Private Letter Ruling 1323006 Released June 7, 2013 Other outcome

PLR 1323006: IRS ruling on redacted gross-income and deduction-timing questions

Apply this to your situation

This page covers one taxpayer's ruling from 2013, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.

About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.

View official IRS release (PDF)

Plain-English summary

The IRS considered a taxpayer's request involving redacted facts about gross income and the proper tax year for a deduction. The released analysis discusses when a receipt is income, when an accrual-method liability is incurred, and when economic performance occurs. It also addresses payments received as a conduit or agent for another person. The taxpayer's specific facts and the conclusions in all three numbered rulings are redacted from the public release, so the document does not disclose the result of those rulings.

Ruling snapshot

Question: How do the gross-income and deduction-timing rules apply to the taxpayer's redacted transaction?
Outcome: Other, the public release redacts the taxpayer's facts and the conclusions of all three rulings.
Key authorities: IRC §§ 61, 162, and 461; Treas. Reg. §§ 1.446-1, 1.461-1, 1.461-4, and 1.461-5

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201323006 Third Party Communication: None
Release Date: 6/7/2013 Date of Communication: Not Applicable
Index Number: 61.00-00; 461.00-00
Person To Contact:
-------------------------- ----------------------------, ID No. --------------
--------------------------------------------------------- -----------------
----------------------------------------------------- Telephone Number:
------------------------------------------ ----------------------
---------------------------------------- Refer Reply To:
CC:ITA:B04
PLR-138563-12
Date:
March 7, 2013

TY: December 31, 2012

Dear -------------------

This letter responds to your request, dated September 6, 2012, for a ruling concerning
whether ---------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

STATEMENT OF FACTS:

---------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------.

---------------------------------------------------------------------------------------------------------------------

PLR-138563-12 2

----------------------------------------1

---------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

APPLICABLE LAW AND ANALYSIS:

Section 61(a) of the Internal Revenue Code generally provides that gross income
means all income from whatever source derived, including (but not limited to):

--------------------------------------------------------------------------------------------------------------------------------------------

PLR-138563-12 3

(1) compensation for services, including fees and similar items; (2) gross income
derived from business; (3) gains derived from dealings in property; and (4) interest.
Section 162(a) provides a deduction for all ordinary and necessary business expenses
paid or incurred during the taxable year in carrying on a trade or business.

Section 461(a) provides that the amount of any deduction or credit is taken for the
taxable year that is the proper taxable year under the method of accounting used in
computing taxable income.

Section 1.461-1(a)(2) of the Income Tax Regulations provides that under an accrual
method of accounting, a liability is incurred, and generally is taken into account for
federal income tax purposes, in the taxable year in which all events have occurred that
establish the fact of the liability, the amount of the liability can be determined with
reasonable accuracy, and economic performance has occurred with respect to the
liability. See also § 1.446-1(c)(1)(ii)(A).

Section 1.461-4(g) provides guidance with respect to certain liabilities for which
payment is economic performance (i.e. payment liabilities). Section 1.461-4(g)(1)(i)
provides, in part, that in the case of liabilities described in paragraphs (g)(2) through
(g)(7) of this section, economic performance occurs when, and to the extent that,
payment is made to the person to which the liability is owed.

Section 1.461-4(g)(7) provides that in the case of a taxpayer’s liability for which
economic performance rules are not provided elsewhere, economic performance occurs
as the taxpayer makes payments in satisfaction of the liability to the person to which the
liability is owed.

Section 1.461-5(a) provides that except as otherwise provided in paragraph (c) of this
section, a taxpayer using an accrual method of accounting may adopt the recurring item
exception described in paragraph (b) of this section as a method of accounting for one
or more types of recurring items incurred by the taxpayer. See also § 461(h)(3).

Section 1.461-5(c) provides that the recurring item exception does not apply to any
liability of a taxpayer described in, among others paragraphs, paragraph (g)(7) (other
liabilities) of § 1.461-4.

In determining what constitutes income, the Supreme Court has stated that § 61(a)
brings within the definition of income any “undeniable accessions to wealth, clearly
realized, and over which the taxpayers have complete dominion.” Commissioner v.
Glenshaw Glass Co., 348 U.S. 426 (1955). See also Burke v. United States, 504 U.S.
229, 233 (1992). The Court has also consistently held that when “a taxpayer acquires
earnings, lawfully or unlawfully, without the consensual recognition, expressed or
implied, of an obligation to repay and without restriction as to their disposition, ‘he has
PLR-138563-12 4

received income….’ “ James v. United States, 366 U.S. 213, 219 (1961), quoting North
American Oil Consolidated v. Burnet, 286 U.S. 417, 424 (1932).

