Government insurance trust's income is excluded under Section 115

Plain-English summary

An association of state political subdivisions operated a trust that provided self-insured property, liability, and workers' compensation pools, along with group medical, dental, and disability insurance. The trust's members were political subdivisions, integral government entities, or organizations whose income was already excluded under IRC § 115. Its programs allowed local governments to obtain insurance and related administration at lower cost, and any remaining assets on termination would return only to qualifying public entities. The IRS found that pooling these governmental risks performed an essential governmental function and that private interests did not participate or benefit beyond providing goods and services. It ruled that the trust's income was excluded from gross income under IRC § 115(1).

Ruling snapshot

• Question: Was the insurance trust's income excluded from gross income under IRC § 115(1)?
• Outcome: Approved
• Key authorities: IRC § 115(1); Rev. Rul. 77-261; Rev. Rul. 90-74

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201551002 Third Party Communication: None
Release Date: 12/18/2015 Date of Communication: Not Applicable
Index Number: 115.00-00, 115.03-00,
115.07-00 Person To Contact:
---------------------, ID No. -----------------
-------------------------------------------------------- Telephone Number:
--------------------- ---------------------
----------------------------- Refer Reply To:
CC:TEGE:EOEG:EO2
PLR-107710-15
Date:
September 8, 2015

Legend

Trust = -------------------------------------------------------
Association = ----------------------------------------------------
State = ----------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Effective Date = ------------------

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

This letter responds to a letter from your authorized representative dated February 18,
2015, and subsequent correspondence submitted on behalf of Trust, requesting a ruling
that the Trust’s income is excludable from gross income under Internal Revenue Code
(IRC) § 115.

Association is a State nonprofit corporation. In Year 2, Association received a
determination from the Internal Revenue Service (IRS) that it was described in IRC §
501(c)(6) and was exempt from tax under IRC § 501(a). In Year 3, the Internal
Revenue Service issued Association a letter ruling concluding that its income was
excludable from gross income under § 115 and was not required to file Form 990.

Association’s bylaws provide that regular membership in the Association is limited to
Special Districts. Special Districts are political subdivisions of the State devoted to
providing specific services to the citizens of State, such as irrigation, port, fire, and
sanitary services. The bylaws further provide that associate membership is open to any
(1) intergovernmental agency, department, council, or like entity created under State
statute or (2) statewide or regional associations of local government or any other public
PLR-107710-15 2

entities which qualify as political subdivisions or municipal, quasi-municipal or public
corporations under State statute.

Since Year 1, one of the activities of the Association has been the provision of self-
insured insurance pools and group purchase of medical and disability insurance for
member governments through Trust. The self-insured insurance pools provide
property, tort, and workers compensation insurance for governmental entities that are
members of Association. The group purchase program allows members of Association
to obtain medical, dental and disability insurance through a group association plan.
These programs allow local governments who participate to obtain insurance and
insurance management and administrative services at a lower cost.

In Year 4, Association’s Board of Directors and the Trustees of the Trust amended the
trust agreement to be more congruent with the requirements for self-insured pools
under State law.

Association members that were participating in the Trust as of Effective Date were
automatically eligible to become a member of the Trust. The members of the Trust are
Special Districts and Public Bodies as described in State law. The Special Districts and
Public Bodies are State Special Districts, a political subdivision of State, an integral part
of the State, or an entity the income of which is excluded from its gross income by
application of IRC § 115.

Trust represents that the income it receives is from political subdivisions of State,
organizations that are integral parts of political subdivisions of State, or from entities
whose entire income is excludable from gross income under IRC § 115.

The Trust may be terminated upon a vote by the Board of Directors and Trustees or
Members. Upon termination, any remaining assets will be distributed among the
Special Districts and Public Bodies who are members at the date of termination.

Law and Analysis

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
PLR-107710-15 3

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.
The benefit to the employees of the insurance coverage obtained by the member
political subdivisions was deemed incidental to the public benefit.

Trust was formed to provide self-insured insurance pools and group purchase of
medical, dental and disability insurance for political subdivisions of State, IRC § 115
organizations, and organizations that are an integral part of the State. Providing these
group benefits 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 the Trust other
than as providers of goods and services to its members.

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.

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

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

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. IRC § 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.
PLR-107710-15 4

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,

                                 /S/

                                 Casey Lothamer
                                 Branch Chief
                                 Exempt Organizations Branch 2
                                 (Tax Exempt & Government Entities)