Taxpayer is a cooperative whose membership is limited to municipalities, counties (or political subdivisions thereof), or any other entity that is exempt from Federal income tax under Code sec. 115(1).  The co-op was formed to own and operate electric generation facilities and procure other energy-related goods or services at competitive prices to its members.

IRS has issued a letter ruling favorable to the cooperative on three issues important to co-ops of State and local government entities (Ltr 200836005, dated May 29, 2008, released September 5, 2008):

1.  Income derived from the cooperative is exempt from tax at the member level under I.R. Code sec. 115(1), which provides gross income of State and local governments "…does not include income derived from any public utility or the exercise of any essential governmental function and accruing to a State or any political subdivision thereof…"
2.  Contributions to the cooperative are deductible by the donor as "charitable contributions" to a State or local government if made exclusively public purposes, pursuant to Code sec. 170.

3.  Bonds issued by the cooperative are eligible to be treated as bonds issued by its local government members, so interest received by bold holders is exempt from Federal income taxation under Code sec. 103 and Treas. Reg. 1.103-1(b).

This ruling reminds us that as State and local governments struggle with tight budgets, cooperatives offer them an efficient and low-cost way to provide valuable services to their citizens.

NSAC wishes to thank KPMG for calling this development to our attention. The full text of this letter ruling is available at http://www.irs.gov/pub/irs-wd/0836005.pdf.