IRS written determination 201430018

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Number: 201430018
Release Date: 7/25/2014
Date: April 28, 2014
UIL: 501.06-00; 513.00-00
Dear
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:
This letter
is in reference to your request from your authorized representative. You are
requesting rulings whether your establishment of a central counterparty structure, pursuant to
which you will become the central counterparty to transactions that take place
in the markets
you administer, will affect your status as an organization described
in I.R.C. § 501 (c)(6) or will
give rise to income from an unrelated trade or business within the meaning
of§ 513(a).
Facts:
You are recognized as an organization exempt from federal income tax
under§ 501 (c)(6). You
are organized and operated for the purpose
of improving the business conditions of the power
and electricity line of business with the meaning of Treas. Reg. § 1.501 (c)(6)-1. You are
mandated by the Federal Energy Regulatory Committee (FERC) to ensure reliable supplies of
power, adequate transmission infrastructure, and competitive wholesale prices of electricity.
You are designated as a regional transmission organization (RTO) by FERC.
FERC is responsible for regulating the transmission and wholesale sale
of electric energy in
interstate commerce to ensure reliability of electric service, nondiscriminatory access to
transmission facilities, and that rates charged are reasonable. Prior to your creation, FERC
directly regulated the vertically integrated utilities that owned generation, transmission, and
distribution facilities
in your region.
As part of the process
of deregulation and the introduction of market competition into the
wholesale electricity market, FERC charged you with providing independent, open and fair
access to electricity transmission systems, facilitating market-based wholesale electricity rates,
and ensuring effective and reliable management and operation
of the bulk power system in your
region. This includes the responsibility of ensuring that rates charged for transmission and the
wholesale sale
of electric energy are reasonable.
In furtherance of your responsibilities, you administer markets for the wholesale purchase and
sale
of electric energy and related products and services. In order to cover your operating

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expenses, you collect fees from the producers and wholesale purchasers of electric power in
your region. These fees as well as the rules and procedures for the electricity markets you
administer are set forth
in your tariffs, which must be approved by FERC. The contracts,
agreements or transactions offered under your FERC-approved tariffs are for the wholesale
purchase and sale of electric energy and related products and services (during the first calendar
quarter next year, you plan to begin offering related financial transactions, which do not involve
physical delivery of electricity).
Currently, you administer a real-time energy imbalance market whereby market participants can
compare real-time prices from many sources to make the most cost-effective decisions to
purchase or
sell energy into the market. Additionally, you settle the various positions of the
market participants on
an aggregate basis and both collect and remit payments to the market
participants on a weekly basis. While you act as the administrator of the markets, clearing and
settling purchases and sales by market participants, you currently do not take title to the electric
energy or related products and services purchased and sold
in the markets.
Additionally, you have been approved by FERC to develop and administer additional, more
advanced markets which will provide additional benefits to current and new market participants.
You are currently
in the development stage and have received conditional approval from FERC
of tariff changes to
implement your new market.
FERC monitors the credit practices of the wholesale electric markets.
In its order No. 7 41,
"Credit Reforms in Organized Wholesale Electric Markets," (Oct. 21, 201 0), 133 FERC 1J61 ,060,
and its Order No. 7 41-A
"Credit Reforms in Organized Wholesale Electric Markets," (Feb. 17,
2011 ).134 FERC
1J61, 126, FERC raised a question about the ability of an RTO or an
independent system operator
(ISO}, in the event of the bankruptcy or a market participant, to set
off
or net the market positions of the bankrupt market participant. FERC's concern is that an
ISO or RTO might not satisfy the "mutuality" requirement for setoff when those obligations are
based upon different purchase and sale transactions because there is potential ambiguity as to
the role
of the ISO and RTO in the transactions. FERC therefore directed you (as well as other
ISOs and RTOs) to submit a compliance filing with a proposed tariff revision that includes one or
the following options:
1. establish yourself as a central counterparty to transactions with market participants;
2. require market participants to provide a security interest in their transactions in order to
establish collateral requirements based on net exposure;
3. propose another alternative, which provides the same degree of protection as the two
above-mentioned methods; or
4. choose none of the three above alternatives and instead establish credit requirements
for market participants based on their gross obligations.
In response to the specific FERC orders above, you intend to pursue option 1: tariff
amendments proposing to establish yourself as the central counterparty to all transactions that
take place
in the new market you will administer. Specifically, you will take title to the electric
energy and related products purchased and sold in the markets. You represent that your role
as central counterparty will not affect the clearing price, because the prices you pay to providers
will exactly match the prices you receive from the sellers. You concluded that option 1 is the

