internal_revenue_service number release date index number ----------------- ----------------------------- ---------------------------------------------------------- ------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no ---------- telephone number --------------------- refer reply to cc psi b05 plr-131568-10 date date legend taxpayer -------------------------------------------------------------------- ------------------------------------------------------------------ state a area dear ---------------- ------ --------------------------------------------------- this is in response to a request for rulings dated date submitted by your authorized representative the rulings concern the interplay of the rules in subchapter_t of the internal_revenue_code concerning the taxation of cooperatives and their patrons and the calculation of the sec_199 deduction for certain cooperatives contained in sec_199 taxpayer is a farmers’ cooperative organized under the state a cooperative law taxpayer serves farmers through a network of --------- facilities located in area taxpayer was formed in--------as a result of the consolidation of two local cooperatives taxpayer markets grain for its farmer members and for others during the fiscal_year ended --------------------------- taxpayer’s grain sales totaled approximately dollar_figure---------- ---------- taxpayer markets principally soybeans corn and wheat it also markets a small amount of oats in addition taxpayer provides its members and others 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 its ------- fiscal_year taxpayer’s supply sales totaled approximately dollar_figure---------------- plr-131568-10 taxpayer’s members must be producers ie farmers or cooperative associations of producers who do business with taxpayer taxpayer currently has approximately --------members taxpayer pays patronage_dividends to members and to other persons that do business with taxpayer by written_agreement on a cooperative basis contract patrons taxpayer typically has approximately --- to ----- contract patrons at any time taxpayer does not pay patronage_dividends to other 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 of its other net_income from business with or for members and other eligible patrons less reserves which shall be provided for in the bylaws or other written agreements shall be distributed to its members and other eligible patrons on the basis of patronage as provided in the bylaws or other written agreements section --------------- taxpayer’s articles of incorporation describe taxpayer’s purpose and the nature of its business as follows the purpose of this association is to associate farmer producers and others to reduce their costs through joint action in purchasing their supplies and equipment and in marketing produce which they raise the general nature of its business shall be to receive grade store ship market and process the agricultural produce of its members and others and to procure for its members and others seeds feeds petroleum products fuel equipment and any other articles of consumption and use upon the farms or in the homes of its patrons and to perform any and all services for its members and other persons sec_1 and taxpayer is organized with capital stock sec_2_1 it has one class of common_stock and three classes of preferred_stock a preferred b preferred and c preferred sec_2 no shares of c preferred are issued and outstanding plr-131568-10 the common_stock is membership stock sec_2 and only producers and cooperative associations of producers are eligible to be members and to own common_stock sec_2 a for this purpose ‘producers’ shall mean persons natural or corporate actually engaged in the production of agricultural products for the market including tenants of land used for the production of any such product and lessors of such land who receive as rent part of the product of such land sec_2 a each voting member owns one share of common_stock the common_stock has a par_value of dollar_figure per share sec_2 holders of common_stock are not entitled to receive dividends with respect to the shares sec_2 c the articles of incorporation provide that only members are entitled to vote and that each member has one vote voting each member of this association shall be entitled to one vote in the affairs of this association and no share of capital stock or other equity_interest shall confer upon the holder any right to vote in the affairs of the association by virtue of share ownership sec_3_2 the remaining classes of stock a preferred and b preferred have a par_value of dollar_figure per share sec_2 holders of a preferred are entitled to a non-cumulative dividend of not less than percent and not more than percent of par_value per annum sec_2 a holders of b preferred are entitled to a non-cumulative dividend of not more than percent of par_value per annum sec_2 b historically this stock traces back to stock issued by taxpayer’s predecessors to provide capital needed for the business the par values of the outstanding a preferred shares and class b shares were dollar_figure----------and dollar_figure--------- respectively at --------------------------- taxpayer’s articles of incorporation provide that its net_earnings shall be distributed on a cooperative basis as provided in its bylaws patronage refunds all net margins savings of this association in excess of dividends if any and additions to the capital reserve shall be distributed to patrons annually or more often on the basis of patronage transactions as more particularly provided in the bylaws the records of the association may show the interest of patrons and members in the capital reserve sec_3_3 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 sec_5 then taxpayer is required to deduct i percent of the net margins as an addition to the capital reserve ii the amount declared by the board_of plr-131568-10 directors as dividends on the preferred_stock and iii an amount sufficient to pay taxpayer’s taxes sec_5 a i ii and iii 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 sec_5 a iv if earnings from nonpatronage sources exceed the amounts required to be retained then any excess nonpatronage earnings are also set_aside in the capital reserve sec_5 a iv taxpayer refers to the amounts required to be retained for reserves dividends and taxes as the association net margins sec_5 a sec_5 of the bylaws defines the term patron as member doing business with this association and other persons with whom this association by written_agreement does business on a cooperative basis contract patrons the bylaws then provide patrons net margins the balance of net margins after b deduction of the association net margins shall be the patrons net margins the patrons net margins shall belong and be allocated to patrons on the basis of their respective patronage transactions sec_5 b this section of the bylaws goes on to provide that taxpayer may pay patronage_dividends based upon allocation units the patrons net margins may be allocated on the basis of their respective patronage of and the amounts which resulted from the operations of the various divisions or departments of the association sec_5 b taxpayer allocates patronage_dividends upon the basis of two allocation units - one for grain marketing and the second for supplies patrons net margins attributable to the grain allocation unit are allocated among members and contract patrons marketing their grain through taxpayer based upon bushels patrons net margins attributable to the supplies unit are allocated among the members and contract patrons doing business with the unit based upon their dollars of purchases sec_5 a of the bylaws authorizes taxpayer to pay patronage_dividends in cash or in equity credits or any combination thereof taxpayer historically has paid its patronage_dividends in a combination of cash and equity credits for its ------- fiscal_year taxpayer paid its patronage_dividend percent in cash and percent in equity credits in the event of dissolution article of taxpayer’s articles of incorporation provides that creditors shall first be paid any assets then remaining are to be distributed first to the holders of a preferred and b preferred_stock in an amount equal to par_value second to the holders of the c preferred_stock in an amount equal to par_value and third to the holders of common_stock and equity credits in an amount equal plr-131568-10 to par_value or face value as the case may be any property then remaining is then to be shared by the member patrons on the basis of their respective accumulated patronage 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 ----- of which are open year-round and ------- of which are seasonal it purchases grain from its members and others 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 ----million bushels taxpayer also purchases some grain from its members and others for sale directly to several large customers in the case of direct sales the grain generally is delivered by members and others at taxpayer’s direction directly to the customers’ facilities and taxpayer is not involved in handling the grain taxpayer sells grain to livestock producers for feed to grain processors to be used to produce ethanol 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 a small amount of grain is sold by taxpayer direct to customers 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 and contract patrons 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 for purposes of this ruling grain payments also do not include patronage_dividends paid to members and contract patrons 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 and contract patrons to a pool at the time of harvest rather that risk remains with members and contract patrons 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 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 plr-131568-10 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 market price paid for grain is determined without