Governmental benefits trust has excluded income and no annual return

Plain-English summary

A county and another political subdivision created separate trusts to fund other post-employment benefits, then used a master trust to pool and invest their assets. The master trust was controlled by a trustee board, maintained separate accounts, and could benefit only the two governmental trusts and their benefit programs. The IRS concluded that pooling and investing those assets was an essential governmental function and that no private interest participated or benefited more than incidentally. Its income was therefore excluded from gross income under section 115(1). Because the master trust had no gross or taxable income for this purpose, it was not required to file an annual federal income tax return under section 6012(a)(4).

Ruling snapshot

• Question: Was the master trust's income excluded as governmental-function income, and was the trust excused from filing an annual income tax return?
• Outcome: approved
• Key authorities: IRC §§ 115(1), 6012(a)(4); Treas. Reg. §§ 301.7701-1(b), 301.7701-4(a)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201735001                                             Third Party Communication: None
Release Date: 9/1/2017                                        Date of Communication: Not Applicable
Index Number: 115.00-00, 115.07-00,
              6012.05-01                                      Person To Contact:
                                                              ---------------------, ID No. ------------------
----------------------------                                  Telephone Number:
----------------------------------------                      ----------------------
-------------------------------------------                   Refer Reply To:
------------------------------                                CC:TEGE:EOEG:EO1
                                                              PLR-102653-17
                                                              Date:
                                                              June 01, 2017




State                 =            --------------
County                =            ------------------
Employer              =            -------------------------------------------------------------------------
Association           =            -------------------------------------------------------------------------------
Trustee               =            ---------------------------------------------------------------------------------
                                   --------------------------------
Master Trust          =            ---------------------------------------------------------------------------------
                                   ------------------------------------------------------------
Employer              =            ---------------------------------------------------------------------------------
Trust                              -----------
County Trust          =            ---------------------------------------------------------------------------------

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

This letter responds to a letter from Master Trust’s authorized representatives dated
December 13, 2016, requesting rulings that:

(1) Master Trust’s income is excludable from gross income under section 115(1) of the
Internal Revenue Code (Code);1 and

(2) Master Trust is not required to file an annual federal income tax return under section
6012(a)(4).

Master Trust represents the facts as follows:

FACTS


1
  Section 115 of the Internal Revenue Code of 1986, as amended, to which all subsequent section
references are made unless otherwise stated.
PLR-102653-17                                 2

County and Employer are political subdivisions of State. Association is a statutorily
created retirement system in which County and Employer participate. County
established County Trust to hold and invest assets to fund and pay benefits under
County’s Other Post-Employment Benefits (OPEB) program. Similarly, Employer
established Employer Trust to hold and invest assets to fund and pay benefits under its
OPEB program. Master Trust was created to co-invest and commingle the assets of
County Trust and Employer Trust for investment purposes.

Master Trust, County Trust, and Employer Trust are governed by Trustee, which is
comprised of a nine member board. Of those nine members, the majority are appointed
by the County board of supervisors, including the County Treasurer and Tax Collector
as an ex officio member. The remaining members are appointed by the membership of
the Association.

Trustee has sole and exclusive authority, control over, and responsibility for directing
the investment and management of Master Trust assets. Trustee maintains separate
accounts for County Trust and Employer Trust reflecting contributions, earnings, and
disbursements, and allocates investment transactions, valuations of assets, rates of
return, and expenses between the separately tracked accounts.

Trustee is required to discharge its duties solely in the interest of, and for the exclusive
purpose of County Trust and Employer Trust. No part of the principal or income of the
Master Trust may be used for, or diverted to, purposes other than the exclusive benefit
of County Trust and Employer Trust. In turn, County Trust’s and Employer Trust’s
agreements prohibit any part of the principal or income of each trust from being used
for, or diverted to, purposes other than the exclusive benefit of participants or for the
payment of reasonable expenses of administering the trusts and the OPEB programs.
County Trust and Employer Trust are prohibited from assigning any portion of their
equity or interests in their separately tracked accounts.

