Tier I Issue - IRC Section 118 Abuse Directive # 5
LMSB Control No: LMSB 4-0808-041
Impacted IRM 4.51.5
September 15, 2008
MEMORANDUM FOR INDUSTRY DIRECTORS
DIRECTOR, FIELD SPECIALISTS
DIRECTOR, PREFILING AND TECHNICAL GUIDANCE
DIRECTOR, INTERNATIONAL COMPLIANCE
STRATEGY AND POLICY
FROM: Patricia C. Chaback
Communications, Technology and Media
SUBJECT: Tier I Issue: IRC Section 118 Abuse Directive # 5
This directive is intended to provide the field with direction on a Tier I Issue relating to an IRC § 118 abuse concerning bioenergy program (BEP) payments. Some taxpayers contend that BEP payments received from the United States Department of Agriculture (USDA) are excluded from a taxpayer’s gross income as nonshareholder contributions to capital under IRC § 118(a). The intent of this industry director directive is to provide guidance related to the applicability of IRC § 118 to BEP payments.
Taxpayers operating in both corporate and non-corporate forms have taken the position that BEP payments are excludable from income as “contributions to capital” under IRC § 118. The Service has emphasized a consistent tax position that BEP payments are intended to compensate the taxpayer for operating costs incurred as a result of purchases of commodities in the taxpayer’s bioenergy production process and do not qualify for the exclusion from gross income under IRC § 118(a).
Any cases having this issue should use the following UIL and SAIN codes:
Non Shareholder Contribution to Capital for Bio Fuel Subsidies 118.01-04
Basis Adjustment Under Section 362(c) 118.01-03
SAIN and Issue Tracking Attribute Codes (ITAC)
Non Shareholder Contribution to Capital for Bio Fuel Subsidies
Primary SAIN 410 ITAC C188
Basis Adjustment Under Section 362(c)
Primary SAIN 110 ITAC C186
Planning and Examination Guidance
The issue may be identified either on the original return or by claims filed. Absent the filing of a claim, the issue may not be readily apparent. Thus an in-depth examination of a taxpayer’s Schedule M entries is required. Specifically, book-tax differences in income and/or depreciation should be analyzed closely.
Other means of identifying the issue include any of the following:
Key words or phrases used on the tax return such as contribution to capital, inducements, CCC Credits, incentives, subsidies or IRC §118.
A review of BEP Participant Payment Reports, UDSA Bioenergy Program will help to determine whether the taxpayer received BEP payments.
A review of fixed assets for reductions in basis.
Planning and Examination Risk Analysis
This issue should be identified and prioritized using material thresholds and other considerations, such as compliance through the risk analysis process. If the issue is selected for examination, agents must contact the Agriculture Technical Advisor. The contact may be via e-mail (utilizing secure messaging), fax or telephone, and provide the name of the case, taxable periods involved, and the name of the examiner working the issue.
A generic Information Document Request (IDR) specific to bioenergy payments should be issued asking the taxpayer for a list of all IRC § 118 exclusions from income. See attachment for pro forma IDR with a list of information to request.
Direction and assistance on evaluating information gathering may be obtained by contacting the Agriculture Technical Advisor. Once it is determined BEP payments were excluded from income the agent should identify the specific amount of BEP payments at issue and obtain the taxpayer’s written position paper. In addition, an in-depth review of the correlative IRC § 362(c) adjustment should be completed to determine the actual asset basis(es) that were decreased. The agent should ask the taxpayer to provide a spreadsheet(s) or other schedule(s) that identifies (1) the amount of BEP payments received and (2) all correlative asset and cost basis adjustments made under IRC § 362(c) during the tax year.
It is the Service’s position that BEP payments are not designed to compensate the taxpayer for capital asset acquisition. Rather, BEP payments are intended to compensate the taxpayer for operating costs incurred as a result of purchases of commodities in the taxpayer’s bioenergy production process. Consequently, BEP payments do not qualify for the exclusion from gross income under IRC § 118(a), and thus fall within the definition of gross income under IRC § 61(a).
The Service’s position on this issue is reflected in the published Coordinated Issue Paper, Agriculture Industry, LMSB-04-0308-019, effective date: April 8, 2008, "Section 118-Characterization of Bioenergy Program Payments UIL: 118.01-04”. Section 118 - Characterization of Bioenergy Program Payments. The CIP concluded that the payments were gross income under IRC § 61(a) and not non-shareholder capital contributions under IRC § 118(a). Additionally, Appeals Settlement Guidelines are currently being drafted.
Each situation may be factually unique; however the agent must contact the Agriculture Technical Advisor for additional guidance before consideration of any resolution other than full concession by the taxpayer.
Effect on Other Guidance:
Contact Name and Phone Number:
Charles Schaffhauser, Agriculture Industry Technical Advisor, (901) 786-7305.
This Directive is not an official pronouncement of law, and cannot be used, cited, or relied upon as such.
cc: Commissioner, LMSB
Deputy Commissioner, Operations
Deputy Commissioner, International
Division Counsel, LMSB
Director, Performance, Quality, Analysis and Support