regard to the actual net_proceeds realized by taxpayer from marketing the grain payments are made in cash by check and occur throughout the year as members and contract patrons sell grain to taxpayer for marketing and are paid pursuant to the terms of their grain contracts after purchasing grain from members and contract patrons taxpayer then markets each member’s and contract patron’s grain along with the grain of all of its other members and contract patrons 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 and contract patrons with respect to the grain they market through taxpayer 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 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 the minneapolis grain exchange of the kansas city board_of trade 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 of acceptable quality for the convenience of members and contract patrons 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 plr-131568-10 time the schedule was printed are also listed on the schedule the cash price at any location at any time equals the futures price minus the basis at that particular location grain prices constantly fluctuate while basis does not fluctuate as dramatically as the futures prices it also is variable as a result of changes in the markets the bid price schedule at country elevators changes from hour to hour and day to day when a farmer delivers grain to taxpayer for a spot sale at the cash bid price a grain settlement document is produced identifying the kind amount and quality of the grain delivered the price per bushel any applicable discounts or other charges and the net amount due to the farmer a member or contract patron 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 or contract patron has the option of entering into a forward_contract to sell his or her grain to taxpayer this is a common way for members and contract patrons 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 also can enter into forward contracts where the pricing is left open for future determination plr-131568-10 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 members and contract patrons have the option to deliver grain to taxpayer leaving the determination of the price partly or wholly open contracts of this sort are called by various names - deferred price contracts delayed price contracts credit-sale contracts etc under a delayed price contract ownership of the grain passes from the farmer to taxpayer at the time of delivery farmers are given the opportunity to wait until later to price the grain when the farmer chooses to price the contract the cooperative’s then current bid price is used to fill the open price term once the price is determined the member is paid 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 the crops are planted or while the crops 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 farmers think that the cash price is low at the time of harvest they can harvest and store their crops either on the farm if they have on-farm storage or at one of taxpayer’s elevators while waiting for the price to improve they can then sell that grain to taxpayer when they think the price is right at the current cash bid price 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 less delayed price fees plr-131568-10 taxpayer represents that these choices are available to all members and contract patrons marketing their grain on a cooperative basis through taxpayer because of these choices two neighbors that market the same quantity and quality of a particular kind of grain through taxpayer during any year will receive different grain payments depending upon where when and how they sell their grain to taxpayer however they will each receive the same patronage_dividend for the fiscal_year ended --------------------------- taxpayer made grain payments to members and contract patrons of approximately dollar_figure--------------- taxpayer paid patronage_dividends to members and contract patrons with respect to that year of approximately dollar_figure------------- of which approximately dollar_figure--------------was paid with respect to grain business in the past taxpayer has treated grain payments made in cash to members as purchases for tax purposes and reported them on schedule a line of its form 1120-c taxpayer has not reported the grain payments made in cash as per-unit retain allocations paid in money and therefore has not reported them on schedule a line 4b of its form 1120-c taxpayer has reported the patronage_dividends paid to members in money and qualified written notices of allocation on schedule h line sec_3a and sec_3b of its form 1120-c because of this reporting grain payments paid in cash have entered into the determination for tax purposes of taxpayer’s cost_of_goods_sold for tax purposes as is customary in the grain business taxpayer values its grain inventories at year end at market for financial statement and tax purposes taxpayer did not add back grain payments in its sec_199 computations for prior years taxpayer has not passed any portion of its sec_199 deduction through to members in prior years recent developments have caused taxpayer to reconsider how it should treat its grain payments for purposes of its sec_199 computation taxpayer is seeking confirmation that grain payments to members and contract patrons can be classified as per-unit retain allocations paid in money taxpayer plans to treat grain payments as per-unit retain allocations paid in money for purposes of computing its sec_199 deduction taxpayer does not currently plan to make any change in the manner it accounts for inventories for tax purposes thus the timing of the deduction of its grain payments will not be changed taxpayer will make certain that it does not exclude or deduct grain payments twice on its tax_return or that it does not add back grain payments twice in its sec_199 computation taxpayer plans to disregard grain payments made to members and contract patrons for purposes of computing its qualified_production_activities_income qpai and plr-131568-10 its taxable_income for purposes of sec_199 taxpayer may pass through all or a portion of its sec_199 deduction based on the foregoing taxpayer requests the following rulings grain payments to members and contract 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 contract 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 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_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 plr-131568-10 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 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 plr-131568-10 cooperative remains entitled to claim the entire sec_199 deduction on its return but is required under sec_199 to reduce the deduction or exclusion it would otherwise claim under sec_1382 for per-unit retain allocations and patronage_dividends sec_199 of the code provides that a cooperative passes through an amount of its sec_199 deduction by identifying such amount in a written notice mailed to such person during the payment period described in sec_1382 sec_1382 provides that the payment period for a year is the period beginning with the first day of such taxable_year and ending with the fifteenth day of the ninth month following the close of such year sec_1_199-6 of the regulations provides that in order for a patron to qualify for the sec_199 deduction sec_1_199-6 requires that the cooperative identify in a written notice the patron's portion of the sec_199 deduction that is attributable to the portion of the cooperative's qpai for which the cooperative is allowed a sec_199 deduction this written notice must be mailed by the cooperative to its patrons no later than the 15th day of the ninth month following the close of the taxable_year the cooperative may use the same written notice if any that it uses to notify patrons of their respective allocations of patronage_dividends or may use a separate timely written notice s to comply with this section the cooperative must report the amount of the patron's sec_199 deduction on form 1099-patr taxable_distributions received from cooperatives issued to the patron while a cooperative is permitted to disregard per-unit retain allocations and patronage_dividends in its sec_199 deduction sec_1_199-6 of the regulations provide that a qualified_payment received by a patron of a cooperative is not taken into account by the patron for purposes of sec_199 sec_1_199-6 of the regulations defines the term qualified_payment to mean any amount of a patronage_dividend or per-unit_retain_allocation as described in sec_1385 or of the code received by the patron from a cooperative that is attributable to the portion of the cooperative’s qpai for which the cooperative is allowed a sec_199 deduction for this purpose patronage_dividends and per-unit retain allocations include any advances on patronage and per-unit retains paid in money during the taxable_year taxpayer is a specified agricultural or horticultural cooperative within the meaning of sec_199 of the code and sec_1_199-6 of the regulations it is an organization to which part i of subchapter_t applies ie it is a nonexempt_cooperative to which subchapter_t applies it is engaged in the marketing of agricultural or horticultural products ie grain which it markets and various farm supplies which it sells to its members and contract patrons plr-131568-10 as a specified agricultural or horticultural cooperative taxpayer is entitled to the benefit of sec_199 of the code and sec_1_199-6 of the regulations which permit such cooperatives to disregard deductions under sec_1382 and c for purposes of computing qpai and taxable_income for purposes of sec_199 sec_1382 provides deductions for per-unit retain allocations paid in money property and qualified per-unit retain_certificates as well as for patronage_dividends paid in money property and qualified written notices of allocation it also provides for deductions when nonqualified per-unit