PLR 1338034: IRS excludes a state student-loan agency's income under section 115

Plain-English summary

A state nonprofit corporation that administered a guaranteed student-loan program asked whether its income would be excluded from federal gross income under IRC § 115(1). The entity no longer guaranteed new loans but continued servicing its loan portfolio, performing default-aversion work, and providing research and public education about college financing. The IRS concluded that these activities performed an essential governmental function, that the entity's income accrued to the state, and that private interests did not materially participate or receive more than incidental benefits. It ruled that the income was excludable under § 115(1), including because remaining assets would return to the state or another entity whose income is excluded under that section.

Ruling snapshot

• Question: Is the state nonprofit's income excludable from federal gross income under IRC § 115(1)?
• Outcome: Approved, income excludable under § 115(1).
• Key authorities: IRC § 115(1); Rev. Ruls. 77-261 and 90-74.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201338034 Third Party Communication: None
Release Date: 9/20/2013 Date of Communication: Not Applicable
Index Number: 115.00-00
Person To Contact:
---------------------------------------- ---------------------, ID No. -------------
---------------------------------------------------- Telephone Number:
-------------------------------- ---------------------
--------------------------------------- Refer Reply To:
CC:TEGE:EOEG:EO
PLR-151993-12
Date:
May 22, 2013

     Entity:                    ----------------------------------------------------
                                -----------------------

     State:                     --------

     Statute 1:                 ---------------------------------------------------------

     Statute 2:                 ---------------------------------------------------------------------------------

     Statute 3:                 ---------------------------------------------------------------------------------

                                --------------------------------------------------

     Statute 4:                 --------------------------------------------------------------------
                                --------------------------

     Year:                      -------

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

     a:                         --

     b:                         --

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

 This letter responds to a letter from your authorized representative dated

November 26, 2012, as well as subsequent correspondence, submitted on behalf of

PLR-151993-12 2

Entity, requesting a ruling that the Entity’s income will be excluded from gross income
under § 115 of the Internal Revenue Code. The Entity represents the facts as follows.

                                      FACTS

   The Entity, a State nonprofit corporation, is recognized by the IRS as an

organization described in § 501(c)(3) of the Code. It was established in Year by state
statute, as codified (Statute 1), to administer a guaranteed student loan program for
State students and to provide various services related to college financing and
attendance. Due to changes in such programs on the national level, primarily through
Statute 2, the Entity no longer reviews loan applications for eligibility or guarantees any
new loans. The Entity represents that it does not contract with the U.S. Department of
Education to service federal direct student loans under Statute 2.

   Despite the changes in student loan programs instituted by the federal

government, many of the Entity’s activities remain the same, such as administering loan
repayments with respect to its loan portfolio (including the rehabilitation of loans in
default), performing default aversion services, and conducting research and public
education relating to college attendance and financing. In establishing the Entity,
Statute 1 refers to the strong interest of the state in facilitating and encouraging
postsecondary education for qualified students and cited higher education as an
important means to promoting the welfare and security of the state.

   Though established by State to pursue what Statute 1 characterizes as an

important public purpose, the Entity is operated under state nonprofit corporation law
(Statute 3) as an entity separate from the state. As a public nonprofit, the Entity has all
the powers and duties of a State nonprofit corporation, except as provided in Statute 1
(for example, the Entity is not subject to voluntary or involuntary dissolution, and it may
not be placed in receivership). Statute 1 provides that all expenses of the Entity must
be paid from the Entity’s income and that none of the liabilities created by the Entity are
to be debts of the state.

    At the same time, because of its special function, the Entity is limited by Statute 1

to activities, both required and permitted, the state deems necessary and desirable to
accomplishing its mission. In addition, Statute 1 subjects the Entity to substantial state
oversight, including the review of its annual reports and audited financial statements.

   The Entity’s governing board is composed of a directors, each serving a term of b

years. The governor of State, with the advice and consent of the senate, appoints the
members of the board of directors and designates the chairman from among that
membership. The Entity’s board elects the other officers from among its members. The
governor may remove the directors with or without cause.

PLR-151993-12 3

    The Entity may be terminated at any time by the state legislature. Absent

legislative action, the Entity will terminate on Date under the state’s sunset law (Statute
4). Upon termination, the , an elected state official, will
serve as trustee to administer the Entity’s assets and to satisfy all outstanding
obligations. At a date certain after termination, as provided by Statute 4, all remaining
funds will be transferred to the state’s general revenue fund.

                               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 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.

     The Entity, by administering student loan payments and providing other

education-related services, performs a function that State has explicitly deemed to be
necessary and desirable to achieving an important public purpose: encouraging and
facilitating higher education for eligible students. Such activities constitute the
performance of an essential governmental function. See Rev. Rul. 90-74 and Rev. Rul.
77-261.

    All of the Entity’s income accrues to State. No private interests materially

participate in, or benefit more than incidentally from, the operation of the Entity other
than as providers of goods or services. The benefit to student borrowers is incidental to
the public benefit. Upon the Entity’s termination, either by the legislature or pursuant to

PLR-151993-12 4

the sunset law, the state will assume control of Entity assets. No assets remaining after
satisfaction of liabilities will be distributed to any entity other than a state, a subdivision
of a state, or an entity the income of which is excluded from gross income under § 115.
See Rev. Rul. 90-74.

                                       RULING

   Based solely on the facts and representations submitted by the Entity, we

conclude that the Entity’s income 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 Entity’s income is excludable from
gross income under § 115(1).

   Except for the specific ruling 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 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
                                        Office of Division Counsel /
                                               Associate Chief Counsel
                                        (Tax Exempt & Government Entities)

enclosures: copy for § 6110 purposes

cc: