Cooperative Tax Consequences Essay

2804 words - 12 pages

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 ...view middle of the document...

eeca.coop, 2009). In the 1930’s, the United States was in the middle of the Great Depression and many people were unemployed. Because the rural areas did not provide profits for utility companies, nine out of ten rural homes and farms were operating without electricity (NRECA.org, 2010) unless they paid several thousand dollars per mile of line to bring it to their homes along with increased electric rates each month.
As a means of providing assistances to rural America, President Roosevelt signed Executive Order No. 7037 and passed the Rural Electrification Act (REA) in the mid-1930’s. Even with this assistance, executives from the utility companies made arguments against providing power beyond the urban boundaries. Since the power companies did not take advantage of the $410,000,000 in loans available, the second administrator, John Carmody arranged for rural Americans to take the initiative themselves and form electric cooperatives.
The people united to form cooperatives in order to bring power at the lowest possible cost so that everyone could benefit from having power (English, 2003) and to improve the lives of all members. Over the next twenty years, the majority of the electric cooperatives were founded; becoming mainstays in their local communities and contributing greatly in the growth and successes of their areas.
On its own, each cooperative is a relatively small utility company. But, as a group they are the largest electric utility network in the nation which covers about three-quarters of the area of the United States. With support and financing by the REA, member-owned cooperatives were formed and have been able to provide electric services for seventy years.
History of Cooperative Tax Structure
Due to the effectiveness of cooperatives in Europe, like Rochdale Cooperative, the United States Congress encouraged their formation in the 1800’s. Even before income taxes, The War Revenue Act of 1898, Pub. L. No 55-144, 30 State. 448 excluded cooperatives from excise taxation (Gould, 1898 and http://IRS.gov). In 1916 when the Sixteenth Amendment was ratified, cooperatives were exempted from federal income taxes. While electric cooperatives were not specifically listed, they were recognized by the Internal Revenue Service as “like organizations” created under IRC 501(c)(12).
To be organized as a 501(c)(12) company, the IRS website states that organizations must meet the organizational and operational requirements as well as the income requirements. Furthermore, in the case of Puget Sound Plywood, Inc. v. Commissioner, 44 T.C. 305 (1966), acq. 1966-2 C.B. 6, the U.S. Tax Court added the descriptions for “democratic control”, “operating at cost”, and “subordination of capital” in order to define the organizational and operational requirements. For this research paper, the key term is “operating at cost”; defined as “the organization must allocate all excess operating revenues (excess of revenue over expenses) among...

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