retain_certificates and nonqualified written notices of allocation are redeemed as a specified agricultural or horticultural cooperative taxpayer is entitled to the benefit of sec_199 and sec_1_199-6 which permit such cooperatives to disregard deductions under sec_1382 and c for purposes of computing qpai and taxable_income for purposes of sec_199 sec_1382 provides deductions for per-unit retain allocations paid in money property and qualified per-unit retain_certificates as well as for patronage_dividends paid in money property and qualified written notices of allocation it also provides for deductions when nonqualified per-unit retain_certificates and nonqualified written notices of allocation are redeemed taxpayer does not operate on a pooling basis taxpayer purchases grain from members and contract patrons and markets the grain the amount that each member or contract patron receives when he or she sells grain to taxpayer for marketing depends upon where how and when the member or contract patron chooses to sell that grain to taxpayer members and contract patrons have a number of options for determining how and when sales are made as stated above two neighbors delivering the same amount of grain to taxpayer during any year will be paid different amounts for that grain depending upon where when and how they sell the grain to taxpayer however all members and contract patrons share in taxpayer’s net_earnings from marketing operations in proportion to the quantity of grains they market through taxpayer those net_earnings are distributed after the end of each year in the form of patronage_dividends paid in cash and qualified written notices of allocation the question presented in this ruling is whether the grain payments made by taxpayer to members and contract 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 members and contract 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’ and contract patrons’ sec_199 computations if the grain payments to members and contract patrons are not per- unit retain allocations paid in money then they should not be added-back in taxpayer’s plr-131568-10 sec_199 computation but should be included in the members’ and contract patrons’ sec_199 computations these results are the same whether taxpayer decides to keep or to pass-through all or a portion of its sec_199 deduction grain marketing cooperatives like taxpayer have never thought of their grain payments as per-unit retain allocations paid in money however taxpayer’s grain payments appear to meet the definition of per-unit retain allocations paid in money which are excludible or deductible under sec_1382 of the code the grain payments are made in cash so the paid in money requirement is met taxpayer’s grain payments also meet all the requirements of the definition of per-unit_retain_allocation contained in sec_1388 of the code which defines the term per-unit_retain_allocation to mean any allocation by an organization to which part i of this subchapter applies to a patron with respect to products marketed for him the amount of which is fixed without reference to the net_earnings of the organization pursuant to an agreement between the organization and the patron first taxpayer’s grain payments to a member or contract patron are paid pursuant to an agreement namely the particular agreement applicable to the method the member or contract patron uses to determine how and when his or her grain is sold to taxpayer second taxpayer’s grain payments to a member or contract patron are made with respect to products marketed for him namely the grain delivered by the member or contract patron for marketing by taxpayer as described above taxpayer markets the grain it acquires from members and contract patrons and members and contract 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 member or contract 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 contract patrons do not receive the same payments for their grain ie that taxpayer does not pool does not mean that grain plr-131568-10 payments should not be treated as per-unit retain allocations paid in money in 619_f2d_718 8th cir the eighth circuit_court of appeals characterized payments to farm service’s poultry growers as per-unit retain allocations paid in money even though they were determined under a formula that resulted in some poultry growers receiving more than others depending upon the efficiency of their operations and the market price of chickens when they delivered their chickens to farm service the tax_court in 70_tc_145 described the formula as follows the grower was paid_by petitioner for growing chickens based on the delivery weight to the processing plant less the weight of chickens condemned by the u s department of agriculture the formula under which the grower was paid also took into account variable market rates for full grown chickens and an efficiency factor that related the number of pounds of feed to the pounds of chickens produced the efficiency factor was figured into the grower's compensation because farm service supplied all chicken feed under the contract provisions established with each of the growers there was also a guaranteed minimum amount the grower would receive from the cooperative irrespective of wholesale market variations for example the contract in effect on date provided that ‘in no event will the grower member receive less than dollar_figure cents per pound less u s d a condemnation ’ on its books petitioner treated payments to its growers as a cost of production taxpayer has treated its grain payments as purchases not as per-unit retain allocations paid in money however how the payments have been reported by taxpayer in prior years does not determine how the payments are treated prospectively in this ruling 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 plr-131568-10 deduction for a qualified_payment received from a cooperative is for the cooperative to pass-through the sec_199 amount in accordance with the provisions of sec_199 of the code and the regulations thereunder we note that to prevent a cooperative from deducting the per-unit retain allocations made in money or qualified certificates for the second time when the associated grain is sold the cost_of_goods_sold mechanism associated with inventory must be adjusted to reflect the deductions allowable under subchapter_t of the code specifically cooperatives need to include the per-unit retain allocations in inventory cost for purposes of making inventory and sec_263a of the code computations and then adjust the ending inventory and cost_of_goods_sold to prevent double deduction of the per-unit retain allocations the adjustments can be made to either the inventory or the line item deduction for the per-unit retain allocations in other words if the per-unit retain allocations are deducted on a deduction line in the cooperative's tax_return they should be removed entirely from the ending inventory and cost_of_goods_sold computed for the tax_year alternatively if the per-unit retain allocations are not deducted on a deduction line in the tax_return the per-unit retain allocations reflected in the ending inventory should be removed and included in the cost_of_goods_sold amount for that tax_year this procedure will allow the cooperative to deduct the per-unit retain allocations once while also preserving the integrity of its sec_263a calculation for the reasons described above taxpayer’s grain payments to members and contract 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 we also note that payments to nonmembers who are not eligible to share in patronage_dividends ie those with whom taxpayer does not operate on a cooperative basis with do not constitute per-unit retains paid in money within the meaning of sec_1382 of the code and accordingly are treated exclusively as purchases in the cost_of_goods_sold mechanism accordingly we rule as requested that grain payments to members and contract 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 activitie sec_2 deduction taxpayer’s qualified_production_activities_income and taxable_income should pursuant to sec_199 of the code be computed without regard to any deduction for grain payments to members and contract patrons plr-131568-10 the conclusions set forth in this ruling address only purchases that are per-unit retain allocations paid in money as they relate to grains marketed by the cooperative during the taxable_year and does not apply to purchases of grain that remain in inventory at year end no opinion is expressed or implied regarding the application of any other provision in the code or regulations this ruling is directed only to the taxpayer that requested it under sec_6110 of the code it may not be used or cited as precedent in accordance with a power_of_attorney filed with the request a copy of the ruling is being sent to your authorized representative sincerely yours paul f handleman paul f handleman chief branch office of the associate chief_counsel passthroughs special industries


