Government retiree-benefit trust has excluded income and no annual return requirement

Plain-English summary

A political subdivision created and controlled a trust to prefund health and welfare benefits for retired employees and their eligible family members. Trust assets could be used only for benefits and reasonable expenses, and any residual assets could return only to the political subdivision or another section 115 entity. The IRS ruled that providing these benefits was an essential governmental function and that the trust's income accrued to a political subdivision, so the income was excluded under section 115(1). It also classified the arrangement as a trust and ruled that section 6012(a)(4) did not require an annual income tax return because the trust had no taxable income from these activities.

Ruling snapshot

• Question: Is the retiree-benefit trust's income excluded under section 115, and must it file an annual federal income tax return?
• Outcome: Approved: the income is excluded and no annual return is required under section 6012(a)(4).
• Key authorities: IRC §§ 115(1), 6012(a)(4), and 7701(a); Treas. Reg. § 301.7701-4(a); 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: 201516031 [Third Party Communication:
Release Date: 4/17/2015 Date of Communication: Month DD, YYYY]
Index Number: 115.00-00
Person To Contact:
---------------------------- ------------------, ID No. ----------------
------------------------------------------------------------ Telephone Number:
------ --------------------
------------------------ Refer Reply To:
------------------ CC:TEGE:EOEG:E0
--------------------------- PLR-127002-14
Date:
December 10, 2014

Legend

A = -------------------------------------------------------------------------
B = ------------------------------------------------------------------
Trust = -----------------------------------------------------------------
State = ------------

Dear -----------------

This letter responds to a letter from your authorized representative dated July 11, 2014,
and subsequent correspondence submitted on behalf of Trust, requesting rulings that
(1) Trust’s income is excludable from gross income under Internal Revenue Code
(“IRC”) § 115 and (2) Trust is not required to file an annual federal income tax return
under IRC § 6012(a)(4). Trust represents the facts as follows:

                                                 FACTS

A is a governmental entity and political subdivision of State. B, the governing body of A,
established Trust to provide a prefunding source for the payment of liabilities for health
and welfare benefits to retired employees of A and their eligible spouses and
dependents.

Trust will receive contributions from A as needed to fund Trust. Trust assets will be used
for the exclusive purpose of providing retiree health and welfare benefits and for
defraying reasonable administrative and actuarial expenses. Under no circumstances
PLR-127002-14 2

will the assets be used for, or diverted to, any other purpose, except as permitted under
IRC § 115 and other applicable law.

The Trust is governed by a Board of Trustees composed of 5 members. Three of the
trustees are members of B, the governing body of A, and two hold managerial positions
with A. The Board of Trustees has investment authority over the Trust funds, including
the authority to invest funds in investments permitted by State law.

Trust may be dissolved by A. However, upon termination of Trust, any remaining
assets will be used to provide health and welfare benefits to retirees and their eligible
spouses and dependents. Any assets remaining in Trust after satisfying all benefit
obligations may be paid to A to the extent consistent with IRC § 115. In no event will
Trust’s assets be distributed or revert to any entity that is not a state, a political
subdivision of a state, or another entity the income of which is excluded from its gross
income by application of IRC § 115.

Issue 1- IRC § 115(1)

                              LAW AND ANAYLSIS

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

Rev. Rul. 77-261, 1977-2 C.B. 45, holds that income generated by an investment fund
that is established by a state to hold revenues in excess of the amounts needed to meet
current expenses is excludable from gross income under IRC § 115(1), because such
investment constitutes an essential governmental function. The ruling explains that the
statutory exclusion is 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 an entity
engaged in the operation of a public utility or the performance of some governmental
function that accrues to either a state or political subdivision of a state. 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 that are within the ambit of a
sovereign to conduct.

Rev. Rul. 90-74, 1990-2 C.B. 34, holds that the income of an organization formed,
funded, and operated by political subdivisions to pool various risks (e.g., casualty, public
liability, workers’ compensation, and employees’ health) is excludable from gross
income under IRC § 115(1) because the organization is performing an essential
governmental function. The revenue ruling states that the income of such an
organization is excluded from gross income so long as private interests do not
participate in the organization or benefit more than incidentally from the organization.
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The benefit to the employees of the insurance coverage obtained by the member
political subdivisions was deemed incidental to the public benefit.

The provision of these health and welfare benefits by A constitutes the performance of
an essential government function within the meaning of IRC § 115(1). See Rev. Rul.
90-74 and Rev. Rul. 77-261.

No private interests will participate in, or benefit from, the operation of Trust other than
as providers of goods or services. The benefit to retirees and eligible spouses and
dependents is incidental to the public benefit. See Rev. Rul. 90-74.

In no event, including dissolution, will Trust’s assets be distributed or revert to any entity
that is not a state, a political subdivision of a state, or another entity the income of which
is excluded from its gross income by application of IRC § 115.

As stated above, Trust was formed for the sole purpose of providing a prefunding
source for the payment of liabilities for health and welfare benefits to retirees and
eligible spouses and dependents of A.

Trust’s dedication of its corpus and income exclusively for the benefit of the retirees of A
and their dependents satisfies an obligation of A to provide health and welfare benefits
to its retired employees. The benefit to A’s participating retirees, spouses, and their
dependents is incidental to the public benefit. Upon termination, all of Trust’s assets
must be used for funding the postemployment benefits offered by A or administrative
expenses. Any remaining assets will be distributed to A, a political subdivision of State.

Issue 2 – IRC § 6012(a)(4)

                               LAW AND 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 301.7701-4(a), unless a provision of the IRC
provides for special treatment of that organization.

Section 301.7701-4(a) 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.

Contributions to Trust are to be used to prefund health care coverage and related
administrative costs for certain retirees and their dependents. Board is charged with the
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responsibility of protecting and conserving Trust property for the benefit of beneficiaries
of Trust pursuant to State law. Beneficiaries of Trust cannot share in the discharge of
Board’s responsibility for the protection and conservation of Trust property and,
therefore, are not associates in a joint enterprise for the conduct of a business for profit.

IRC § 6012(a)(4) provides that every trust having taxable income for the tax year, or
income, must file a return with respect to income taxes under subtitle A.

                                     RULINGS

   Based solely on the facts and representations submitted by Trust:

   1.       Because the income of Trust is derived from the exercise of an
            essential governmental function and will accrue to a political subdivision
            or to an entity the income of which is excludable from gross income
            under the provisions of IRC § 115(1), we rule that Trust’s income is
            excludable from gross income under IRC § 115(1).

   2.       We conclude that Trust is classified as a trust within the meaning of IRC
            § 7701(a) and § 301.7701-4(a). IRC § 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 Trust’s income is excludable from
            gross income under IRC § 115(1), we rule that Trust is not required by
            IRC § 6012(a)(4) to file an annual income tax return.

No opinion is expressed concerning the Federal tax consequences under any IRC
provision other than the one specifically cited above. In particular, no representation is
made that contributions or premiums paid on behalf of or benefits received by
employees, former employees, retirees, spouses, dependents or others will be tax-free.
This ruling concerns only the Federal tax treatment of Trust’s income and may not be
cited or relied upon as to any matter relating to the taxation of accident or
IRC § 115(1) provides that gross income does not include income derived from any
public utility or the exercise of any essential governmental function and accruing to state
or any political subdivision thereof.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
PLR-127002-14 5

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                   Sincerely,



                                   Casey L. Lothamer
                                   Senior Technician Reviewer
                                   (Tax Exempt & Government Entities)

Enclosure (1)