PLR: Distributive shares of partnership income from sale of partnership assets is patronage-sourced income
IRS private letter ruling
IRS private letter ruling
The IRS today publicly released a private letter ruling* that responds to a request from a rural telephone cooperative for a ruling that its subsidiaries’ distributive shares of partnership income from a sale of substantially all the partnership’s assets constituted patronage-sourced income. The IRS concluded that the portion of the cooperative’s income that is allocable to the cooperative’s patrons’ use of the subsidiaries’ networks is directly related to securing cellular service for the taxpayer’s patrons and is patronage sourced income.
Read PLR 202326010 [PDF 121 KB] (release date June 30, 2023, and dated April 5, 2023)
* Private letter rulings are taxpayer-specific rulings furnished by the IRS Office of Chief Counsel in response to requests made by taxpayers and can only be relied upon by the taxpayer to whom issued. Pursuant to section 6110(k)(3), written determinations such as private letter rulings are not intended to be relied upon by third parties and may not be cited as precedent. These written determinations may, however, offer an indication of the IRS’s position on the issues addressed.
Summary
The taxpayer (a rural telephone cooperative) at some point in the past was no longer able to report receiving 85% or more of its income from its members and, as a result, now operates as a taxable cooperative corporation.
The taxpayer is the parent and agent of an affiliated group that files a consolidated federal income tax return. The taxpayer wholly owns subsidiary A, which in turn wholly owns subsidiary C. Subsidiaries A and C together owned all of the interests in a partnership that constructed and operated a rural wireless network and also operated retail stores.
The taxpayer decided to exit the wireless business conducted through the partnership and focus on its services delivered through fiber optic cable because it believed it could not effectively compete with other major wireless carriers. As a result, substantially all of the assets of the partnership, including related wireless licenses and equipment held by subsidiary A that were used in the partnership’s business, were sold to three unrelated parties. The taxpayer is using the proceeds from these divestiture transactions to build out its fiber optic local exchange networks, to improve fiber-delivered services to its patrons and other customers, and to focus on its core mission of bringing state-of-the-art telecommunications services to businesses and residents in the rural communities it serves.
The taxpayer requested a ruling that subsidiary A’s and C’s distributive shares of partnership income from the partnership’s sale of substantially all its assets resulting from three separate divestiture transactions constituted patronage-sourced income and, if properly allocated to the taxpayer’s patrons, was excludable from the taxpayer’s consolidated gross income in the tax year of the sale.
The IRS examined the legislative, judicial, and administrative history and concluded that the portion of the taxpayer’s income that is allocable to the taxpayer’s patrons’ use of Subsidiary A’s and C’s networks is directly related to securing cellular service for the taxpayer’s patrons and is patronage sourced income, which may be excluded from the taxpayer’s income if properly allocated to the taxpayer’s patrons.
For more information, contact KPMG National Director of Cooperative Tax Services:
David Antoni | dantoni@kpmg.com
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