[Congressional Record Volume 143, Number 69 (Thursday, May 22, 1997)]
[Senate]
[Pages S5009-S5010]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. DASCHLE (for himself, Mr. Dorgan, Mr. Grassley, Mr. 
        Johnson and Mr. Conrad):
  S. 791. A bill to amend the Internal Revenue Code of 1986 with 
respect to the treatment of certain amounts received by a cooperative 
telephone company; to the Committee on Finance.


          Tax Treatment of Telephone Cooperatives Act of 1997

  Mr. DASCHLE. Mr. President, today I am introducing legislation that 
reaffirms the intent of the U.S. Congress, originally expressed in 
1916, to grant tax exempt status to telephone cooperatives. This 
exemption is now set forth in section 501(c)(12) of the Internal 
Revenue Code.
  I am joined by my distinguished colleagues, Senators Dorgan, 
Grassley, Johnson, and Conrad.
  This legislation is identical to a bill I introduced in the 103d and 
104th Congresses and to a measure that was included in the Revenue Act 
of 1992, which ultimately was vetoed.
  Congress has always understood that a tax exemption is necessary to 
ensure that reliable, universal telephone service is available in rural 
America at a cost that is affordable to the rural consumer. Telephone 
cooperatives are nonprofit entities that provide this service where it 
might otherwise not exist due to the high cost of reaching remote, 
sparsely populated areas.
  The facilities of a telephone cooperative are used to provide both 
local and long distance communications services. Perhaps the most 
important of these for rural users is long distance. Without these 
services, both local and long distance, people in rural areas could not 
communicate with their own neighbors, much less with the world. While 
telephone cooperatives comprise only a small fraction of the U.S. 
telephone industry--about 1 percent--their services are vitally 
important to those who must rely upon them.
  Under Internal Revenue Code section 501(c)(12), a telephone 
cooperative qualifies for tax exemption only if at least 85 percent of 
its gross income consists of amounts collected from members for the 
sole purpose of meeting losses and expenses. Thus, the bulk of the 
revenues must be related to providing services needed by members of the 
cooperative, that is, rural consumers. No more than 15 percent of the 
cooperative's gross income may come from nonmember sources, such as 
property rentals or interest earned on funds on deposit in a bank. For 
purposes of the 85 percent test, certain categories of income are 
deemed neither member nor nonmember income and are excluded from the 
calculation. The reason for the 85 percent test is to ensure that 
cooperatives do not abuse their tax exempt status.

[[Page S5010]]

  A technical advice memorandum [TAM] released by the Internal Revenue 
Service a few years ago threatens to change the way telephone 
cooperatives characterize certain expenses for purposes of the 85 
percent test. If the rationale set forth in the TAM is applied to all 
telephone cooperatives, the majority could lose their tax exempt 
status.
  Specifically, the IRS now appears to take the position that all fees 
received by telephone cooperatives from long distance companies for use 
of the local lines must be excluded from the 85 percent test and that 
fees received for billing and collection services performed by 
cooperatives on behalf of long distance companies constitute nonmember 
income to the cooperative.
  The legislation I am introducing today would clarify that access 
revenues paid by long distance companies to telephone cooperatives are 
to be counted as member revenues, so long as they are related to long 
distance calls paid for by members of the cooperative. In addition, the 
legislation would indicate that billing and collection fees are to be 
excluded entirely from the 85 percent test calculation.
  Mr. President, it is no secret that mere distance is the single most 
important obstacle to rural development. In the telecommunications 
industry today, we have the ability to bridge distances more 
effectively than ever before. Technology in this area has advanced at 
an incredible pace; however, maintaining and upgrading the rural 
telecommunications infrastructure is an exceedingly expensive 
proposition. We must do all we can to encourage this development, and 
ensuring that telephone cooperatives retain their legitimate tax exempt 
status is a vital step toward this goal. I believe that providing 
access to customers for long distance calls as well as billing and 
collecting for those calls on behalf of the cooperative's members and 
long distance companies are indisputably part of the exempt function of 
providing telephone service, especially to rural communities. The 
nature and function of telephone cooperatives have not materially 
changed since 1916, and neither should the formula upon which they rely 
to obtain tax exempt status.

  In the 104th Congress, the Joint Committee on Taxation estimated the 
cost of this legislation to be $61 million over a 6-year period. At the 
appropriate time, I will recommend appropriate offsets to cover the 
cost of this measure over the 10-year period required under the Budget 
Act.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 791

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. TREATMENT OF CERTAIN AMOUNTS RECEIVED BY A 
                   COOPERATIVE TELEPHONE COMPANY.

       (a) Nonmember Income.--
       (1) In general.--Paragraph (12) of section 501(c) of the 
     Internal Revenue Code of 1986 (relating to list of exempt 
     organizations) is amended by adding at the end the following 
     new subparagraph:
       ``(E) In the case of a mutual or cooperative telephone 
     company (hereafter in this subparagraph referred to as the 
     `cooperative'), 50 percent of the income received or accrued 
     directly or indirectly from a nonmember telephone company for 
     the performance of communication services by the cooperative 
     shall be treated for purposes of subparagraph (A) as 
     collected from members of the cooperative for the sole 
     purpose of meeting the losses and expenses of the 
     cooperative.''
       (2) Certain billing and collection service fees not taken 
     into account.--Subparagraph (B) of section 501(c)(12) of such 
     Code is amended by striking ``or'' at the end of clause 
     (iii), by striking the period at the end of clause (iv) and 
     inserting ``, or'', and by adding at the end the following 
     new clause:
       ``(v) from billing and collection services performed for a 
     nonmember telephone company.''
       (3) Conforming amendment.--Clause (i) of section 
     501(c)(12)(B) of such Code is amended by inserting before the 
     comma at the end thereof ``, other than income described in 
     subparagraph (E)''.
       (4) Effective date.--The amendments made by this subsection 
     shall apply to amounts received or accrued after December 31, 
     1996.
       (5) No inference as to unrelated business income treatment 
     of billing and collection service fees.--Nothing in the 
     amendments made by this subsection shall be construed to 
     indicate the proper treatment of billing and collection 
     service fees under part III of subchapter F of chapter 1 of 
     the Internal Revenue Code of 1986 (relating to taxation of 
     business income of certain exempt organizations).
       (b) Treatment of Certain Investment Income of Mutual or 
     Cooperative Telephone Companies.--
       (1) In general.--Paragraph (12) of section 501(c) of such 
     Code (relating to list of exempt organizations) is amended by 
     adding at the end the following new subparagraph:
       ``(F) In the case of a mutual or cooperative telephone 
     company, subparagraph (A) shall be applied without taking 
     into account reserve income (as defined in section 512(d)(2)) 
     if such income, when added to other income not collected from 
     members for the sole purpose of meeting losses and expenses, 
     does not exceed 35 percent of the company's total income. For 
     the purposes of the preceding sentence, income referred to in 
     subparagraph (B) shall not be taken into account.''
       (2) Portion of investment income subject to unrelated 
     business income tax.--Section 512 of such Code is amended by 
     adding at the end the following new subsection:
       ``(d) Investment Income of Certain Mutual or Cooperative 
     Telephone Companies.--
       ``(1) In general.--In determining the unrelated business 
     taxable income of a mutual or cooperative telephone company 
     described in section 501(c)(12)--
       ``(A) there shall be included, as an item of gross income 
     derived from an unrelated trade or business, reserve income 
     to the extent such reserve income, when added to other income 
     not collected from members for the sole purpose of meeting 
     losses and expenses, exceeds 15 percent of the company's 
     total income, and
       ``(B) there shall be allowed all deductions directly 
     connected with the portion of the reserve income which is so 
     included.
       For purposes of the preceding sentence, income referred to 
     in section 501(c)(12)(B) shall not be taken into account.
       ``(2) Reserve income.--For purposes of paragraph (1), the 
     term `reserve income' means income--
       ``(A) which would (but for this subsection) be excluded 
     under subsection (b), and
       ``(B) which is derived from assets set aside for the repair 
     or replacement of telephone system facilities of such 
     company.''
       (3) Effective date.--The amendments made by this subsection 
     shall apply to amounts received or accrued after December 31, 
     1996.
                                 ______