Legislation Needed To Improve Administration of Tax Exemption Provisions for Electric Cooperatives

GGD-83-7: Published: Jan 5, 1983. Publicly Released: Jan 5, 1983.

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GAO reviewed the changes that have occurred in some tax-exempt electric cooperatives since they were first granted tax-exempt status and the difficulty that the Internal Revenue Service (IRS) has had in attempting to apply the broad tax exemption provisions of the Internal Revenue Code to cooperatives.

GAO found that, since electric cooperatives were granted tax-exempt status almost 60 years ago, the operations of many cooperatives and the environment in which they do business have changed substantially. Originally, most electric cooperatives were small associations which distributed electricity to sparsely populated rural areas. Today, many electric cooperatives serve both rural and suburban areas, and their operations and activities closely resemble those of investor-owned utility companies. Some electric cooperatives have expanded their activities to form subsidiaries or associations which generate power, provide financing, own or lease coal mining properties, procure fuel and supplies, and provide ancillary business services. Consequently, many cooperatives have been able to accumulate and retain substantial amounts of member equity or capital. Because the law generally exempts all electric cooperatives regardless of the differences in their operations and activities, financial condition, size, or mix of consumers served, GAO has proposed alternatives to the present law, which would modify the cooperatives' nonmember income allowance or eliminate that allowance and apply tax rules, which are already applicable to other types of cooperatives. These alternatives would have an estimated revenue impact ranging from $2 to $45 million.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress had not yet addressed this issue and no action was pending as of October 31, 1987; therefore, this recommendation should be dropped.

    Matter: Congress should establish a tax treatment which better addresses electric cooperatives' present operating environment.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The recommendation was contingent on the issuance of IRS regulations. IRS proposed these regulations through the Department of the Treasury, which solicited public comments. IRS adopted a position that any intended change in this computation of member and nonmember income was inappropriate. Since the GAO proposal was based on a change in this position, it will not be adopted by IRS.

    Recommendation: The Commissioner of Internal Revenue should provide more complete guidance to assist electric cooperatives and other section 501(c)(12) organizations in complying with the 85-percent member income requirement of the law and to assist IRS examiners in determining compliance with this requirement. At a minimum, such guidance should address those issues that affect the computation of member and nonmember income.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: This recommendation was contingent on the issuance of IRS regulations. IRS proposed the regulations through Treasury, which solicited public comments. IRS will not issue regulations, as initially intended. Since this recommendation was based on the issuance of the regulations, the issue is moot. IRS revised its 990 Instructions and contends that both the form and instruction are adequate.

    Recommendation: The Commissioner of Internal Revenue should direct the Tax Forms Coordinating Committee to examine the need for revisions to the exempt organization return (Form 990), and the need to include a supplementary schedule to provide the format necessary for section 501(c)(12) organizations to properly account for their member and nonmember income and compute the percentage of gross income collected from members.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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