Internal Revenue Service
Revenue Ruling
Rev. Rul. 65-99
1965-1 C.B. 242
Sec. 453
Sec. 501
IRS Headnote
A cooperative exempt from Federal income tax under section 501(a) of the
Internal Revenue Code of 1954 as an organization described in section
501(c)(12), sold its office building under a valid installment sale
transaction from which it realized a long-term gain of 100 x dollars. Held
, in determining whether the organization meets the 85 percent income from
members requirement of section 501(c)(12), the amount of the gain that the
organization is required to include in its income for the annual accounting
period involved, is the income portion of the installment payment actually
received during that period.
Full Text
Rev. Rul. 65-99
Advice has been requested whether an installment sale transaction engaged
in by an electric cooperative exempt from Federal income tax as an
organization described in section 501(c)(12) of the Internal Revenue Code
of 1954, would adversely affect the organization's exempt status under
circumstances described herein.
The cooperative sold its office building under a valid installment sale
transaction for an amount which resulted in a long-term gain of 100 x
dollars . The organization received a down payment in the year of sale of
30 percent of the selling price and is to receive the balance in two equal
installments, one in each of the 2 years following the year of sale. On
Form 990, Return of Organization Exempt From Income Tax, filed by the
organization for the year in which the sale occurred, the election was made
to report the transaction on the installment method.
Section 453 of the Code provides, in part, that income from the sale or
other disposition of real property may be returned on the installment
method only if in the taxable year of the sale or other disposition there
are no payments, or the payments (exclusive of evidences of indebtedness of
the purchaser) do not exceed 30 percent of the selling price. Under the
installment method, a person may return as income in any taxable year that
proportion of the installment payments actually received in that year which
the gross profit, realized or to be realized when payment is completed,
bears to the total contract price.
Section 501(c) of the Code describes certain organizations exempt from
Federal income tax under section 501(a) and as pertinent here provides, in
part, as follows:
(12) * * *, mutual ditch or irrigation companies, mutual or cooperative
telephone companies, or like organizations; but only if 85 percent or more
of the income consists of amounts collected from members for the sole
purpose of meeting losses and expenses.
The 85 percent income requirement of the above statute is applied on the
basis of annual accounting periods.
Since the sale of the property in this case is a valid installment sale
transaction for purposes of section 453 of the Code, it is concluded that
the amount to be taken into consideration for the purpose of the 85 percent
member income provision of section 501(c)(12) of the Code is the income
portion of each installment payment actually received during a particular
year or annual accounting period. Only the amount representing the income
portion of the annual installment payments is includible (as income from
other than members) in determining whether the organization meets the 85
percent of income requirement for the year or annual accounting period
involved.
However, if for any year the income received from the transaction, together
with other nonmember income, causes the organization's income from members
for the year to fall below 85 percent, the organization is required to file
a corporation income tax return, Form 1120, for that year.
