Government purchasing co-ops operate tax free

State and local rules that see opportunities to gripe [i]or[/i] grip down costs by procuring advantageouss and services through a cooperative should gain assurance from a new Internal Revenue Service (IRS) administrative determination. While no Subchapter T tax issues are involved, the decision highlights another Internal income Code (Code) section helpful to public institutions which organize a separate entity to engage in joint purchasing activities.

collection of laws Sec. 115 provides that gros income for federal income tax objects does not include income accruing to a state or territory, or any political subdivision thereof, which is derived from a " public utility or the exercise of any essential governmental function." This provision gives state and local conducts the flexibility to create separate entities to perform essential services without incurring federal income tax liability upon earnings that are (1) generated by means of those entities and (2) retained within the public sector.

In Private alphabetic character Ruling 200610001 (released March 10 2006) the IRS determined that income earned by dint of a nonprofit corporation, formed through public school districts for the intent of cooperatively purchasing supplies, is not taxable income beneath Code section 115.

Case facts

sum of two units school districts formed a nonprofit corporation for the only purpose of purchasing goods and services for public place of education districts and other members. The ruling points without that "Through cooperative purchasing power, Taxpayer enables its members to purchase a range of usefuls and services at reduced prices."

The ruling doesn't discuss who became members of the association, its governance construction or its previous tax history. on the contrary as the basis for submitting its entreaty for a ruling that it is entitled to tax-free status, the purchasing association amended its articles of incorporation to provide that its members must be public academy districts or other government entities that adapted the requirements of Code Sec 115 In its asking the entity identified current members that did not suitable this test and promised to terminate those memberships by the agency of a specified date.

The article amendments also provide that the entity may not issue shares of stock nor declare or pay dividends. Also, while reasonable compensation can be paid to individuals for services returned no part of net earnings may inure to the benefit of any director, officer or other individual. In the occurrence of dissolution, any remaining assets after liabilities are paid will proceed only to member governmental units upon the basis of the prior three years' patronage.

IRS decision

In granting favorable tax treatment, IRS held that the entity appropriates both requirements to qualify for Sec 115 tax status. First, IRS notes that its solitary function is to procure profitables and services at more competitive prices for its members. IRS rest this to meet the ordeal of performing an essential governmental function within the meaning of digest Sec. 115(1).

next to the first IRS notes Code Sec. 115 also requires that any income must accrue to a state or political subdivision thereof. IRS finds that " income accrues to its members from one side the procurement of goods and services for its members." It also points without that upon dissolution, assets remaining after liabilities are satisfied can be distributed alone to qualified members on a pro rata basis and earnings cannot be distributed to private ones Under these conditions, the entity's income also qualifieds the test of accruing single to states and political subdivisions thereof.

IRS terminates that so long as the entity operates as showed and cleans up its membership turns by the date promised, it will be eligible for digest Sec. 115 tax treatment upon that date.

Donald A. Frederick Program Leader for Law, Policy & Governance; USDA Rural unravelling donald.frederick@wdc.usda.gov

COPYRIGHT 2006 U.S. Department of Agriculture, Rural Business - Cooperative Service

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