RULING ON RURAL TELEPHONE CO-OPS PROSPECTIVE; TAX PAYMENTS MADE ON RETROACTIVE APPLICATION REFUNDABLE.

Notice 92-33

PURPOSE: The purpose of this notice by the Internal Revenue Service is to clarify the implementation of its position with respect to certain types of income received by cooperative telephone companies that are, or have been, exempt from federal income tax under section 501(c)(12)(A) of the Internal Revenue Code.

SERVICE POSITION: In a technical advice memorandum issued to a cooperative telephone company last year, the Service held that income received from charges to third parties such as interexchange carriers, local exchange carriers, or other exchange carriers for billing or collecting intrastate, interstate, or international revenues is income from the provision of a service to nonmembers. Thus, such income is neither excludable pursuant to section 501(c)(12)(B)(i) from the computation of the percentage of non-member income for purposes of the requirement that such exempt cooperatives receive no less than 85% of their income from members, nor is it member-source income under section 501(c)(12)(A). A cooperative telephone company that receives 15% or more of its income from non- member sources in any tax year is not exempt from federal income tax for that year.

The technical advice memorandum held further that such income constitutes income from the regular conduct of an unrelated trade or business, as defined in sections 512 and 513. Consequently, in the event that such non-member income does not, in combination with other non-member source income, exceed 15% of the cooperative's income for the tax year, the cooperative's exempt status is not withdrawn, but the net income from such billing and collection services is subject to the tax on unrelated business income that is imposed by section 511 on such income of nearly all organizations that are otherwise exempt from tax under any of the paragraphs of section 501.

ACTION: The Service proposes to apply these positions to all cooperative telephone companies similarly situated for all tax years beginning after December 31, 1990.

Any formerly exempt telephone cooperatives that have filed and paid tax as taxable entities, whether voluntarily or as a result of audit action by the Service, solely as a consequence of the above- described ruling, for any years beginning before December 31, 1990, are invited to file claims for refund of the taxes, interest, and penalties paid for those years. Likewise, any exempt telephone cooperatives that have paid unrelated business income tax solely as a result of the ruling may file claims for refund for those years.

In order to avoid possible penalties for failure to file or pay quarterly estimated taxes for all taxable years beginning after December 31, 1990, telephone cooperatives that as a consequence of this ruling no longer meet the 85% member income test, or that become subject to unrelated business income tax because of this ruling, must have made the appropriate installment payments of estimated taxes.

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

FOR FURTHER INFORMATION: Information concerning the application of the Service's positions may be obtained by calling Edward Karcher, (202) 566-3376, or after July 31, 1992, (202) 622-8041, or Kenneth Earnest, (202) 566-3376, or after July 31, 1992, (202) 622-7647 (not toll-free numbers).