5
Petitioner has performed B & C services since it was formed
in 1953. Prior to the divestiture of AT&T in 1984, petitioner
did not separately account for the costs attributable to B & C
services. Rather, these costs were included in a single
aggregate account with all of petitioner's costs of providing
telephone service to its members. Petitioner was then
compensated by the long-distance carrier for all such costs by
retaining an appropriate portion of the toll rates paid by
petitioner's members for long-distance calls.
As a result of the divestiture, the Federal Communications
Commission (FCC) revised the accounting requirements for
telephone cooperatives. Under the new system, billing and
collection revenues were required to be reported separately from
other income sources. Petitioner's operating methods and sources
of revenue remained the same.
Under section 501(c)(12), a cooperative telephone company
qualifies as a tax-exempt entity if at least "85 percent * * * of
the income consists of amounts collected from members for the
sole purpose of meeting losses and expenses." In determining
whether a telephone cooperative has satisfied the 85-percent
test, section 501(c)(12)(B) provides that income received "from a
nonmember telephone company, for the performance of communication
services which involve members" of the cooperative shall not be
taken into account. At issue here is whether B & C services are
"communication services" within section 501(c)(12)(B). If so,
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