DESCRIPTION OF H.R. 4220, 

THE “WATER AND AGRICULTURE TAX REFORM ACT OF 2015”

Scheduled for Markup 

by the 

HOUSE COMMITTEE ON WAYS AND MEANS 

on September 14, 2016 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

September 13, 2016 

JCX-82-16
i 

CONTENTS 

Page 

INTRODUCTION .......................................................................................................................... 1

A. Modify Tax Exemption Requirements for Mutual Ditch or Irrigation Companies ............ 2

B. Estimated Revenue Effect ................................................................................................... 4
1 

INTRODUCTION 

The House Committee on Ways and Means has scheduled a committee markup of 

H.R. 4220, the “Water and Agriculture Tax Reform Act of 2015,” on September 14, 2016. This 

document,1

 prepared by the staff of the Joint Committee on Taxation, provides a description of 

the bill. 

 1

 This document may be cited as follows: Joint Committee on Taxation, Description of H.R. 4220, the 

“Water and Agriculture Tax Reform Act of 2015” (JCX-82-16), September 13, 2016. This document can also be 

found on the Joint Committee on Taxation website at www.jct.gov. All section references herein are to the Internal 

Revenue Code of 1986, as amended, unless otherwise stated. 
2 

A. Modify Tax Exemption Requirements for Mutual Ditch 

or Irrigation Companies 

Present Law 

Under section 501(c)(12), certain mutual or cooperative organizations are exempt from 

Federal income tax under section 501(a), provided that certain requirements are satisfied. These 

organizations include: (1) benevolent life insurance associations of a purely local character; (2) 

mutual ditch or irrigation companies; (3) mutual or cooperative telephone companies; and (4) 

like organizations of organizations described in (1), (2), or (3).2 

To qualify for exemption under section 501(c)(12), at least 85 percent of the 

organization's income must consist of amounts collected from members for the sole purpose of 

meeting losses and expenses.3

 The 85-percent test is applied on a year-by-year basis. If an 

organization fails to satisfy the test for a year, it does not qualify for exemption for that particular 

year; it may, however, continue to qualify for exemption for any year for which the 85-percent 

test is satisfied. Present law includes special rules regarding the treatment of certain specific 

types of income under the 85-percent test for mutual or cooperative electric and telephone 

companies, but not for other types of organizations described in section 501(c)(12).4

The IRS takes the position that mutual or cooperative organizations described in section 

501(c)(12) also must comply with fundamental cooperative principles.5 Although not defined by 

statute or regulation, the two principal criteria for determining whether an entity is operating on a 

cooperative basis are: (1) ownership of the cooperative by persons who patronize the 

cooperative; and (2) return of earnings to patrons in proportion to their patronage. The IRS 

requires that cooperatives must operate under the following principles: (1) subordination of 

capital in control over the cooperative undertaking and in ownership of the financial benefits 

from ownership; (2) democratic control by the members of the cooperative; (3) vesting in and 

allocation among the members of all excess of operating revenues over the expenses incurred to 

 2

 In general, the cooperative tax rules of subchapter T (sections 1381-1388 of the Code) apply to any 

corporation operating on a cooperative basis (except mutual savings banks, insurance companies, certain tax exempt 

organizations (such as those described in section 501(c)(12)), and certain utilities), including tax-exempt farmers' 

cooperatives (described in section 521(b)). Except for section 521 tax-exempt farmers’ cooperatives, cooperatives 

that are subject to the cooperative tax rules of subchapter T of the Code are permitted a deduction for patronage 

dividends from their taxable income only to the extent of net income that is derived from transactions with patrons 

who are members of the cooperative. Sec. 1382. The availability of such deductions from taxable income has the 

effect of allowing the cooperative to be treated like a conduit with respect to profits derived from transactions with 

patrons who are members of the cooperative. Unlike subchapter T cooperatives, a section 501(c)(12) mutual or 

cooperative organization generally is exempt from Federal income tax, but pays tax on certain income derived from 

trade or business activities unrelated to the organization’s exempt purposes (unrelated business taxable income, or 

UBTI). 

3

 Sec. 501(c)(12)(A). 

4

 See secs. 501(c)(12)(B)-(H). 

5

 See Rev. Rul. 72-36, 1972-1 C.B. 151. 
3 

generate revenues in proportion to their participation in the cooperative (patronage); and (4) 

operation at cost (not operating for profit or below cost). Regarding the requirement of 

democratic control, the IRS has stated that the election of officers must be on a one member, one 

vote basis (not, for example, in proportion to share ownership in a corporation).6

Description of Proposal 

The proposal provides that certain income received or accrued by a mutual ditch or 

irrigation company, or by a like organization to a mutual ditch or irrigation company, generally 

is not taken into account for purposes of applying the 85-percent-of-member-income test. The 

rule applies to income received or accrued from: (1) the sale, lease, or exchange of fee or other 

interest in real and personal property, including interests in water; (2) the sale or exchange of 

stock in a mutual ditch or irrigation company (or a like organization to a mutual ditch or 

irrigation company) or contract rights for the delivery or use of water; or (3) the investment of 

proceeds from sales, leases, or exchanges under (1) or (2). 

Notwithstanding this general rule, any such income that is distributed or expended for 

expenses (other than for operations, maintenance, and capital improvements) of the mutual ditch 

or irrigation company or like organization is treated as non-member income for purposes of the 

85-percent test in the year in which it is distributed or expended. For this purpose, “expenses 

(other than for operations, maintenance, and capital improvements)” include expenses for the 

construction of conveyances designed to deliver water outside of the mutual ditch or irrigation 

company or like organization system. 

The proposal also provides a special rule for mutual ditch or irrigation companies (and 

like organizations to mutual ditch or irrigation companies) regarding organization governance. 

Under this special rule, where State law provides that such a company or organization may be 

organized in a manner that permits voting on a basis that is pro rata to share ownership on 

corporate governance matters, an organization's qualification as a mutual ditch or irrigation 

company (or a like organization to a mutual ditch or irrigation company) is determined without 

taking into account whether its member shareholders have one vote on corporate governance 

matters per share held in the corporation. This portion of the proposal, however, shall not be 

construed as giving rise to an inference regarding the requirements for organizations other than 

mutual ditch or irrigation companies (or like organizations to mutual ditch or irrigation 

companies). 

Effective Date 

The proposal is effective for taxable years beginning after the date of enactment. 

 

 6

 See, e.g., I.R.M. sec. 7.25.12.5 (Rev. August 9, 2006) (citing Puget Sound Plywood, Inc. v. 

Commissioner, 44 T.C. 305 (1966), acq., 1966-2 C.B. 6). 
4 

B. Estimated Revenue Effect 

Fiscal Years 

[Millions of Dollars] 

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-21 2017-26 

 

-3 -4 -4 -4 -4 -4 -4 -4 -4 -5 -18 -40 

NOTE: Details do not add to totals due to rounding.