Public-employer benefit trust receives income exclusion

Plain-English summary

A multiple-employer trust lets public agencies set aside funds for retiree health and welfare benefits, pension obligations, or both. Each employer has a separate account, employees cannot contribute, and the funds may be used only for that employer's benefit obligations and reasonable expenses. The IRS concluded that funding these public-employee benefits is an essential governmental function and that the trust's income accrues only to governmental participants. The income is therefore excluded under section 115(1). Because the arrangement is classified as a trust and has no taxable income from these activities, it is not required to file an annual income tax return under section 6012(a)(4).

Ruling snapshot

• Question: Is the public-employer benefit trust's income excluded under section 115, and must it file annual federal income tax returns?
• Outcome: The income is excluded, and the trust is not required to file an annual income tax return.
• Key authorities: IRC §§ 115(1), 6012(a)(4), and 7701(a); Treas. Reg. § 301.7701-4(a)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201607025                                             Third Party Communication: None
Release Date: 2/12/2016                                       Date of Communication: Not Applicable
Index Number: 115.01-00
                                                              Person To Contact:
--------------------------------------------                  -------------------, ID No. --------------------
---------------------------                                   Telephone Number:
------------------------------------------                    ----------------------
-------------------------------                               Refer Reply To:
                                                              CC:TEGE:EOEG:EO1
                                                              PLR-124213-15
                                                              Date:
                                                              November 05, 2015

Legend

Trust                    =   --------------------------------------------
Trust Agreement          =   ------------------------------------------------------------
Trustee                  =   --------------------------------
Plan                     =   ----------------------------------------------------------------------



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

This letter responds to a letter from your authorized representative dated July 6, 2015,
and subsequent correspondence, requesting rulings that (1) the Trust’s income is
excludable from gross income under section 115 of the Internal Revenue Code (IRC)
and (2) the Trust is not required to file annual federal income tax returns under IRC
section 6012(a)(4). The Trust represents the facts as follows:

FACTS

The Trust is a multiple employer trust arrangement created to enable public-agency
employers to set aside funds to be used to satisfy employer’s obligation to (1) provide
other post-employment benefits (OPEB) under the Plan, (2) contribute to a defined-
benefit pension plan maintained by employer that is qualified under IRC section 401(a),
or (3) a combination of both.

Each participating employer must be a public agency that is a state, political subdivision
of a state, or an entity the income of which is excludable from gross income under IRC
section 115. The employer’s governing body must authorize in writing the adoption of
the Trust and the employer must execute the adoption agreement, which approves the
Trust’s administrator and provides that the agency adopts and agrees to be bound by
the Trust Agreement.

PLR-124213-15                                 2

Section 3.1 of the Trust Agreement provides that employees of the employers are not
permitted to make contributions to the Trust.

Section 4.2 of the Trust Agreement provides that the assets in each employer’s account
shall be held in trust for the exclusive purpose of funding the OPEB, the pension
obligation or both and defraying the reasonable expenses associated with these
obligations. The assets in each account shall not be used for or diverted to any other
purpose including, but not limited to, the satisfaction of any other employer’s obligations.

Section 4.6(a) of the Trust Agreement provides that a separate account will be
established under the Trust for each employer, and all assets of the Trust attributable to
that employer shall be held in that employer’s account. The assets held in an account
shall consist of all contributions and transfers received by the Trust on behalf of the
employer, together with the income and earnings from such contributions and transfers
and any increments accruing to them, net of any investment losses, benefits, expenses
or other costs.

Section 4.6(c) of the Trust Agreement provides that an employer’s account is comprised
of three subaccounts: a pension subaccount; an OPEB subaccount; and an omnibus
subaccount. The assets of the Trust that are held in an employer’s pension subaccount
shall be available only to fund the employer’s pension obligation and defray the
reasonable expenses associated with the same. The assets of the Trust held in the
employer’s OPEB subaccount will be available to fund the employer’s OPEB obligation
and defray the reasonable expenses associated with the same. The assets held in an
employer’s omnibus subaccount shall be available only to fund either the employer’s
pension obligation or OPEB obligation.

The employers appoint the Trustee and the Trust’s administrator and may remove the
Trustee or the administrator by a two-thirds vote of all employers. The employers may
amend the Trust Agreement with the approval of two-thirds of all employers then
participating in the Trust. The employers may terminate the Trust by unanimous
agreement of all employers.

Upon termination of the Trust, any assets remaining in an employer’s account, after
satisfaction of benefit and the Trust’s obligations are returned to the employer to the
extent permitted by law and consistent with the requirements 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-124213-15                                   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 was deemed incidental to the public benefit.

Through the Trust, participating public agency employers fund health and welfare and
pension obligations for retired employees. Each of the Trust’s participating employers is
required to be a state, political subdivision of a state or an entity the income of which is
excludable from gross income under IRC section 115. Providing health, welfare and
pension benefits to current and former employees 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 its participating employers, all of which are political
subdivisions of a state or entities the income of which is excludable from gross income
under IRC section 115. No private interests will participate in, or benefit from, the
operation of Trust, other than as providers of goods or services. The benefit to
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 entity the income of which is
excludable from its gross income by application of IRC section 115(1).

PLR-124213-15                                4

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
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 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 public-agency employers to set aside funds to be used to satisfy
each employer’s separate pension and health and welfare benefit funding obligations.
The Trustee is charged with the responsibility of the protection and conservation of the
Trust property for the benefit of the beneficiaries of the Trust. The beneficiaries of the
Trust cannot share in the discharge of the Trustee’s responsibility for the protection and
conservation of property and, therefore, are not associates in a joint enterprise for the
conduct of business for profit. 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 will accrue 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 within the meaning of IRC section 7701(a)
          and section 301.7701-4(a) of the Regulations. Because Trust’s income is
          excludable from gross income under IRC section 115, the Trust is not
          required by IRC section 6012(a)(4) to file an annual income tax return.

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-124213-15                                  5


This ruling is directed only to the taxpayer who requested 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.

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,

                                       /S/

                                       David L. Marshall
                                       Assistant Branch Chief,
                                       Exempt Organizations Branch 1
                                       (Tax Exempt and Government Entities-)