PLR 201120005: property and casualty self-insurance pool income excluded under section 115

Plain-English summary

The IRS ruled that the income of a state nonprofit joint property and casualty self-insurance pool was excludable from gross income under IRC § 115(1). The pool was formed as one of three successor organizations to a joint self-insurance plan and served political subdivisions and § 115 entities. The IRS concluded that providing pooled insurance services to those members was an essential governmental function and that the pool's income accrued to a state or political subdivision. No private interests materially participated in the pool or benefited more than incidentally from it. The ruling addressed only the specified income exclusion and did not express an opinion on other federal tax consequences.

Ruling snapshot

• Question: Is the self-insurance pool's income excludable under IRC § 115(1)?
• Outcome: Approved.
• Key authorities: IRC § 115(1); Rev. Rul. 77-261 and Rev. Rul. 90-74.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201120005
Release Date: 5/20/2011
Index Number: 115.00-00
Person To Contact:
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--------------------------------------------- Refer Reply To:
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CC:TEGE:EOEG:EO1
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PLR-132648-10
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Date:
December 01, 2010

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Entity B: ------------------------------------------------
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Entity A: -----------------------
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Entity C: ------------------------------------------------------
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Plan: ---------------------------------------------------------------------------------

State: ------

Date 1: -----------------------

Date 2: -------------------

Date 3: -------------------------------------------

Statute: -------------------------------------------------------

Dear ----------------------,

This letter responds to a letter from your authorized representative dated July 13, 2010, as well as subsequent correspondence, submitted on behalf of Entity B, requesting a ruling that Entity B’s income from certain activities is excludable from gross income under § 115(1) of the Internal Revenue Code. 2 PLR-132648-10 CC:TEGE:EOEG:EO1

FACTS

Entity B is a State nonprofit corporation formed on Date 1 by, and as one of three successor organizations to, the Plan.

The Plan was an unincorporated association formed on Date 2 pursuant to Statute. It served as a joint self-insurance pool for its political subdivision members. The Service issued a favorable § 115 private letter ruling to the Plan on Date 3.

The Plan subdivided its functions into three parts to avoid cross-liability between its joint self-insurance lines: Entities A, B, and C. Entity A is an umbrella organization that oversees the other two organizations. It has no members. Entity B is a joint property & casualty self-insurance pool, and Entity C is a joint healthcare self-insurance pool. The members of Entities B and C are political subdivisions or entities the income of which is excludable under § 115.

Entity B is governed by a board of directors in accordance with regulations and bylaws (governing documents) which are subject to amendment or repeal by a majority vote of the board. Directors are elected representatives or current employees of the members of Entity B, and they are elected by a majority vote of those members casting ballots. The directors of Entities B and C make up Entity A’s board of trustees.

Day-to-day management of Entity B is provided by an administrator, whose appointment must be approved by Entity A. The administrator is subject to termination by Entity B’s board, with or without cause.

Upon Entity B’s termination, any assets remaining after payment of all liabilities shall be distributed to the members of Entity B, as determined by the board of directors.

LAW AND ANALYSIS

Section 115(1) provides that gross income does not include income derived from any public utility or the exercise of an essential governmental function and accruing to a state or a political subdivision of a state.

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 3 PLR-132648-10 CC:TEGE:EOEG:EO1

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 stated 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 Rev. Rul. 90-74, 1990-2 C.B. 34, the income of an organization formed, funded, and operated by political subdivisions to pool various risks arising from their obligations regarding public liability, workers’ compensation, or employees’ health is excludable from gross income under § 115. In this ruling, private interests did not materially participate in the organization, nor did they benefit more than incidentally from the organization.

Entity B operates a joint property and casualty self-insurance program for its members. This program allows these members to pool resources to obtain insurance coverage at a level no single member could afford to provide on its own. Providing pooled insurance services to political subdivisions and § 115 entities constitutes the performance of an essential governmental function within the meaning of § 115(1). See Rev. Rul. 90-74 and Rev. Rul. 77-261.

No private interests materially participate in the operation of, or otherwise benefit more than incidentally from, Entity B. Upon dissolution, Entity B’s remaining assets, after satisfaction of all debts, will be distributed to its members, all of which are political subdivisions or § 115 entities. See Rev. Rul. 90-74.

Based solely on the facts and representations submitted by Entity B, we conclude that the income of Entity B 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 hold that Entity B’s income is excludable from gross income under § 115(1).

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.

Under a power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.
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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)

enclosure: copy for § 6110 purposes