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best balance between (i) fostering market liquidity and efficiency; and (ii) minimizing the risk of
defaults. All transactions
in which you engage will be pursuant to a FERC-approved tariff. The
revisions to the tariff establishing you as centr4al counterparty will
be filed with FERC and will
go into effect only if approved by FERC.
You have represented that your proposed activities as the central counterparty to transactions
in
the markets you administer (i) will not require an amendment to any of your organizing
documents or any change
in your organization; (ii) will require only minor revisions to your
FERC-approved tariff; (iii)
will result
in no net profit or loss to you; and (iv) will not directly affect
market clearing prices for electric energy and related products and services in the wholesale
electric markets you administer. You have also represented that you are not aware of any
statute or
law that prohibits a government from acting as or performing the functions of an RTO,
and that your operations will not change materially following your assumption of the central
counterparty role.
Rulings Requested:
1. Your establishment and implementation of a central counterparty structure pursuant
to which you will become the central counterparty to transactions consummated through
the markets you administer will not adversely affect your status as an organization
exempt from
federal income tax under §
501 ( c)(6).
2. The revenues you receive by virtue of being the central counterparty to transactions
consummated through the markets you administer will not be classified
as income from
an unrelated trade or business within the meaning
of§ 513(a).
Law:
I.R.C. §
501 (c)(6) provides for the exemption from federal income tax of business leagues,
chambers of commerce, real-estate boards, boards of trade, or professional football leagues
(whether or not administering a pension fund for football players), not organized for profit and no
part
of the net earnings of which inures to the benefit of any private shareholder or individual.
I.R.C. §
511 (a)(1) imposes a tax on the unrelated business taxable income of organizations
described
in § 501 ( c)(6).
I. R. C. § 512( a)( 1) states that the term "unrelated business taxable income" means the gross
income derived by any organization from any unrelated trade or business (as defined
in § 513)
regularly carried on by
it, less the applicable deductions, and computed with the modifications in
§ 512(b).
I.R.C. § 513(a) provides that the term "unrelated trade or business" means,
in the case of any
organization subject to the tax imposed by § 511, any trade or business the conduct of which is
not
substantially related (aside from the need of such organization for income or funds or the
use it makes of the profits derived) to the exercise or performance by such organization
of the
purpose or function constituting the basis for its exemption under §
501.

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Treas. Reg. § 1.501 (c)(6)-1 provides that a business league is an association of persons having
some common business interest, the purpose of which
is to promote such common interest and
not to engage
in a regular business of a kind ordinarily carried on for profit. It is an organization
of the same general class as a chamber of commerce or board of trade. Thus, its activities
should be directed to the improvement of business conditions of one or more lines of business
as distinguished
from the performance of particular services for individual persons.
Treas. Reg. § 1.513-1 (d)(1) provides,
in general, that gross income derives from "unrelated
trade or business," within the meaning
of§ 513(a), if the conduct of the trade or business which
produces the income
is not substantially related (other than through the production of funds) to
the purposes for which exemption is granted.
Treas. Reg. § 1.513-1 (d)(2) provides that trade or business is
"related" to exempt purposes,
in
the relevant sense, only where the conduct of the business activities has causal relationship to
the achievement of exempt purposes (other than through the production of income); and it is
"substantially related," for purposes
of§ 513, only if the causal relationship is a substantial one.
Thus, for the conduct of trade or business from which a particular amount of gross income is
derived to be substantially
related to purposes for which exemption is granted, the production or
distribution of the goods or the performance of the services from which the gross income is
derived must contribute importantly to the accomplishment of those purposes.
Analysis:
Ruling 1
As an RTO for your particular region, you improve the business conditions of the power and
electricity line of business by being responsible for administering the market-based regulation
of
the wholesale electricity market and ensuring that rates charged for transmission and sale of
electric energy are reasonable. Pursuant to FERC's mandate, you ensure reliable supplies
of
power, adequate transmission infrastructure, and competitive wholesale prices of electricity.
Your establishment and implementation of a central counterparty structure pursuant to which
you
will become the central counterparty to transactions
in the markets you administer, is a
response to credit reforms mandated
in FERC Order Nos. 741 and 741-A. Your activities as the
central counterparty will not require an amendment to any of your organizing documents, though
certain revisions to your FERC-approved tariff
will
be required for implementation of the central
counterparty structure. These revisions must be approved by FERC prior to implementation.
As central counterparty, you will take title for a brief period of time to the electric energy and
related products that are the subject matter of those transactions. Your role as a central
counterparty will not affect the clearing price, because the prices you pay to producers will
exactly match the prices you receive from the wholesale purchasers. Apart from taking title to
electric energy and related products
in your capacity as central counterparty, your market
administration activities will
remain essentially the same. Your activities as the central
counterparty will result
in no net profit or loss to you.
By mandating the ISOs and RTOs revise their tariffs to implement enhanced credit