In a more recent case, the Court has held that in “determining whether a taxpayer
enjoys ’complete dominion’ over a given sum, the crucial point is not whether his use of
the funds is unconstrained during some interim period. The key is whether the taxpayer
has some guarantee that he will be allowed to keep the money.” Commissioner v.
Indianapolis Power & Light Co., 493 U.S. 203, 210 (1990).

When a taxpayer receives money or property for someone else’s use or benefit, such
receipt is not income to the taxpayer. In Rev. Rul. 74-321, 1974-2 C.B. 16, a regulated
farm credit production association received credit insurance premiums from
member/borrowers for payment to an insurer. The association also received dividends
from the insurer that were used for the benefit of members to reduce future premiums.
The Service held that neither the payments nor the dividends received by the
association are includible in the income of the association because the payments were
earmarked and retained for the benefit of the member/borrowers, not the association,
from the time received until expended. See also Seven-Up Co. v. Commissioner, 14
T.C. 965 (1950), acq. in result, 1974-2 C.B. 1 (concluding that a manufacturer’s receipt
of funds from participating bottlers for a national advertising campaign was includible in
gross income because the funds benefitted the payors, not the manufacturer).2

Similarly, if a taxpayer receives a payment under a binding legal obligation to remit the
payment to another, or as an agent receiving amounts on behalf of a principal, the
taxpayer is deemed to be a mere conduit of those funds and is not required to include
the payment in income. See Rev. Rul. 76-479, 1976-2 C.B. 20; Rev. Rul. 69-274, 1969-
1 C.B. 36; Rev. Rul. 65-282, 1965-2 C.B. 21 and Rev. Rul. 58-220, 1958-1 C.B. 26, for
instances in which the Service has held that a taxpayer does not have gross income
upon receipt of a payment because the taxpayer receives the payment as a conduit for
the ultimate recipient.

---------------------------------------------------------------------------------------------------------------------

2
The Service acquiesced only in the result of Seven-Up Co. on the ground that the correct party to be
charged with the income (and deductions for the advertising) was an unincorporated association
consisting of the manufacturer and bottlers. The action on decision states that the entity has income in
the amounts contributed by the bottlers because it “has the power to exercise day-to-day business
judgments and to control the details respecting the manner in which the funds shall be expended in
achieving the overall purpose” of the fund. 1973 AOD LEXIS 264 (December 3, 1973). -----------------------

--------------------------------------------------------------------------------------------------------------------------------------------

PLR-138563-12 5

-------------------------------------------------------------------------------------------------------------------3

---------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------- This is supported by Rev. Rul. 74-
321, which concluded that since a credit association acted as an agent for borrowers to collect and pay
insurance premiums and to hold insurance dividends it therefore “is not required to include the payments
by the borrowers or the insurance dividends in its gross income and it is not entitled to a deduction for the
annual premium payment” (emphasis added). In contrast, expenditures are deductible in circumstances
where a determination is made that the taxpayer is not an agent or conduit for the ultimate recipient. See
Rev. Rul. 66-377, 1966-2 C.B. 21 (university faculty members who engage in private practice must report
fees as income since they were not acting as agents of university but may deduct fees they were
contractually required to turn over to the university under § 162 ).
PLR-138563-12 6

---------------------------------------------------------------------------------------------------------------------

RULINGS:

1. -----------------------------------------------------------------------------------------------------

2. ------------------------------------------------------------------------------------------------------------
   --------------------

3. ------------------------------------------------------------------------------------------------------------
   ----------------------------------------------------------------------------

DISCLAIMERS:

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)
of the Code provides that it may not be used or cited as precedent.

You must attach a copy of this letter to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                             Sincerely,



                                             Michael J. Montemurro
                                             Branch Chief, Branch 4
                                             (Income Tax & Accounting)

cc: Internal Revenue Service
Attn: Industry Director, LB&I:F
Financial Services
PLR-138563-12 7

 290 Broadway, 12th Floor
 New York, NY 10007

---------------------------------------------------------------------

-----------------------------------------------

Get today's answer for your situation

You just read what the IRS ruled for one taxpayer in 2013, and it can't be cited as precedent. Ezel checks the current Internal Revenue Code and IRS guidance and answers your specific situation, with citations.

Opens in Ezel Pro. Every answer cites the authority it relies on.

Apply this to your situation

This page covers one taxpayer's ruling from 2013, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

On this page

Document type

Private Letter Ruling

IRS subject

Gross Income v. Not Gross Income; General Rule for Taxable Year of Deduction

Topics

Income and deductions

Code sections

§ 61, § 162, § 461, § 6110

Ruling dated

March 7, 2013

Publicly released

June 7, 2013

View Official PDF