of the code provides that a cooperative passes through an amount of its sec_199 deduction by identifying such amount in a written notice mailed to such person during the payment period described in sec_1382 sec_1382 provides that the payment period for a year is the period beginning with the first day of such taxable_year and ending with the fifteenth day of the ninth month following the close of such year sec_1_199-6 of the regulations 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 plr-123371-09 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 taxpayer is an organization to which part i of subchapter_t applies it is engaged in the marketing of agricultural or horticultural products ie q which it markets and various other supplies which it sells to its members as a specified agricultural or horticultural cooperative taxpayer is entitled to the benefit of sec_199 of the code and sec_1_199-6 of the regulations which permit such cooperatives to disregard deductions under sec_1382 and c for purposes of computing qpai and taxable_income for sec_199 purposes 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 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 member’s hands that is the member may not count the qualified_payment received from the cooperative in the member’s own sec_199 computation whether or not the cooperative keeps or passes through the sec_199 deduction accordingly the only way that a member 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 taxpayer does not operate on a pooling basis taxpayer purchases q from its members markets that q the amount that each member receives when the member sells q to taxpayer for marketing depends upon which delivery schedules and pricing mechanisms the member chooses members have a number of options for determining how and when sales are made however all members share in taxpayer’s net_earnings from member q operations in proportion to the amount of q they market through taxpayer those net_earnings are distributed after the end of each year in the form of patronage_dividends the question presented in this ruling is whether the cash advances made by taxpayer to patrons for q 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 amount of the advances in plr-123371-09 the sec_199 computation if the advances 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 members’ sec_199 computations if the advances 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 members’ sec_199 computations these results are the same whether taxpayer decides to keep or to pass-through all or a portion of its sec_199 deduction the advances for q are made in cash so the paid in money requirement is met taxpayer’s advances 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 advances to a member are paid pursuant to an agreement namely the agreement that pre-dates the acquisition of the q by taxpayer second taxpayer’s advances to a member are made with respect to products marketed for him namely the q delivered by the member for marketing by taxpayer as described above taxpayer markets the q it acquires from members and members share in taxpayer’s net_earnings from its marketing activities in the form of patronage_dividends third the amount of the advances for q to each member is fixed without reference to the net_earnings of taxpayer since at the time the advances 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 patrons do not receive the same payments for their q ie that taxpayer does not pool does not mean that the advances 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 plr-123371-09 service the tax_court in 70_tc_145 described the formula as follows the grower was paid_by petitioner for growing chickens based on the delivery weight to the processing plant less the weight of chickens condemned by the u s department of agriculture the formula under which the grower was paid also took into account variable market rates for full grown chickens and an efficiency factor that related the number of pounds of feed to the pounds of chickens produced the efficiency factor was figured into the grower's compensation because farm service supplied all chicken feed under the contract provisions established with each of the growers there was also a guaranteed minimum amount the grower would receive from the cooperative irrespective of wholesale market variations for example the contract in effect on date provided that ‘in no event will the grower member receive less than dollar_figure cents per pound less u s d a condemnation ’ on its books petitioner treated payments to its growers as a cost of production taxpayer’s advances qualify as per-unit retain allocations within the meaning of sec_1388 of the code because they are distributed with respect to q that taxpayer markets for its patrons the patrons receive the payments based on the quantity of q delivered the advances are determined without reference to taxpayer’s net_earnings the advances are paid pursuant to an agreement with the member establishing the pre-existing agreement and obligation and the advances are paid within the payment period of sec_1382 such per-unit retains are to be reported in box of form 1099-patr taxable_distributions received from cooperatives 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 product is sold the cost_of_goods_sold mechanism associated with inventory must be adjusted to reflect the deductions allowable under subchapter_t of the code specifically cooperatives need to include the per-unit retain allocations in inventory cost for purposes of making inventory and sec_263a of the code computations and then adjust the ending inventory and cost_of_goods_sold to prevent double deduction of the per-unit retain allocations the adjustments can be made to either the inventory or the line item deduction for the per-unit retain allocations in other words if the per-unit retain allocations are deducted on a deduction line in the cooperative's tax_return they should be removed entirely from the ending inventory and cost_of_goods_sold computed for the tax_year alternatively if the per-unit retain allocations are not deducted on a deduction line in the tax_return the per-unit retain allocations reflected in the ending inventory should be removed and included in the cost_of_goods_sold amount for that tax_year this procedure will allow the cooperative to deduct the per-unit retain allocations once while also preserving the integrity of its sec_263a calculation plr-123371-09 for reasons described above taxpayer’s cash advances meet the definition of per-unit retain allocations paid in money taxpayer may disregard such payments in determining the amount of its sec_199 deduction based on the foregoing we rule that cash advances from taxpayer to its members in exchange for q products grown in the united_states are per-unit retain allocations paid in money as defined in sec_1388 and sec_1382 of the code and that such advances are properly included in qpai and taxable_income of taxpayer solely for purposes of calculating at the cooperative level the deduction allowed under sec_199 no opinion is expressed or implied regarding the application of any other provision in the code or regulations the conclusions set forth in this ruling are limited to cash advances made during a year attributable to q which is sold by taxpayer during the year no opinion is expressed or implied as to whether cash advances made during a year attributable to q which is in inventory at year-end qualify as per-unit retain allocations paid in money this ruling is directed only to the taxpayer that requested it under sec_6110 of the code it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours paul f handleman paul f handleman chief branch office of the associate chief_counsel passthroughs special industries