No-fault family-care payments excluded from income

Plain-English summary

A state-created entity administered a no-fault plan for children with birth-related neurological injuries. Under the governing statute, parents or legal guardians could be paid for medically necessary care performed under a physician’s direction that went beyond ordinary child-care and family services. The IRS ruled that those payments were amounts received through an arrangement having the effect of accident or health insurance and therefore were excluded from the recipients’ gross income under § 104(a)(3). The entity was not required to issue information returns or other tax forms for the payments.

Ruling snapshot

• Request: Determine whether specified no-fault payments to parents and legal guardians are excluded from gross income
• Outcome: Approved; the payments are excluded and require no information returns or other tax forms
• Key authorities: I.R.C. § 104(a)(3); Treas. Reg. § 1.104-1(d); Rev. Rul. 73-154

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201544019                                              Third Party Communication: None
Release Date: 10/30/2015                                       Date of Communication: Not Applicable
Index Number: 104.01-00
                                                               Person To Contact:
                                                               ----------------------------, ID No. --------------
------------------------------------------------               ----------------------------------------------------
-----------------------------------------------------          Telephone Number:
---------------------------------------------                  ----------------------
-------------------------------                                Refer Reply To:
----------------------------------------                       CC:TEGE:EB:HW
                                                               PLR-113065-15
                                                               Date:
                                                               July 28, 2015




Legend

Taxpayer          =         -----------------------------------------------------------------------------------------
-----------------
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State             =        -----------

Statute           =        ---------------------------------------------------

Plan              =        ------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------


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

This is in reply to the letter dated April 10, 2015, submitted on your behalf, concerning a
ruling request that certain payments provided by Taxpayer to parents or legal guardians
of children who have sustained a birth-related neurological injury are excluded from the
recipient parent’s or legal guardian’s gross income under section 104(a)(3) of the
Internal Revenue Code (the “Code”).

FACTS

Taxpayer was created by the State legislature for the sole purpose of administering the
Plan. State established the Plan to provide no-fault benefits for birth-related
neurological injuries in accordance with the Plan. Benefits provided under the Plan are

PLR-113065-15                                2

made irrespective of fault and are the exclusive remedy for birth-related neurological
injury claims. Taxpayer administers the Plan based on the individual needs of the
injured child who has been rendered permanently and substantially mentally and
physically impaired. Benefits awarded may include a one-time cash payment or death
benefit to parents, medically necessary therapy and equipment for the injured child,
house modification and upgrade, a specially-equipped vehicle, transportation costs,
attendant and nursing care, medically necessary drugs and other medically necessary
expenses of the child not otherwise reimbursed by insurance.

Taxpayer’s ruling request is solely related to payments made to parents or legal
guardians of the injured child under the Statute. This ruling does not address other
benefits under the Plan. The Statute provides payments for care normally rendered by
trained professional attendants which is beyond the scope of child care duties, but
which is provided by family members. Family members who provide nonprofessional
care may not be compensated for care that falls within the scope of child care duties
and other services normally and gratuitously provided by family members. Family care
under the Statute is performed only at the direction and control of a physician when
such care is medically necessary.

Family member is defined as a father, mother, or legal guardian.

LAW AND ANALYSIS

Section 104(a)(3) of the Code provides that except in the case of amounts attributable
to (and not in excess of) deductions allowed under section 213 of the Code for any prior
taxable year, gross income does not include amounts received through accident or
health insurance (or through an arrangement having the effect of accident or health
insurance) for personal injuries or sickness (other than amounts received by an
employee, to the extent such amounts are attributable to contributions by the employer
which were not includible in the gross income of the employee, or are paid by the
employer).

Section 1.104-1(d) of the Income Tax Regulations provides that section 104(a)(3)
excludes from gross income amounts received through accident or health insurance for
personal injuries or sickness (other than amounts received by an employee, to the
extent that such amounts (1) are attributable to contributions of the employer which
were not includible in the gross income of the employee, or (2) are paid by the
employer). Similar treatment is also accorded to amounts received under accident or
health plans and amounts received from sickness or disability funds.

Rev. Rul. 73-154, 1973-1 C.B. 50, considered a taxpayer who was injured in an
accident and, as a result of his injuries, received disability payments under the
automobile owner’s no-fault insurance policy. The state statute required that disability
insurance benefits be provided without regard to fault under motor vehicle policies that

PLR-113065-15                                 3

provide bodily injury and property damage liability insurance for motor vehicles
registered in that state. The ruling held that disability benefits received under a no-fault
insurance contract are amounts received through accident or health insurance for
personal injury or sickness within the meaning of section 104(a)(3) of the Code and are
not includible in the gross income of the recipients for federal income tax purposes.

Based on the information submitted and authorities cited above, we conclude that the
no-fault payments made by Taxpayer to parents or legal guardians pursuant to the
Statute are excludable from the recipient parent’s or legal guardian’s gross income
under section 104(a)(3) of the Code and Taxpayer is not required to issue information
returns or other tax forms for these payments.

No opinion is expressed as to the federal tax consequences of the transaction under
any other section of the Code, Statute or Plan other than those specifically stated
above.

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.


                                       Sincerely,



                                       Harry Beker, Chief
                                       Health and Welfare Branch
                                       Office of Associate Chief Counsel
                                       (Tax Exempt and Government Entities)

cc: