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Sale of Taxable Telephone Cooperative’s Subsidiary Generated Patronage-Sourced Income

Many cooperatives obtain interests in other entities or create subsidiaries to facilitate various business objectives.  For example, electric distribution cooperatives regularly form generation and/or transmission cooperatives to procure wholesale power and transmission services.  Other cooperatives create subsidiaries to operate businesses that they could not operate directly (e.g., financing companies, supply cooperatives, and propane gas subsidiaries).

But when the need for such subsidiaries or interests ends, how should a cooperative divest itself of the no-longer-needed interests? This is an important question for both taxable and tax-exempt cooperatives.  For instance, a taxable cooperative could incur substantial gains on the sale of such interests.  And a tax-exempt Section 501(c)(12) cooperative may fail the member-income test if the resulting gain is considered non-member income.

A recent IRS ruling addresses how one taxable telephone cooperative managed to avoid a devastating taxable gain on the sale of its interest in a subsidiary.

Read more about the ruling in the latest AHC Cooperative Tax Brief.