PLR 1036008: Retiree-benefit trust income excluded under section 115

Plain-English summary

The IRS ruled that income earned by a trust established by a public corporation to fund retiree health and welfare benefits was excluded from gross income under section 115(1). The corporation was formed by a city and operated public electric facilities. The trust was funded solely by the corporation, used only for eligible retiree benefits and reasonable expenses, and could return excess assets to the plan or the corporation. The IRS concluded that providing benefits to former public employees was an essential governmental function and that the trust's income accrued to a public entity. The IRS also ruled that the arrangement was a trust for federal tax purposes and did not have to file an annual income tax return because its income was excluded and its gross income was below the applicable filing threshold.

Ruling snapshot

• Question: Is income of a public corporation's retiree-benefit trust excluded under section 115, and must the trust file an annual income tax return?
• Outcome: Approved
• Key authorities: IRC §§ 115, 6012, 301.7701-1, and 301.7701-4; Rev. Rul. 77-261; Rev. Rul. 90-74

Full text (IRS public release)

• Internal Revenue Service Department of the Treasury
  Washington, DC 20224

Number: 201036008
Release Date: 9/10/2010
Index Number: 115.00-00 Person To Contact:
--------------------, ID No. ------------
Telephone Number:

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---------------------------------- Refer Reply To:
----------------------------- CC:TEGE:EOEG:EO1
--------------------------- PLR-148655-09
------------------------------- Date:
February 17, 2010
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-

      Corporation:                 ------------------------------------------------------------

        Trust:                      ------------------------------------------

        Date:                       --------------------------

        City:                       ---------------------

        State:                      ------------

        Facilities:                 ---------------------------------------------------------------------------------
                                    ---------------------------------------------------------------------------------
                                    -----------

        Year:                       -------

        Company:                    -----------------------------------------------

        Agreement:                  ---------------------------------------------------------------------------------
                                    ------------------

        Trustee:                    -----------------------------------------

        Administrator:              ---------------------------------------------------------------------------------
                                    --------
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PLR-148655-09

Dear --------------------:

   This letter responds to a letter from your authorized representative dated October

7, 2009, submitted on behalf of the Corporation, requesting rulings that (1) the Trust’s
income is excludable from gross income under § 115 of the Internal Revenue Code and
(2) the Trust is not required to file an annual income tax return. The Corporation
represents the following facts.

Issue 1 – § 115(1)

                                     FACTS

  The Corporation, formed on the Date by the City, is a public corporation with all

the powers of eminent domain conferred on municipalities in the State. Governed by a
board of directors elected by the city council of the City, the Corporation owns and
operates the Facilities.

  Since the Year, the Corporation has had a self-insuring agreement with the

Company to administer its health and welfare benefits plan (the “Plan”), along with a
excess health insurance policy under the Plan.

    The Corporation established the Trust pursuant to the Agreement to provide

post-employment benefits (other than pension benefits), such as medical, dental, vision,
life insurance, longterm care insurance, and other similar benefits to its eligible
employees.

   The Trust allows for pre-funding. Employer contributions, which are received and

invested by the Trustee, consist solely of amounts with respect to the Corporation’s
unfunded liability and reasonable expenses with respect to the Plan. Employee
contributions are not allowed.

   All contributions and transfers of assets, together with net income and earnings,

are held exclusively to provide health and welfare benefits under the Plan to eligible
employees. Assets shall not be used for, or diverted to, any other purpose, except for
the refund of contributions for mistake of fact or upon receipt of an unfavorable § 115
private letter ruling.

   Except for payment of reasonable expenses, only the plan administrator,

designated by the Corporation, may withdraw or otherwise direct the Trustee to make
disbursements. Except for the purpose of covering benefits for eligible employees or
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contributions subject to refund, no such withdrawals or disbursements shall be made
unless the Corporation’s obligation under the Plan has been fully satisfied, at which time
any excess assets shall be paid to the Plan or returned to the Corporation, as directed
by the Administrator. In no event shall assets be transferred to an organization that is
not a state, a political subdivision of a state, or a § 115 entity.

The Trustee, who may be removed at the discretion of the Corporation, shall receive all
assets for the Trust on behalf of the Corporation and shall hold the assets in trust for the
exclusive purpose of providing benefits under the Plan to eligible employees. No
beneficiary of the Trust shall have any right to take part in, or direct or control of, the
business of the Trust, nor may any beneficiary act for or bind the Trust or the Trustee or
otherwise transact any business on behalf of the Trust.

                               LAW AND ANALYSIS

    Section 115(1) provides that gross income does not include income derived from

any public utility or the exercise of any essential government function and accruing to a
state or any political subdivision thereof.

    In Rev. Rul. 77-261, 1977-2 C.B. 45, income from an investment fund,

established under a written declaration of trust by a state, for the temporary investment
of cash balances of the state and its participating political subdivisions, was excludable
from gross income for federal income tax purposes under § 115(1). The ruling indicated
that the statutory exclusion was intended to extend not to the income of a state or
municipality resulting from its own participation in activities, but rather to the income of a
corporation or other entity engaged in the operation of a public utility or the performance
of some governmental function that accrued to either a state or municipality. The ruling
points out that it may be assumed that Congress did not desire in any way to restrict a
state’s participation in enterprises that might be useful in carrying out projects that are
desirable from the standpoint of a state government and which are within the ambit of a
sovereign properly to conduct. In addition, pursuant to § 6012(a)(2) and the underlying
regulations, the investment fund, being classified as a corporation that is subject to
taxation under subtitle A of the Code, was required to file a federal income tax return
each year.