t c memo united_states tax_court larry bruce petitioner v commissioner of internal revenue respondent docket no 24303-05l filed date respondent filed a notice_of_federal_tax_lien against p for the unpaid balance of his federal income taxes for after notice to p and a hearing r’s settlement officer issued a notice_of_determination upholding the proposed collection action r moved for summary_judgment on all issues held r’s motion for summary_judgment will be granted r may proceed with collection by lien e kenneth wall for petitioner jeffrey e gold for respondent memorandum opinion nims judge petitioner asks this court to review a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination this case is before the court on respondent’s motion for summary_judgment pursuant to rule rule a provides that either party may move for summary_judgment upon all or any part of the legal issues in controversy full or partial summary_judgment may be granted only if it is demonstrated that no genuine issue exists as to any material fact and a decision may be entered as a matter of law rule b 98_tc_518 affd 17_f3d_965 7th cir we conclude that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law unless otherwise indicated all section references are to sections of the internal_revenue_code in effect for the tax_year at issue and all rule references are to the tax_court rules_of_practice and procedure background at the time he filed the petition in this case petitioner resided in lumberton north carolina petitioner is a long-haul trucker who spends a great deal of time on the road in he won more than dollar_figure million dollars from a slot machine in new jersey petitioner timely filed an income_tax return and reported the winnings calculating income_tax due of dollar_figure offset by withholding of dollar_figure but paid nothing beyond the withheld amount respondent assessed the reported tax plus additions to tax and interest on date respondent’s revenue_officer attempted negotiations to secure payment of the assessed balance to no avail during a meeting with the revenue_officer on date petitioner filled out a form 433-a collection information statement for wage earners and self-employed individuals but did not provide any supporting documentation ignoring requests and suggestions by respondent’s revenue_officer petitioner took no steps toward payment of his tax obligation respondent sent to petitioner a final notice - notice_of_intent_to_levy and notice of your right to a hearing on date respondent filed a notice_of_federal_tax_lien on or around date and sent petitioner a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 on date petitioner mailed requests for appeals hearings on date the mailing was timely with respect to the lien notice but not with respect to the levy notice attachments to the hearing requests prepared by petitioner’s representative stated that petitioner was working on an offer-in-compromise oic to resolve his tax_liability by letter dated date respondent’s settlement officer informed petitioner that his request for a hearing was timely and scheduled a telephone conference for date in response to petitioner’s mention of an oic in the hearing request the settlement officer also requested a completed form 433-a with required attachments copies of petitioner’s federal and state_income_tax returns and a form_656 offer_in_compromise with the required processing fee the settlement officer asked that this information be submitted within days to allow time for review before the telephone conference petitioner never forwarded an oic the necessary financial information or any other documentation neither petitioner nor his representative ever confirmed the hearing or otherwise corresponded with the settlement officer with respect to the scheduled hearing nevertheless a telephone conference in which petitioner’s representative participated was conducted on date as initially scheduled on date the settlement officer issued a determination sustaining the federal_tax_lien filing petitioner filed the petition on date in it petitioner stated that he was appealing the notice_of_determination and wanted a redetermination of the additions to tax the only specifically listed errors as required by rule were that petitioner was denied his right to a fair hearing that the filing of the notice_of_federal_tax_lien was erroneous and that the balance due on the notice_of_federal_tax_lien was erroneous discussion respondent moved for summary_judgment on all issues pursuant to rule summary_judgment is intended to expedite litigation and avoid unnecessary trials fla peach corp v commissioner 90_tc_678 a motion for summary_judgment may be granted if there is no genuine issue as to any material fact and a decision may be rendered as a matter of law see rule b 118_tc_226 the moving party bears the burden of showing that there is no genuine issue of material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment 100_tc_32 85_tc_812 the party opposing summary_judgment must set forth specific facts which show that a genuine question of material fact exists and may not rely merely on allegations or denials in the pleadings 91_tc_322 87_tc_214 sec_6321 creates a lien in favor of the united_states on all property and rights to property belonging to a person liable for taxes when payment has been demanded and neglected the lien arises by operation of law when the internal_revenue_service irs assesses the amount of unpaid tax sec_6322 the irs files a notice_of_federal_tax_lien to preserve priority and put other creditors on notice see sec_6323 sec_6320 provides that the secretary shall furnish the person described in sec_6321 with written notice of the filing of a lien under sec_6323 this notice must be provided not more than business days after the day the notice of lien is filed and must advise the taxpayer of the opportunity for administrative review in the form of a hearing sec_6320 sec_6320 further provides that the taxpayer may request a hearing within the 30-day period beginning on the day after the 5-day period the hearing generally shall be conducted consistent with the procedures set forth in sec_6330 d and e sec_6320 a taxpayer may raise any relevant issue at the hearing including challenges to the appropriateness of collection actions and may make offers of collection alternatives which may include the posting of a bond the substitution of other assets an installment_agreement or an offer-in-compromise sec_6330 the appeals officer must consider those issues verify that the requirements of applicable law and administrative procedures have been met and consider whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the person involved that any collection action be no more intrusive than necessary sec_6330 after the appeals hearing process sec_6330 gives this court jurisdiction to review the appeals officer’s determination where the underlying tax_liability is properly at issue we review the appeals determination with respect to the existence and amount of tax_liability de novo 114_tc_604 114_tc_176 when the underlying tax_liability is not properly at issue we review the appeals officer’s determination using an abuse_of_discretion standard sego v commissioner supra pincite goza v commissioner supra pincite at the hearing a taxpayer may challenge the existence and amount of the underlying tax_liability if he or she received no notice_of_deficiency or did not otherwise have an opportunity to dispute such tax_liability sec_6330 a self-reported tax_liability along with statutory penalties and interest constitute an underlying tax_liability and may be the proper subject of challenge at the hearing see 122_tc_1 in the case before us petitioner would have been entitled to challenge his self-reported tax_liability however it is arguable whether petitioner raised the issue of his underlying tax_liability in his imprecise petition in any event petitioner is precluded from challenging his underlying tax_liability in the instant proceeding because he did not challenge it at the administrative hearing bourbeau v commissioner tcmemo_2003_117 tabak v commissioner tcmemo_2003_4 see 115_tc_582 n affd 21_fedappx_160 4th cir sec_301_6320-1 q a-f5 proced admin regs see also sec_6330 and d petitioner’s form request for a collection_due_process_hearing indicated that the amount of the self-reported tax_liability was disputed however petitioner’s representative stated at the hearing that no such challenge to the amount of assessment existed accordingly in this proceeding we do not consider petitioner’s underlying tax_liability for this reason we do not address petitioner’s argument regarding abatement of the sec_6651 failure to pay addition_to_tax based on reasonable_cause which first surfaced in petitioner’s objection to respondent’s motion for summary_judgment since the underlying tax_liability is not at issue we review the appeals officer’s determination using the abuse_of_discretion standard under this standard a determination will be affirmed unless action was taken that was arbitrary or capricious lacks sound basis in fact or is not justifiable in light of the facts and circumstances 125_tc_14 petitioner broadly assigned error to a denial of his right to a fair hearing based on the information before us and the arguments in his opposition to summary_judgment we believe his primary contention to be that the appeals officer abused her discretion by failing to recommend any collection alternatives in lieu of the federal_tax_lien in his opposition to summary_judgment petitioner presents a laundry list of collection alternatives that he believes would have been appropriate however the appeals officer is only required to consider the offers of collection alternatives raised and information presented by the taxpayer chandler v commissioner tcmemo_2004_7 the only collection alternative even remotely pursued by petitioner at the appeals hearing was an offer-in-compromise however petitioner’s attempt at securing an oic was weak at best see discussion below therefore it was not an abuse_of_discretion for respondent’s settlement officer to decline to give more consideration to the matter than she did petitioner’s representative indicated in an attachment to the form request for a hearing dated date that petitioner was working on an oic at the time even assuming petitioner’s representative reiterated a desire to enter into an oic at the hearing the settlement officer did not abuse her discretion by sustaining the notice_of_federal_tax_lien filing petitioner never actually submitted an oic or any other collection alternative at the telephone hearing on date months after the notice of lien and almost months after stating he was working on an oic in his request for a hearing petitioner’s representative indicated at the hearing that petitioner was aware of the consequences of not cooperating during the appeals process petitioner did not submit a reviewable oic or any other current financial information