Cooperative Tax Consequences

Running Head: Electric Cooperative Tax Status

Tax Research:

Effects of Non-Member Income for Electric Cooperatives

Kari Miller

Metropolitan State University

Accounting 530: Business Taxation

Professor Grover Cleveland

November 23, 2010

Executive Summary

About 80 years ago, government agencies realized that rural America had a need for affordable electricity. As a way of assisting the power companies in building the needed infrastructure to these areas, Congress set aside loan funds for them. Unfortunately, the power companies did not want to join in this seemingly unprofitable undertaking. The people then united to form electric cooperatives in order to bring power at the lowest possible cost to the rest of Americans.

Recognizing that cooperatives were a unique type of organization, Congress created special tax rules for them. It is important that cooperative managers understand how these rules affect the tax situations at hand. In order to help managers in this endeavor, the following questions will be answered:

• Who are the cooperative members?

• What is the 85 percent member revenue test?

• What revenue sources qualify as member income?

• What is a “like organization”?

• What is non-member income?

• What income is excluded from member revenue test?

• What are the consequences for failing the member revenue test?

Starting with the history of cooperatives and their tax structure, we will review the federal tax exemption to see what issues have come up and how the IRS and tax courts have handled them. Finally, we will see if there is tax planning that can be done to put the cooperative in the best tax situation with the least amount of tax liability.

History of Cooperatives

Similar to the Rochdale Cooperative formed in Rochdale, England in the 1800’s, electric cooperatives of rural America were formed because the members had a need that...