Governmental employee-benefit trust income excluded from tax

Plain-English summary

Political subdivisions created a trust to fund health and welfare benefits for current and former employees and their families. The IRS ruled that providing those benefits was an essential governmental function and that the trust's income accrued to political subdivisions without impermissible private benefit. Its income was therefore excluded under IRC § 115(1). Because the arrangement was classified as a trust and had no taxable gross income, it was not required to file annual income tax returns under IRC § 6012(a)(4).

Ruling snapshot

• Question: Was the governmental benefit trust's income excluded, and did the trust have to file annual income tax returns?
• Outcome: Approved
• Key authorities: IRC §§ 115(1), 6012(a)(4); Treas. Reg. § 301.7701-4(a); Rev. Ruls. 77-261, 90-74

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201550026
Release Date: 12/11/2015
Index Number: 115.00-00, 115.03-00,
115.07-00, 6012.05-01, Person To Contact:
7701.00-00 ----------------------------
ID No. -----------------
---------------------------------------------------- Telephone Number:
------------------------------------------------- --------------------
-------------------------------------------- Refer Reply To:
---------------------------------------- CC:TEGE:EOEG:EO3
------------------------------------ PLR-111663-15
Date:
August 31, 2015

Legend

Trust = --------------------------------------------------
Date 1 = ------------------------
Date 2 = -----------------------
State = -------------------------------------------
Plan = -----------------------------------------------------------
Statute 1 = --------------------------------
Statute 2 = --------------------------------

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

This letter responds to a letter from your authorized representative dated March 27,
2015, and subsequent correspondence submitted on behalf of the Trust, requesting a
ruling that (1) the Trust’s income is excludable from gross income under Internal
Revenue Code (IRC) section 115(1) and (2) the Trust is not required to file annual
income tax returns under IRC section 6012(a)(4). The Trust represents the facts as
follows.

FACTS

The Trust was established on Date 1, pursuant to the laws of the State. It operates
pursuant to a trust agreement amended and restated as of Date 2. The Trust was
established by various political subdivisions of the State (the participating employers) to
hold assets used to provide health and welfare benefits to their employees, and some
former employees, as provided under the Plan. The Trust is managed by a nine-
member board of trustees. Each board member is elected by the participating
employers.
PLR-111663-15 2

The board established and administers the Plan, which is set forth in a separate written
instrument adopted by the board. The Plan provides health insurance, life insurance,
disability insurance, and survivor income benefits.

Each participating employer must be (1) a political subdivision created by and existing
under the laws of the State that is also a local government as defined in Statute 1 or (2)
a council of governments comprised of State political subdivisions and recognized as a
legal entity pursuant to Statute 2. Participants are employees, some former employees,
and their spouses, dependents, and beneficiaries.

For each participating employer, the Trust’s board and the employer’s governing body
sign an agreement that binds the employer to the provisions of the trust agreement,
defines the participants, identifies those benefits provided by the Plan to participants,
and sets forth the employer contributions (and employee contributions, if applicable) to
the Trust.

The Trust holds all contributions, together with any appreciation, to be managed and
administered in trust pursuant to the terms of the trust agreement. The Trust’s assets
are applied for the purpose of providing benefits under the Plan, providing related
services, and paying the reasonable expenses of administering the Plan and the Trust.

No part of the Trust’s assets will inure to a private interest, other than to pay the
reasonable expenses of administering the Plan and the Trust. No individual or entity
has any rights under the Plan or the Trust except as provided in the Plan and in the trust
agreement. Any attempt to assert additional rights will be void.

The Plan and the Trust are always to be operated to comply with all requirements under
the IRC.

The Trust may be dissolved by a two-thirds vote of the board. However, upon
termination of the Trust, after the payment of outstanding benefits, the Trust’s remaining
assets will be distributed to the participating employers on a pro-rata basis. In no event
will the Trust’s assets be distributed or revert to any entity that is not a state, a political
subdivision of a state, or an entity the income of which is excludable from its gross
income by application of IRC section 115.

LAW AND ANALYSIS

Issue 1 – IRC section 115(1)

IRC section 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.
PLR-111663-15 3

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 section 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 section 115(1) because the organization is performing an essential
governmental function. The revenue ruling states that the income of such an
organization is excludable from gross income so long as private interests do not
participate in the organization or benefit more than incidentally from the organization.
The benefit to the employees of the insurance coverage obtained by the member
political subdivisions is deemed incidental to the public benefit.

Through the Trust, political subdivisions of the State are able to provide health and
welfare benefits to current, and some former, employees. Providing these health and
welfare benefits constitutes the performance of an essential government function within
the meaning of IRC section 115(1). See Rev. Rul. 90-74 and Rev. Rul. 77-261.

The Trust’s income accrues to political subdivisions of the State. No private interests
will participate in, or benefit from, the operation of the Trust other than as providers of
goods or services. The benefit to the current and former employees is incidental to the
public benefit. See Rev. Rul. 90-74.

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

Issue 2 – IRC Section 6012(a)(4)

Section 301.7701-1(b) of the Procedure and Administration Regulations (“Regulations”)
provides that the classification of organizations that are recognized as separate entities
is determined under sections 301.7701-2, 301.7701-3, and 301.7701-4 of the
PLR-111663-15 4

Regulations unless a provision of the IRC provides for special treatment of that
organization.

Section 301.7701-4(a) of the Regulations provides that, in general, an arrangement will
be treated as a trust 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 Trust enables political subdivisions of the State to set aside funds to be used to
provide health and welfare benefits to current, and some former, employees as provided
for under the Plan. The Trustees are charged with the responsibility for the protection
and conservation of the Trust’s assets for the benefit of the beneficiaries of the Trust.
The beneficiaries of the Trust cannot share in the discharge of the Trustees’
responsibility for the protection and conservation of property and, therefore, are not
associates in a joint enterprise for the conduct of business for profit. Thus, the Trust is
treated as a trust under section 301.7701-4(a) of the Regulations.

IRC section 6012(a)(4) provides that every trust having for the taxable year any taxable
income or having gross income of $600 or more, regardless of the amount of taxable
income, shall make returns with respect to income taxes under Subtitle A.

Based solely on the facts and representations submitted by the Trust, we conclude that:

   (1) Because the income of the Trust derives from the exercise of an essential
   governmental function and accrues to a state or a political subdivision thereof,
   the Trust’s income is excludable from gross income under IRC section 115(1).

   (2) The Trust is classified as a trust under section 301.7701-4(a) of the
   Regulations. Because the Trust’s income is excludable from gross income under
   IRC section 115(1), the Trust is not required by IRC section 6012(a)(4) to file
   annual income tax returns.

No opinion is expressed concerning the federal tax consequences under any IRC
provision other than the ones specifically cited above. 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
concerns only the federal tax treatment of the Trust’s income and may not be cited or
relied upon by any taxpayer, including the Trust, employers participating in the Trust,
and any recipients of benefits paid under the terms of the Trust, as to any matter
relating to the taxation of accident or health contributions or benefits.
PLR-111663-15 5

This ruling is directed only to the taxpayer requesting it. IRC section 6110(k)(3)
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The ruling contained in this letter is 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,



                                   Kenneth M. Griffin
                                   Branch Chief, Exempt Organizations Branch 3
                                   (Tax Exempt & Government Entities)

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