before the determination was made on date days after the hearing the only information concerning petitioner’s ability to pay was the form 433-a that had been in respondent’s file since respondent’s revenue_officer was attempting collection almost seven months before the determination this form was poorly filled out incomplete and did not have any supporting documentation attached further the information was not current and was grossly insufficient to permit reasonable consideration of an oic there is no abuse_of_discretion in failing to consider an oic when no oic has been made after a taxpayer has been given a reasonable opportunity to submit one 124_tc_69 petitioner had adequate opportunity to make an oic but did not and therefore there were no less intrusive means of collection for the appeals officer to consider consequently the settlement officer considered each item required by sec_6330 and reached the determination that the filing of the notice of lien was appropriate furthermore the information in the form 433-a weighed dramatically against the appropriateness of respondent’s accepting an oic petitioner listed dollar_figure per month in income with dollar_figure per month in expenses petitioner indicated that these expenses were for himself and his girlfriend while the allowance of all of these expenses is questionable at the very least we include all of them for illustration petitioner valued his assets as over dollar_figure in a checking account a house worth dollar_figure nice furniture worth dollar_figure a peterbilt sleeper cab worth dollar_figure a utility trailer worth dollar_figure and a pickup truck worth dollar_figure petitioner owned all of these assets free and clear with no encumbrances the form 433-a showed that petitioner had no other debt petitioner who early in the collections stage had more than dollar_figure in net_worth and more than dollar_figure per month in disposable income was seeking leniency for not paying taxes on his million dollar gambling winnings under these facts and circumstances it was not an abuse_of_discretion for respondent’s settlement officer to sustain the filing of the notice_of_federal_tax_lien we briefly address petitioner’s assignment of error that respondent erroneously filed the notice_of_federal_tax_lien no facts in the petition indicate any basis for this assertion but petitioner’s opposition to summary_judgment reveals his view that respondent sent the notification letter late ie beyond the business-day period as provided in sec_6320 and therefore the lien is invalid in support of his view petitioner points out that the notice_of_federal_tax_lien shows the date the document was prepared and signed as date according to petitioner since the notification of the lien filing was not mailed to him until date business days later the lien is invalid and it was an abuse_of_discretion for respondent to sustain the lien filing we disagree that may the date the lien notice was prepared and signed has any consequence in this case the notice of lien sent to petitioner the statement of the appeals officer and the appeals case memorandum referral all say that the revenue_officer filed the lien on date petitioner’s transcript of account and certified form_4340 certificate of assessments payments and other specified matters both show the notice of lien as filed on date regardless of which of the two aforementioned dates may or may was the one on which the lien notice was actually filed respondent’s mailing of the notice to petitioner on may does not give rise to an abuse_of_discretion in cases where notice to the taxpayer was at issue we have said that proper mailing and receipt were irrelevant when a hearing was timely requested within the prescribed 30-day period that begins to run on the day after the fifth business_day following the filing of the notice of lien see call v commissioner tcmemo_2005_ affd aftr 2d ustc par big_number 9th cir stein v commissioner tcmemo_2004_124 in those situations we viewed the error in a notice as harmless and not resulting in an abuse_of_discretion that would prevent us from sustaining the lien see call v commissioner supra stein v commissioner supra the same logic applies to the facts of this case respondent received petitioner’s hearing request on date which falls well within the 30-day period described in sec_6320 whether the notice_of_federal_tax_lien was filed on may or thus the date the lien notice was prepared and signed has no significance and does not bear on whether there was an abuse_of_discretion in this case based upon the record before us we have determined that there is no genuine issue of material fact we hold that the settlement officer’s determination sustaining the notice_of_federal_tax_lien filing was not an abuse_of_discretion we therefore shall grant respondent’s motion for summary_judgment we have considered all of the parties’ contentions and arguments that are not discussed herein and we find them to be without merit irrelevant and or moot an appropriate order and decision will be entered for respondent


t c memo united_states tax_court larry j sumrall and patricia a sumrall petitioners v commissioner of internal revenue respondent docket no filed date held petitioners did not make informal claims for refund entitling them to refunds attributable to nol carrybacks from to and steven a wilson for petitioners mark h howard for respondent memorandum findings_of_fact and opinion halpern judge by notices of deficiency dated date respondent determined deficiencies in additions to and penalties with respect to petitioners’ federal income taxes for their taxable calendar years through the audit years as follows additions to tax and penalties sec sec sec year deficiency b dollar_figure dollar_figure 'dollar_figure --- big_number big_number big_number --- big_number big_number --- dollar_figure big_number big_number --- big_number big_number big_number --- big_number ' plu sec_50 of the interest due on underpayment of dollar_figure due to fraud sec_6653 b because of the complicated procedural history of this case we set forth in some detail the disposition of various issues that the parties themselves have agreed to or disposed of by motion for leave to file amended answer respondent informed the court that he had determined not to pursue the penalties determined under sec_6653 and for fraud we interpret that as a concession and we accept it by the amended answer to amended petition respondent admits that there are no deficiencies in tax for and and for and he claims additions to tax for delinguency under sec_6651 and for negligence under sec_6653 by a stipulation of settled issues petitioners concede the claimed addition to - - tax for failure_to_file a return under sec_6651 for on brief respondent concedes the claimed addition_to_tax for failure to pay under sec_6651 for at trial petitioners conceded the claimed additions to tax for for both delinquency under sec_6651 and negligence under sec_6653 at trial the parties stipulated that there are no additions to tax under sec_6654 on brief with respect to the deficiencies in tax for and petitioners propose that we find that but for certain claimed credits and refunds still in issue there are deficiencies in tax of dollar_figure and dollar_figure for those years respectively respondent agrees with those proposed findings_of_fact and we shall treat such agreements as constituting a stipulation of settlement with respect to those deficiencies which we accept the parties agree that petitioners have raised as issues in this case overpayments on account of withholding and refundable credits for and and net_operating_loss nol carrybacks from and at trial petitioners conceded that there was no timely claim for any overpayment on account of withholding and refundable credits for on brief respondent concedes that petitioners submitted timely refund claims for overpayments for and except with respect to nol carrybacks and states that the necessary computations to satisfy those claims can be made under rule we accept the parties’ various concessions and leave the computations to be disposed of pursuant to rule the parties have stipulated that petitioners are entitled to the following carryback deductions on account of nols if they can establish that they made timely claims for credit or refund without distinction refund of overpayments in tax attributable to those deductions loss_year carryback_year carryback deduction dollar_figure big_number big_number on brief respondent concedes that petitioners made a timely claim for a refund attributable to an nol_carryback to from we accept that concession the only issue remaining for decision is whether petitioners made timely claims for refunds attributable to nol carrybacks to and from unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure dollar amounts have been rounded to the nearest dollar petitioners bear the burden_of_proof rule a findings_of_fact some facts have been stipulated and are so found the stipulations of fact with attached exhibits are incorporated herein by this reference residence at the time of the petition petitioners resided in reno nevada returns petitioners did not timely file federal_income_tax returns for any of the audit years through or for and in early the internal_revenue_service irs initiated a criminal tax investigation the criminal investigation of petitioner husband petitioner with respect to the audit years on date petitioners filed their federal_income_tax returns with respondent for the audit years those returns show tax_liabilities as follows year liability dollar_figure big_number big_number big_number big_number petitioners requested an extension of time to file their federal_income_tax return for respondent approved the request and extended the due_date for the return to date petitioners made a joint_return of federal_income_tax for by filing a form_1040 u s individual_income_tax_return the return with the internal_revenue_service center in