    In Rev. Rul. 90-74, 1990-2 C.B. 34, the Internal Revenue Service determined

that the income of an organization formed, funded, and operated by political
subdivisions to pool various risks (casualty, public liability, workers’ compensation, and
employees’ health) is excludable from gross income under § 115. In Rev. Rul. 90-74,
private interests neither materially participate in the organization nor benefit more than
incidentally from the organization.
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    The Trust was established and is maintained by the Corporation as a separate

entity to provide various health and welfare benefits under the Plan to its retired
employees and their spouses and dependents. Providing such benefits to former public
employees constitutes the performance of an essential governmental function within the
meaning of § 115(1). See Rev. Rul. 90-75 and Rev. Rul. 77-261.

   The provision of health and welfare benefits to participating retirees and their

dependents satisfies the obligation of the Corporation under the Plan to provide those
benefits; thus, the income of the Trust accrues to the benefit of the Corporation, which is
a public entity with municipal powers. No private interests participate in, or benefit from,
the operation of the Trust, other than as providers of goods and services. Any amounts
remaining in the Trust after all health and welfare benefits, plus reasonable fees and
expenses, have been paid shall be paid to the Plan or returned to the Corporation. The
benefit to retired Corporation employees is incidental to the public benefit. See Rev.
Rul. 90-74.

Issue 2 – § 6012(a)(4)

                                      FACTS

   The Corporation created the Trust to provide a vehicle for funding retiree health

and welfare benefits under the Plan. The income of the Trust consists solely of
contributions from the Corporation, plus investment income. No contributions will be
made to the Trust by employees. No part of the Trust may be diverted to purposes
other than the exclusive benefit of the participants and their beneficiaries. No part of the
Trust's net earnings may inure to the benefit of any private person. The parties to the
Agreement are the Corporation and the Trustee.

    The Corporation will have exclusive authority and discretion to manage and

control the assets of the Trust, but will delegate investment management of trust assets
to the Trustee pursuant to the terms of the Agreement. The Agreement provides that
the Corporation may remove and replace the Trustee at any time upon 90 days prior
written notice. In the event of the Trustee's removal or resignation, a successor trustee
will be appointed by the Corporation.

  The Corporation represents that the purpose of the Trust is to vest in the Trustee

responsibility for the protection and conservation of trust property for the benefit of the
Plan participants and their spouses and dependents, none of whom can share in the
discharge of this responsibility for profit.
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   The Agreement provides that the Corporation may amend or terminate the Trust

at any time, provided that trust assets shall be used only for the purpose of providing
health and welfare benefits to the participants of the Plan. In no event will the assets be
transferred to an entity which is not a state, a political subdivision of a state, or an entity
the income of which is excluded from gross income under § 115 of the Code.

                                 LAW & ANALYSIS

    Section 301.7701-1(b) of the Procedure and Administration regulations provides,

in part, that the classification of organizations that are recognized as separate entities is
determined under §§ 301.7701-2 through -4, unless a provision of the Code provides for
special treatment of that organization.

  Section 301.7701-4(a) of the regulations provides, in general, that an

arrangement will be treated as a trust under the Code if it can be shown that the
purpose of the arrangement is to vest in trustees responsibility for the protection and
conservation of property for beneficiaries who cannot share in the discharge of this
responsibility and, therefore, are not associates in a joint enterprise for the conduct of
business for profit.

    The Corporation’s contributions to the Trust are to be used to pay retiree health

and welfare benefits for eligible retired employees and their spouses and dependents.
The Trustee is charged with the responsibility of the protection and conservation of trust
property for the benefit of the beneficiaries of the Trust. The beneficiaries of the Trust
cannot share in the discharge of the Trustee's responsibility for the protection and
conservation of property and, therefore, are not associates in a joint enterprise for the
conduct of business for profit. Assuming that the Trust is recognized as a separate
entity under § 301.7701-1, we conclude that the Trust is a trust under § 301.7701-4(a).

   Section 6012(a)(4) provides that every trust having taxable income for the tax

year, or having gross income of $600 or more for that year regardless of the amount of
taxable income, must file a return with respect to income taxes under subtitle A.

                                   CONCLUSION

   Based solely on the facts and representations submitted by the Corporation:

   1.        We conclude that the income of the Trust is derived from the exercise of
             an essential governmental function and will accrue to a state or a
             political subdivision thereof for purposes of § 115(1). Consequently, we
             rule that the Trust’s income is excludable from gross income under
             § 115(1).
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PLR-148655-09

   2.       We conclude that the Trust is classified as a trust under § 301.7701-
            4(a). Section 6012(a)(4) does not require a trust without taxable income
            to make a return of income when gross income is less than $600.
            Because the Trust’s income is excludable from gross income under
            § 115(1), we rule that the Trust is not required by § 6012(a)(4) to file an
            annual income tax return.

   Except for the specific rulings above, we express or imply no opinion concerning

the federal tax consequences of the facts of this case under any other provision of the
Code. Specifically, we express or imply no opinion regarding the federal tax
consequences of contributions to, or payments from, the Plan, including (but not limited
to) whether contributions to the Plan are excludable from the gross income of
employees, former employees, or retirees under § 106 and whether payments from the
Plan (including reimbursements of medical expenses) are excludable from the gross
income of employees, former employees, or retirees under §§ 104 or 105.

    Under a power of attorney on file with this office, we are sending a copies of this

letter to your authorized representatives.

  This ruling is directed only to the taxpayer who requested it. According to

§ 6110(k)(3), this ruling may not be used or cited as precedent.

                                      Sincerely,




                                      SYLVIA HUNT
                                      Assistant Chief
                                      Exempt Organizations Branch 2
                                      Office of Division Counsel /
                                             Associate Chief Counsel
                                      (Tax Exempt & Government Entities)

enclosures: copy for § 6110 purposes

cc: