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

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.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Jennie S. Stathis Team: General Accounting Office: General Government Division Phone: (202) 512-5407