IRS letter ruling - Treatment of electric cooperative’s payout to redeem former members’ capital credits 

June 13:  The IRS publicly posted a private letter ruling (PLR)* to an electric cooperative concerning its proposal for redeeming former members’ capital credits pursuant to a settlement agreement. PLR 201423027 (release date June 6, 2014 and dated March 13, 2014)

*Private letter rulings are taxpayer-specific rulings furnished by the IRS National Office in response to requests made by taxpayers and can only be relied upon by the taxpayer to whom issued. It is important to note that, pursuant to section 6110(k)(3), such items cannot be used or cited as precedent. Nonetheless, such rulings can provide useful information about how the IRS may view certain issues.

Read text of PLR 201423027 [PDF 444 KB]


Former members of an electric cooperative filed suit against the cooperative, to require immediate retirement of capital credits of a member once the member ceased taking electric power from the cooperative. Under a settlement agreement, the cooperative agreed to offset a former member’s bad debt, and then to discount to present value all capital credits and pay out this amount to the former members over a period of time.

The cooperative sought a ruling from the IRS that the proposal in the settlement agreement would not adversely affect its tax-exempt status; that the discounted portion of the former member’s redeemed capital credits would not be included in the cooperative’s income for purposes of the 85% member income test; and that the redemption of the capital credits would be patronage dividends or patronage-sourced income.

The IRS issued a letter ruling that basically granted the requests of the cooperative—i.e., that the settlement proposal would not adversely affect the tax-exempt status, that the discounted portion would not be included in the cooperative’s income for purposes of the 8% member income test, and that the redemption of the former members’ capital credits would be patronage dividends or patronage-sourced income.

For more information, contact KPMG’s National Director of Cooperative Tax Services:

David Antoni, in Philadelphia

(267) 256-1627

Or Associate National Director of KPMG’s Cooperative Tax Services

Brett Huston, in Sacramento

(916) 554-1654

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