SECTION 1. TREATMENT OF CERTAIN AMOUNTS RECEIVED BY A COOPERATIVE 
              TELEPHONE COMPANY.

    (a) Nonmember Income.--
            (1) In general.--Paragraph (12) of section 501(c) of the 
        Internal Revenue Code of 1986 (relating to list of exempt 
        organizations) is amended by adding at the end the following 
        new subparagraph:
                    ``(E) In the case of a mutual or cooperative 
                telephone company (hereafter in this subparagraph 
                referred to as the `cooperative'), 50 percent of the 
                income received or accrued directly or indirectly from 
                a nonmember telephone company for the performance of 
                communication services by the cooperative shall be 
                treated for purposes of subparagraph (A) as collected 
                from members of the cooperative for the sole purpose of 
                meeting the losses and expenses of the cooperative.''
            (2) Certain billing and collection service fees not taken 
        into account.--Subparagraph (B) of section 501(c)(12) of such 
        Code is amended by striking ``or'' at the end of clause (iii), 
        by striking the period at the end of clause (iv) and inserting 
        ``, or'', and by adding at the end the following new clause:
                            ``(v) from billing and collection services 
                        performed for a nonmember telephone company.''
            (3) Conforming amendment.--Clause (i) of section 
        501(c)(12)(B) of such Code is amended by inserting before the 
        comma at the end thereof ``, other than income described in 
        subparagraph (E)''.
            (4) Effective date.--The amendments made by this subsection 
        shall apply to amounts received or accrued after December 31, 
        1996.
            (5) No inference as to unrelated business income treatment 
        of billing and collection service fees.--Nothing in the 
        amendments made by this subsection shall be construed to 
        indicate the proper treatment of billing and collection service 
        fees under part III of subchapter F of chapter 1 of the 
        Internal Revenue Code of 1986 (relating to taxation of business 
        income of certain exempt organizations).
    (b) Treatment of Certain Investment Income of Mutual or Cooperative 
Telephone Companies.--
            (1) In general.--Paragraph (12) of section 501(c) of such 
        Code (relating to list of exempt organizations) is amended by 
        adding at the end the following new subparagraph:
                    ``(F) In the case of a mutual or cooperative 
                telephone company, subparagraph (A) shall be applied 
                without taking into account reserve income (as defined 
                in section 512(d)(2)) if such income, when added to 
                other income not collected from members for the sole 
                purpose of meeting losses and expenses, does not exceed 
                35 percent of the company's total income. For the 
                purposes of the preceding sentence, income referred to 
                in subparagraph (B) shall not be taken into account.''
            (2) Portion of investment income subject to unrelated 
        business income tax.--Section 512 of such Code is amended by 
        adding at the end the following new subsection:
    ``(d) Investment Income of Certain Mutual or Cooperative Telephone 
Companies.--
            ``(1) In general.--In determining the unrelated business 
        taxable income of a mutual or cooperative telephone company 
        described in section 501(c)(12)--
                    ``(A) there shall be included, as an item of gross 
                income derived from an unrelated trade or business, 
                reserve income to the extent such reserve income, when 
                added to other income not collected from members for 
                the sole purpose of meeting losses and expenses, 
                exceeds 15 percent of the company's total income, and
                    ``(B) there shall be allowed all deductions 
                directly connected with the portion of the reserve 
                income which is so included.
        For purposes of the preceding sentence, income referred to in 
        section 501(c)(12)(B) shall not be taken into account.
            ``(2) Reserve income.--For purposes of paragraph (1), the 
        term `reserve income' means income--
                    ``(A) which would (but for this subsection) be 
                excluded under subsection (b), and
                    ``(B) which is derived from assets set aside for 
                the repair or replacement of telephone system 
                facilities of such company.''
            (3) Effective date.--The amendments made by this subsection 
        shall apply to amounts received or accrued after December 31, 
        1996.
Amends the Internal Revenue Code with respect to the tax-exempt status of a mutual or cooperative telephone company to provide that 50 percent of the income received from a nonmember telephone company for services by the cooperative shall be treated as collected from members of the cooperative for the sole purpose of meeting the losses and expenses of the cooperative. 
Excludes, in determining the income of a cooperative:  (1) billing and collection services performed for a nonmember telephone company; and (2) certain reserve income that does not exceed 35 percent of the company's total income.  Subjects a portion of such reserve income to unrelated business income tax.
A bill to amend the Internal Revenue Code of 1986 with respect to the treatment of certain amounts received by a cooperative telephone company.