ogden utah the ogden service_center on date among the attachments to the return is a single page page of form_1045 application_for tentative refund the form_1045 page the form_1045 page is preprinted with a schedule schedule a on which pursuant to instructions is to be computed an nol on the form_1045 page petitioners computed an nol of dollar_figure petitioners filed their joint federal_income_tax return for the return on date dale k barker jr dale k barker jr is a certified_public_accountant who was retained by petitioners in date mr barker was retained among other reasons to prepare returns for the audit years mr barker prepared those returns he also prepared the and returns the criminal investigation rick raven is employed by the irs as a special_agent his duties include the conduct of criminal investigations in date special_agent raven began the criminal investigation he was assisted in the criminal investigation by dick stufflebeam a revenue_agent employed by the irs special_agent raven collected information concerning petitioner’s income and expenses for the audit years he was not concerned with whether any of petitioner’s tax_liabilities for any of the years under investigation could be reduced on account of nol carrybacks since he believed that nol carrybacks were not a defense to a criminal charge as part of his investigation revenue_agent raven did not concern himself with petitioner’s tax_liability for since as of the start of the criminal investigation no return for had yet become due during his investigation special_agent raven interviewed mr barker on one or more occasions accompanied on at least one occasion by mr stufflebeam during the course of those interviews there was no discussion of nols by letter dated date the february letter mr barker provided certain information to donald c hill criminal tax counsel for petitioner shortly after he received the february letter mr hill provided a copy to the u s attorney and employees of the irs the february letter contains no claim for any refund overpayment or nol_carryback it does state we may have some timing errors in according to petitioner the returns for through yet the tax returns should be materially correct as a result of his investigation special_agent raven recommended the prosecution of petitioner for crimes connected with his and income_tax liabilities on date petitioner signed a plea agreement agreeing to plead guilty to one count of willfully failing to file an income_tax return for in violation of sec_7203 judgment was entered on date the civil investigation at the conclusion of the criminal investigation revenue_agent stufflebeam became responsible for resolving petitioners’ civil tax_liabilities for the audit years in the process of resolving those liabilities he received both written and oral communications from mr barker mr barker did not file with him any claim for an nol_carryback from by a letter dated date the may letter sent by mr barker to the ogden service_center mr barker advised the irs that he was preparing income_tax returns for petitioners for their through tax years but that those returns were on hold to await the outcome of settlement with the internal_revenue_service out of the reno area he states to finalize these years there was required a settlement on the exact inventory and other critical capitalized amounts to present an accurate return on date revenue_agent stufflebeam memorialized in handwritten notes the june notes a phone conversation that had taken place that day between himself and mr barker as memorialized in the june notes mr barker stated that based on the cost_of_goods_sold used in the criminal case against petitioner petitioners would have nol carrybacks in later years revenue_agent stufflebeam told mr barker that he could complete - the audit in to days if he could get certain additional requested documents and the returns for the later years during the course of mr stufflebeam’s civil examination of the audit years he did not also examine the return he did not receive a copy of it from the ogden service_center when on date it was filed there nor was he provided a copy of it by petitioner or mr barker opinion i introduction we must determine whether petitioners made timely claims for refunds attributable to net_operating_loss nol carrybacks from to and if they did then the parties are in agreement that the amounts of such carrybacks are dollar_figure and dollar_figure to and respectively il code and regulations sec_172 allows an nol deduction for a taxable_year equal to the aggregate of the nol carryovers and carrybacks to that year every taxpayer claiming an nol deduction for any taxable_year must file with his return for such year a statement computing the amount of the nol deduction claimed and setting forth certain pertinent information sec_1_172-1 income_tax regs if the taxpayer is entitled in computing his nol deduction to a carryback that he is not able to ascertain at the time he files his return he must compute his nol deduction without -- - regard to such carryback see sec_1_172-1 income_tax regs when the taxpayer ascertains the nol_carryback he may within the applicable_period of limitations file a claim_for_refund of the overpayment if any resulting from the failure originally to compute the nol deduction for the taxable_year with the inclusion of the carryback id sec_301_6402-2 proced admin regs sets forth the following general requirements concerning the contents of a claim_for_refund b grounds set forth in claim no refund_or_credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed before the expiration of such period the claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the commissioner of the exact basis thereof an individual makes a claim_for_refund of an overpayment of income taxes for a taxable_year on a form 1040x amended u s individual_income_tax_return form 1040x see sec_301 a proced admin regs alternatively the taxpayer may file an application under the provisions of sec_6411 for a tentative_carryback_adjustment attributable to an nol sec_1_172-1 income_tax regs a tentative_carryback_adjustment can result in a refund’s being paid within days sec_6411 b an individual makes application_for a tentative_carryback_adjustment by filing form_1045 application_for tentative refund form sec_1_6411-1 income_tax regs as pertinent to this case sec_6411 provides that an application_for a tentative_carryback_adjustment does not constitute a claim_for_refund sec_6511 provides the applicable_period of limitations to file a claim_for_refund of the overpayment attributable to a nol_carryback as pertinent to the facts before us such period end sec_3 years after the due_date including extensions for filing the return for the taxable_year here of the nol see sec_6511 a iii discussion a introduction petitioners requested and were granted an extension of time to file their federal_income_tax return for until date because of such extension they had until date to file claims for refunds attributable to nol carrybacks from to and petitioners did not ' petitioners acknowledge that the time has passed for them to avail themselves of a tentative_carryback_adjustment application_for such adjustment must be made on or after the date of filing the tax_return for the year of the nol but no later than months from the end of such year sec_6411 sec_1_6411-1 income_tax regs the form_1040 with the form_1045 page attached was filed on date well past the end of comply with sec_301_6402-3 proced admin regs and make such claims by filing form sec_1040x for and nevertheless petitioners claim that they filed timely validl informal claims to carry back their nol to and petitioners informal claims for consist of oral and written communications with respondent which placed respondent on notice that petitioners were claiming net operating losses in x respondent answers that petitioners’ oral and written communications did not constitute adequate notice that petitioners were requesting refunds and thus do not constitute informal claims for refund b discussion informal claims it is well established that an informal claim_for_refund e one that does not comply with the formal requirements of the statute and regulations will suffice as long as it requests a refund and fairly advises respondent of the nature of the taxpayer’s claim 314_us_186 as we summarized in turco v commissioner t c memo there are no bright line rules as to what constitutes an informal claim rather each case must be decided on its own particular set of facts the relevant question is whether respondent knew or should have known that a refund claim was being made also an informal claim must have some written component e g 73_tc_1198 jackson v commissioner tcmemo_2002_44 petitioners’s argument petitioners ask us to assemble the following pieces into informal claims for refund for and the form_1045 page attached to the return filed date mr barker’s date telephone conversation with revenue_agent stufflebeam the june conversation memorialized in the june notes and the provisions of sec_172 specifying the years to which an nol is to be carried taken separately or together however such pieces do not constitute informal claims for refund the form_1045 page the instructions accompanying form_1045 provide that it is to be used by an individual to apply for a quick refund resulting from an nol_carryback the instructions state that the application is not treated as a claim for credit or refund which claim by an individual is to be made by filing a form 1040x the instructions further state that the form is to be filed with the internal_revenue_service center for the place where the taxpayer lives the instructions warn caution do not mail form_1045 with your year income_tax return in 32_fedclaims_636 the u s court of federal claims stated that in addition to a written component an informal claim must have two additional components first an informal claim must provide the commissioner of the irs with notice that the