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Let's talk antitrust: Discussing recent cases and emerging competition issues
Recent cases and judgments have shone a light on some emerging themes and trends that companies will want to consider as part of their risk management framework.
Global | Publication | December 2017
A jointly owned company formed by a group of municipal utilities and electric cooperatives to enter into a long-term contract to buy electricity from a private gas-fired power plant is not a tax-exempt entity, the IRS said.
The municipal utilities and coops applied to the IRS for status as a section 501(c)(6) entity, a type of tax-exempt entity that is used by some trade associations, chambers of commerce and football leagues that are not organized for profit.
The IRS said the only activity of the joint venture will be to hire a law firm to negotiate a power purchase agreement with the project developer. The only expenses expected are the legal fees. Once the PPA and perhaps other contracts are negotiated, the joint venture will terminate, the IRS said.
It is not clear why the joint venture needs to be a tax-exempt entity since the members can split the legal fees, and a joint venture organized by them to enter into a contract on their behalves — as a partnership — would not be subject to income tax. If they had any concerns, they could elect out of partnership status by filing an election under section 761 of the US tax code, in which case each member would be treated as owning an undivided interest in the power contract directly. Each would have to take its percentage interest of the electricity in kind.
The project had not been built yet. It appears another reason for the joint venture was to enter into a development-stage agreement with the developer so that the developer can secure development financing to begin detailed engineering work on the project.
The IRS said section 501(c)(6) status is reserved for business leagues “whose purpose is to promote the common business interest and not to engage in a regular business of a kind ordinarily carried on for profit. Its activities are directed to the improvement of business conditions of one or more lines of business rather than the performance of particular services for individual persons.”
The problem with the joint venture in this case is its focus seems to be to pool resources to pay legal expenses of negotiating a private business deal for its members.
The IRS analysis is in Private Letter Ruling 201749016. The IRS made the ruling public in early December.
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Recent cases and judgments have shone a light on some emerging themes and trends that companies will want to consider as part of their risk management framework.
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After a lacklustre finish to 2022 when compared to the vintage year for M&A that was 2021, dealmakers expected 2023 to see the market continue to cool in most sectors, in response to the economic headwinds of rising inflation (with its corresponding impact on financing costs), declining market valuations, tightening regulatory scrutiny and increasing geopolitical tensions.
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