Master Trust may be terminated by Trustee and will automatically terminate upon
satisfaction of all liabilities under County Trust and Employer Trust’s OPEB programs.
Upon termination, assets in each separately tracked account will be distributed to the
County Trust and Employer Trust after holding back a reasonable amount of assets
necessary for outstanding expenses and administrative costs.

LAW AND ANALYSIS

Issue 1 – Section 115(1)

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-102653-17                                  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 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 (casualty, public
liability, workers’ compensation, and employees’ health) is excludable from gross
income under section 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.

Pooling the investments of County Trust and Employer Trust, both of which are political
subdivisions of State that fund OPEB programs, is an essential government function
within the meaning of section 115(1). See Rev. Rul. 77-261.

No part of the net earnings of Master Trust inures to the benefit of, or is distributable to,
any private entity or individual. No private interests are involved in or participate in the
Master Trust. Upon dissolution, assets of Master Trust must be distributed to County
Trust and Employer Trust. Thus, Master Trust’s income accrues to a state or a political
subdivision of a state within the meaning of section 115(1). See Rev. Rul. 90-74.

Based solely on the facts and representations submitted, Master Trust’s income is
excludible from gross income under section 115(1).

Issue 2 – Section 6012(a)(4)

Section 6012(a)(4) provides that every trust having for the taxable year any taxable
income, or having gross income of $600 or over, regardless of the amount of taxable
income, must file a return with respect to income taxes under subtitle A.

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
PLR-102653-17                                 4

determined under §§ 301.7701-2 through 301.7701-4(a), unless a provision of the Code
provides for special treatment of that organization.

Section 301.7701-4(a) of the Procedure and Administration Regulations 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.

The purpose of Master Trust is to co-invest and commingle the assets of County Trust
and Employer Trust for investment purposes. Trustee is charged with the responsibility
of protecting and conserving Master Trust property for the benefit of County Trust and
Employer Trust. County Trust and Employer Trust cannot share in the discharge of
Trustee’s responsibility for the protection and conservation of Master Trust property
and, therefore, are not associates in a joint enterprise for the conduct of a business for
profit. See § 301.7701-4(a). Thus, Master Trust is classified as a trust within the
meaning of § 301.7701-4(a).

Section 6012(a)(4) does not require a Trust without taxable income to file a return when
gross income is less than $600. Because Master Trust’s income is excludable from
gross income under section 115(1), it is not required to file an annual income tax return.

CONCLUSIONS

(1) Master Trust’s income is excludable from gross income under section 115(1); and

(2) Master Trust is not required to file an annual federal income tax return under section
6012(a)(4).

The rulings contained in this letter are based upon information and representations
submitted by or on behalf of Master Trust and accompanied by a penalty of perjury
statement executed by an individual with authority to bind Master Trust and upon the
understanding that there will be no material changes in the facts. 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. The Associate office will revoke or modify a letter
ruling and apply the revocation retroactively if there has been a misstatement or
omission of controlling facts; the facts at the time of the transaction are materially
different from the controlling facts on which the ruling was based; or, in the case of a
transaction involving a continuing action or series of actions, the controlling facts
change during the course of the transaction. See Rev. Proc. 2017-1, § 11.05.

This letter does not address the applicability of any section of the Code or Regulations
to the facts submitted other than with respect to the sections specifically described, and,
PLR-102653-17                                  5

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

Because it could help resolve questions concerning federal income tax status, this letter
should be kept in Master Trust’s permanent records.

A copy of this letter must be attached to any tax return to which it is relevant.
Alternatively, if Master Trust files a return electronically, this requirement may be
satisfied by attaching a statement to the return that provides the date and control
number of this letter.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to Master Trust’s authorized representatives.

This ruling letter is directed only to Master Trust. Section 6110(k)(3) provides that it
may not be used or cited as precedent.


                                           Sincerely,


                                           David L. Marshall
                                           Assistant Branch Chief
                                           Office of the Chief Counsel
                                           (Tax Exempt & Government Entities)




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