taxpayer is asserting a right to a refund second the claim must describe the legal and factual basis for the refund at best the form_1045 page informs the commissioner of the possibility that petitioners have one or more claims for refund which possibility arises by operation of law if a taxpayer has an nol see sec_172 the form does not however assert the right to any refund nor does it provide the legal and factual basis for any refund since it fails to specify any refund year or the particulars in any refund year that would entitle petitioners to a refund by itself the form_1045 page does not constitute an informal claim_for_refund since it lacks one or more of the components of an informal claim_for_refund ’ the june conversation nor do we believe that the form_1045 page perfected an informal claim initiated by mr barker during the june conversation respondent proposes a finding with respect to the june conversation petitioners have no objection to that indeed courts have held that the full form_1045 does not constitute an informal claim_for_refund since it is insufficient to put the service on notice that a claim_for_refund is being made e g 131_fsupp2d_389 s d n y kamens v united_states aftr 2d ustc par w d mo -- - finding and we think it fairly reflects the testimony of revenue_agent stufflebeam and mr barker the proposed finding is mr barker said that based on the cost_of_goods_sold used in the criminal case for mr sumrall the petitioners would have net_operating_loss carrybacks in later years mr stufflebeam told mr barker that he could complete the audit in to days if he could get the additional requested documents and the returns for later years put simply we think that mr barker told revenue_agent stufflebeam that based on information gathered during the criminal investigation petitioners expected to report losses for subsequent years that would carry back and reduce petitioners’ income for one or more of the audit years petitioners may thus have asserted a right to a refund nevertheless revenue_agent stufflebeam was examining petitioners’ returns for through petitioners had not yet filed their returns for and or any amended returns for any year under examination and revenue_agent stufflebeam told mr barker that he would consider any carrybacks resulting from losses when he received returns showing such losses to make an informal claim_for_refund a taxpayer not only must assert his right to a refund for a year but he must describe the legal and factual basis of the claim new england blec sys v united_states supra petitioners have not shown that they adequately described the factual basis of their claim to revenue_agent stufflebeam revenue_agent stufflebeam -- - undoubtedly had knowledge of the years under examination but petitioners did not tell him that the subsequent year from which a loss would carry back was or identify the year or years among those under examination to which the loss would be carried back or more importantly give him any particulars of that loss other than that it was expected to be based on the cost_of_goods_sold used in the criminal case against petitioner to constitute a claim_for_refund a taxpayer must give the commissioner adequate notice of the grounds including the factual basis for the claim before the expiration of the period of limitations so that the commissioner can if he wishes initiate an examination of the bona fides of the claim see 107_tc_189 beghe j dissenting affd 153_f3d_302 6th cir see also am radiator standard sanitary corp v united_states ct_cl 318_f2d_915 petitioners did not through the june conversation give respondent adequate notice that they had claims for refund or of the grounds underlying such claims the facts of this are distinguishable from those of am radiator standard sanitary corp v united_states ct_cl 318_f2d_915 in which the court of claims found an informal claim_for_refund with respect to retroactive inventory adjustments where the revenue_agent had knowledge of the taxpayer’s desire for a refund the approximate total amount of the refund expected and the cost of the later year inventory replacement giving rise to the earlier year adjustments and refunds the equivalent of that last component is missing in this case revenue_agent stufflebeam’s request revenue_agent stufflebeam asked for a copy of any loss_year return petitioners did not however give him a copy of the return nor did he receive one from the ogden service_center where the original was filed on date petitioners have not persuaded us that it was revenue_agent stufflebeam’s duty to put someone on lookout for the return at the ogden service_center or that it was someone’s duty at the service_center to separate the form_1045 page from the return and forward it to the revenue_agent in 40_fedclaims_42 the u s court of federal claims found that it was not necessary for a taxpayer to direct the information that constitutes an informal claim to the precise irs official who will consider that claim so long as it 1s given to an official whose general responsibilities and interactions with the taxpayer are sufficient to put the irs on notice of the pertinent claim the facts of that case are distinguishable from the facts before us the return was not directed to an official whose general responsibilities and interactions with petitioners were sufficient to put the irs on notice of a refund claim other contacts finally petitioners have not shown that on or before date the last day for making a claim for a refund - - attributable to an nol_carryback from they provided information to any other official at the irs so as to put respondent on notice that petitioners had claims for refunds attributable to carrybacks of the nol they did not provide such information to special_agent raven nor did they convey it by the february letter or otherwise c conclusion petitioners did not make informal claims for refunds attributable to nol carrybacks from to and before the expiration on date of the period for doing so iv conclusion petitioners are not entitled to nol carrybacks in the amounts of dollar_figure and dollar_figure to and respectively decision will be entered under rule


t c memo united_states tax_court jon e hellesen petitioner v commissioner of internal revenue respondent docket no filed date jon e hellesen pro_se monica d gingras for respondent memorandum findings_of_fact and opinion vasquez judge respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax and a dollar_figure addition_to_tax under sec_6651 the deficiency arises from unless otherwise indicated all section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure dollar_figure of unreported income from settlement proceeds interest received and a state_income_tax refund petitioner conceded the deficiency relating to the interest and the state_income_tax refund the issues for decision are whether petitioner may exclude the settlement proceeds received from his gross_income pursuant to sec_104 and whether petitioner is liable for an addition_to_tax under sec_6651 for his failure to timely file a return we hold that the settlement award is not excludable from gross_income and petitioner is liable for the failure_to_file addition_to_tax under sec_6651 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in california at the time of filing his petition with this court petitioner was employed as a claims litigation attorney by state farm insurance co state farm from date through date petitioner’s wife beverly harlan ms harlan was also employed as a claims litigation attorney by state farm from date through date petitioner and his wife jointly filed a lawsuit against state farm based on allegations related to their employment and discharge from state farm petitioner and ms harlan filed the lawsuit on date and alleged the following seven causes of action sexual harassment discrimination under gov code et seq on behalf of plaintiff beverly harlan v sic all defendants tortious discharge in contravention of public policy on behalf of plaintiff beverly harlan vs all defendants negligence on behalf of plaintiff beverly harlan vs all defendants negligent misrepresentation on behalf of plaintiff beverly harlan vs all defendants fraud - labor code on behalf of plaintiff beverly harlan vs all defendants tortious discharge in contravention of public policy behalf of plaintiff jon e hellesen vs all defendants and negligence on behalf of plaintiff jon e hellesen vs all defendants in the complaint petitioner alleged that he had suffered extreme and severe emotional distress including a lack of concentration loss of self-esteem embarrassment anxiety humiliation and stress petitioner requested general damages in the prayer for relief portion of the complaint petitioner did not ask for damages resulting from physical injuries or sickness from emotional distress petitioner asked for general damages and further relief as the court deemed proper in connection with the lawsuit petitioner was deposed on september and in the deposition petitioner stated that he was a victim of sexual harassment while working at state farm and that it caused him to pace and to feel upset nervous and stressed petitioner was able to work after his termination from state farm but physical problems occurred as a result of the termination petitioner experienced an escalation in chest pains an aching pain and loss of sensitivity on the right side of his forehead increased blood pressure weight loss an upset stomach irregular bowel movements headaches and emotional instability petitioner had a single appointment with each of two physicians dr raszinski and dr viltuznik regarding his physical ailments petitioner did not provide proof of costs incurred for seeing the two physicians or paying for any sort of medical_care petitioner saw dr raszinski for his chest pains the doctor instructed petitioner to reduce his stress level and did not diagnose a heart problem or prescribe him any medication petitioner told dr raszinski that difficulty