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practices, FERC has established how you must conduct your market administration
activities to provide for the nondiscriminatory and efficient transmission of electric
energy. A default by one or more market participants could lead to a larger default
in the
market, disrupting services and the
flow of electricity as well as raising the costs of doing
business
in the electricity market and a corresponding increase in rates paid. By acting
as the central counterparty, you will
be able to offset the obligations of a defaulting
participant against payments owed to that participant, reducing the impact of one
participant's
default on the operations of other participants. The market participants are
not able to do this themselves because of the clearing price system you use and the lack
of contract privity with the defaulting party. Your sole purpose
in acting as a central
counterparty is to reduce the disruptions caused by a participant's default and in turn
fulfill your responsibility for administering the market-based regulation of the wholesale
electricity
market and ensuring that rates charged for transmission and sale of electric
energy are reasonable,
in line with your exempt purpose within the meaning of Treas.
Reg. § 1.501 (c)(6)-1. You will not generate any net income from the activity.
Accordingly, the implementation of the central counterparty structure, and your activities
as the
central counterparty to each transaction
in the markets you administer, will not
adversely affect your status as an exempt organization described in § 501 (c)(6) as
compared to your previous operations.
Ruling 2
Section 513(a) defines the term
"unrelated trade or business" as any trade or business
which is not substantially related to the performance of
an organization's exempt
purpose. Treas. Reg. § 1.513-1 (d)(2) states that a trade or business
in substantially
related
to an organization's exempt purpose if it contributes importantly to the
accomplishment of that purpose. As stated above, by acting as a central counterparty
you will reduce the disruptions caused by a market participant's default. This contributes
importantly to the accomplishment of your exempt purpose of improving the business
conditions of the power and electricity line of business by administering the market-
based regulation of the wholesale electricity market and ensuring that rates charged for
transmission and
sale of electric energy are reasonable. Therefore, acting as a central
counterparty is substantially related to your exempt purpose and will not constitute an
"unrelated trade or business" within the meaning
of§ 513(a).
Rulings:
Accordingly, based on the facts and circumstances discussed above, we rule as follows:
1. Your establishment and implementation of a central counterparty structure pursuant
to which you will become the central counterparty to transactions consummated through
the markets you administer
will not adversely affect your status
as an organization
exempt from
federal income tax
under§ 501 (c)(6).
2. The revenues you receive by virtue of being the central counterparty to transactions
consummated through the markets you administer
will not
be classified as income from

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an unrelated trade or business within the meaning of§ 513(a).
These rulings are based on the facts as they were presented and on the understanding that
there will be no material changes
in these facts. Any changes that may have a bearing upon
your tax status should be reported to the Service. Because it could help resolve questions
concerning your federal income tax status, this ruling should
be kept in your permanent records.
Pursuant to a Power of Attorney
on file in this office, a copy of this letter is being sent to your
authorized representative.
Except as we have
specifically ruled herein, we express no opinion as to the consequences of
this transaction under the cited provisions or under any other provision of the Code.
This
ruling will be made available for public inspection
under§ 6110 after certain deletions of
identifying information are made. For details, see enclosed Notice 437,
Notice of Intention to
Disclose.
A copy of this ruling with deletions that we intend to make available for public
inspection is attached to Notice 437. If you disagree with our proposed deletions, you should
follow
the instructions
in Notice 437.
This
ruling is directed only to the organization that requested
it. § 611 O(k)(3) provides that it
may not be used or cited as precedent.
If there are any questions about this ruling, contact the person whose name and telephone
number are shown
in the heading of this letter.
Enclosure
Notice 437
Sincerely yours,
Mike Seto
Manager, Exempt Organizations