Section of Taxation Publications
  VOL. 55
NO. 2
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
 Tax-Exempt Electric Cooperatives: A Discussion of Issues Relating to the 85% Member Income Requirement
Clayton S. Reynolds

Partner, Orrick, Herrington & Sutcliffe LLP, New York, New York; Trinity College, Cambridge, B.A., 1976; Harvard University, J.D., 1979; NYU Univ. of Law, LLM (Tax), 1987.


Section 501(c)(12) of the Code provides a tax exemption for certain life insurance associations, ditch and irrigation companies, cooperative telephone companies, and other "like organizations" in years during which 85% or more of the entity's "income" consists of "member income" or, more precisely, consists of amounts "collected from members for the sole purpose of meeting losses and expenses" (the "85% Test" or the "Test"). This article examines various questions raised by the 85% Test, viewed primarily from the perspective of electric cooperatives (which qualify as "like" organizations for purposes of section 501(c)(12)).

The 85% Test traces its lineage to the Revenue Act of 1924. However, notwithstanding the Test's long history, there remain uncertainties about the proper interpretation and application of the 85% Test. Several of these issue are addressed in this article, namely: (1) Who are the members of the cooperative? (2) what is the income of the cooperative that must satisfy the 85% Test-gross income, taxable income, gross receipts, or some combination thereof? (3) when is income viewed as having been collected? (4) what constitutes member income-that is, does all income collected from members qualify as member income, or do only specified types of income qualify? (5) must member income be collected for the purpose of meeting current losses and expenses or, instead, can the income be collected to meet future losses and expenses? and (6) must federal income taxes be paid on the entity's nonmember income-that is, does such income constitute per se unrelated business taxable income for purposes of section 512? As the following discussion will show, some of these questions have relatively clear answers, while others do not.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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