at work had caused his stress petitioner saw dr viltuznik for the pain and loss of sensitivity over his right eye petitioner told dr viltuznik it area over right eye seems to be a weakened area on my body that as stress or upset feelings build it goes there on deposition petitioner did not recall whether dr viltuznik made a petitioner began feeling chest pains in diagnosis petitioner was referred to another doctor or medical center for the condition but did not see anyone else about the condition at trial petitioner stated that dr viltuznik had diagnosed a condition in his head and stated that in a blood vessel had burst in his head on the right side petitioner reported this condition had not improved petitioner has lost approximately pounds since his termination by state farm he began having an upset stomach while working at state farm after his termination petitioner became more emotional and an upset stomach became a daily problem petitioner and his wife settled their lawsuit with state farm on date for dollar_figure less dollar_figure the cost of the arbitrator in petitioner received a check for dollar_figure and in state farm reported on a form 1099-misc miscellaneous income that it paid petitioner dollar_figure in the settlement agreement and general release settlement agreement a paragraph titled witnesseth states as follows whereas claimants claim they suffered personal physical injuries and sickness including but not limited to medial sic injuries costs and treatment resulting from being subjected to sexual harassment wrongful termination and retaliation caused by defendant resulting in physical disabilities the settlement and release portion of the settlement agreement states as follows said amount includes all obligations by defendants to claimants including without limitation severance_pay sick_pay and other wages or benefits and general damages for personal physical injuries and sickness including medical costs and treatment incurred therein as well as emotional injuries arising from claimants’ alleged personal physical injuries and sickness from alleged sexual harassment wrongful termination and retaliation and all other statutory tort contract or other claims of any kind the settlement agreement does not allocate the portions of the total amount being paid to settle claims related to sexual harassment tortious discharge negligence negligent misrepresentation and fraud further there is no allocation of the portions of the total amount being paid to petitioner and ms harlan each received a check for half of the total settlement petitioner filed his federal_income_tax return on date petitioner’s federal tax_return for was due on date because petitioner received an extension petitioner did not report any of the settlement proceeds as income on his return opinion i deficiency a burden_of_proof generally the taxpayer bears the burden of proving the commissioner’s deficiency determinations incorrect rule a 290_us_111 petitioner has neither claimed nor shown that he satisfied the requirements of sec_7491 to shift the burden_of_proof to respondent accordingly petitioner bears the burden_of_proof see rule a b sec_104 it is well established that pursuant to sec_61 gross_income includes all income from whatever source derived unless otherwise excluded by the internal_revenue_code see 348_us_426 exclusions from gross_income are construed narrowly 515_us_323 as relevant here sec_104 provides sec_104 compensation_for injuries or sickness a in general --except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 relating to medical etc expenses for any prior taxable_year gross_income does not include-- the amount of any damages other than punitive_damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal physical injuries or physical sickness for purposes of paragraph emotional distress shall not be treated as a physical injury or physical sickness the preceding sentence shall not apply to an t he term emotional distress includes symptoms eg insomnia headaches stomach disorders which may result from such emotional distress h conf rept pincite ndollar_figure 1996_3_cb_741 amount of damages not in excess of the amount_paid for medical_care described in subparagraph a or b of sec_213 attributable to emotional distress damages received means amounts received through prosecution of a legal suit or action based upon tort or tort type rights or through a settlement agreement entered into in lieu of such prosecution sec_1_104-1 income_tax regs in evaluating whether amounts received pursuant to the settlement agreement are excludable from income pursuant to sec_104 we look to the written terms of the settlement agreement to determine the origin and allocation of the settlement proceeds see 88_tc_834 affd without published opinion 845_f2d_1013 3d cir jacobs v commissioner tcmemo_2000_59 affd sub nom 22_fedappx_967 10th cir petitioner and state farm entered into a written settlement agreement before trial petitioner was paid dollar_figure to settle all claims petitioner did not allege a cause of action in the lawsuit for personal physical injuries or sickness rather petitioner claimed general damages resulting from negligence there is no allocation of amounts paid to settle physical injuries and sickness however the amounts petitioner received sec_104 was amended by the small_business job protection act of publaw_104_188 sec 110_stat_1838 to provide effective for amounts received after date that the personal_injury_or_sickness for which the damages are received must be physical settled all obligations by state farm to pay petitioner for any personal physical injuries and sickness arising from alleged sexual harassment wrongful termination retaliation and all other statutory tort contract or other claims of any kind if a settlement agreement lacks express language stating what the settlement amount was paid to settle we look to the intent of the payor on the basis of all the facts and circumstances of the case including the complaint filed and details surrounding the litigation 504_us_229 102_tc_116 affd in part and revd in part on another issue 70_f3d_34 5th cir knuckles v commissioner tcmemo_1964_33 affd 349_f2d_610 10th cir a key question to ask is ‘in lieu of what were the damages awarded ’ robinson v commissioner supra pincite quoting 144_f2d_110 1st cir affg 1_tc_952 we have previously addressed factual scenarios where a settlement has been reached between the parties and there is no express allocation of an amount of the settlement for physical sickness and injuries see pettit v commissioner tcmemo_2008_87 in pettit a dollar_figure settlement was apportioned as follows dollar_figure attributed to lost wages and dollar_figure attributed to emotional distress pain and suffering and other nonwage damages the settlement agreement made no allocation to compensation_for a physical injury or physical sickness and the court made no apportionment of any of the settlement proceeds to a physical injury or physical sickness see also seidel v commissioner tcmemo_2007_45 affd without published opinion aftr 2d ustc par big_number 9th cir written settlement agreement said ‘ petitioner acknowledges that she considers the payment of the check payable to her without withholdings to be compensation_for personal injury ie emotional distress damages only’ but did not specifically allocate any portion of the settlement as paid for a physical injury or physical sickness although petitioner has stated his impression that in reaching a settlement state farm was very concerned about his physical injuries petitioner has not presented any evidence in support of his impression and we are not required to accept petitioner’s self-serving testimony see 87_tc_74 petitioner and his wife alleged seven causes of action in their lawsuit petitioner did not allege physical injury or sickness in his complaint but the settlement agreement is broad and encompasses all possible causes of action including physical injuries however there is no allocation of a specific amount of the settlement as compensation_for physical injuries or physical sickness without such an allocation no amount of the settlement may be excluded from income pettit v commissioner supra seidel v commissioner supra petitioner must report the entire settlement amount as income received in ii failure_to_file addition_to_tax sec_6651 imposes an addition_to_tax for failure_to_file a return when due unless it is shown that such failure is due to reasonable_cause and not due to willful neglect the addition equal sec_5 percent for each month that the return is late not to exceed percent in total the commissioner has the burden of production with respect to the liability of an individual for an addition_to_tax under sec_6651 sec_7491 the burden of showing reasonable_cause under sec_6651 remains on the taxpayer 116_tc_438 to show reasonable_cause petitioner must demonstrate that he exercised ordinary business care and prudence but nevertheless was unable to file his federal_income_tax return by the due_date see 469_us_241 sec_301_6651-1 proced admin regs willful neglect is defined as a conscious intentional failure or reckless indifference united_states v boyle supra pincite petitioner has stipulated that he did not file his federal_income_tax return until date petitioner’s federal_income_tax return was due on date respondent accordingly met his burden of production with regard to the sec_6651 addition_to_tax see sec_7491 higbee v commissioner supra petitioner has neither offered an explanation for his failure to timely file his federal_income_tax return nor produced evidence to establish any reasonable_cause for his failure to timely file this return we sustain respondent’s determination of an addition_to_tax under sec_6651 we have considered all of the contentions and arguments of the parties that are not discussed herein and we find them to be without merit irrelevant or moot to reflect the foregoing decision will be entered for respondent y