Public retiree-benefit trust income is excluded and no return is required

Plain-English summary

A political subdivision created and funded a trust to pay post-employment life and health benefits for retired employees and their eligible dependents and beneficiaries. The employer controlled withdrawals, could remove board members and the trustee, and would receive any assets left after all obligations and expenses were satisfied. The trust represented that no private interests participated or benefited other than service providers, while retiree benefits were incidental to the public benefit. The IRS ruled that the trust performed an essential governmental function and that its income was excluded under Section 115(1). Because it was classified as a trust and had no includible income, it was not required to file an annual income tax return under Section 6012(a)(4).

Ruling snapshot

• Question: Was the retiree-benefit trust's income excluded under Section 115, and did the trust have to file an annual income tax return?
• Outcome: Approved on both issues; the income was excluded and no annual return was required.
• Key authorities: IRC §§ 115(1), 6012(a)(4), and 7701; Treas. Reg. § 301.7701-4; Rev. Ruls. 77-261 and 90-74

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201821004 Third Party Communication: None
Release Date: 5/25/2018 Date of Communication: Not Applicable
Index Number: 115.00-00, 6012.05-01
Person To Contact:
-------------------------------- ----------------------, ID No. ------------------
----------------------------------- Telephone Number:
----------------------------------- ----------------------
----------------------------------------- Refer Reply To:
-------------------------- CC:TEGE:EOEG:EO1
------------------------------------- PLR-125377-17
---------------------------------------- Date:
February 08, 2018

     Employer:                  --------------------------------------------------------

     Trust:                     --------------------------------------------------------
                                ----------------------------------------
                                ------------------------

     Trustee:                   --------------------------------

     Board:                     -----------------------------------------

     Plan:                      ----------------------------------------------------------------
                                ---------------------------------------------------

     State:                     --------------

     a:                         --

     b:                         --

     c:                         --------------------------------------

     d:                         --------------------------------

     e:                         ------------------------------

     f:                         ------------------------------

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

This letter responds to a letter from your authorized representative dated August 14,
2017, as subsequently amended and supplemented, submitted on behalf of the Trustee,
requesting rulings that (1) the Trust’s income is excludable from gross income under
§ 115 of the Internal Revenue Code, and (2) the Trust is not required to file an annual
federal income tax return under § 6012(a)(4) of the Code. The Trustee represents the
facts as follows.

                                     FACTS

The Trust was established to invest and disburse funds irrevocably designated by the
Employer, a political subdivision of State, to fund its obligations under the Plan to
provide retired employees and their eligible dependents and beneficiaries (plan
participants) with post-employment life and health benefits (life, sickness,
hospitalization, dental, and long-term care). Under the trust agreement, only the
Employer acting as plan administrator, or an authorized representative of the Employer,
may direct the Trustee to withdraw or otherwise disburse funds held in the Trust for the
benefit of plan participants. Except as provided by the trust agreement, funds are to be
used solely to pay for plan liabilities and related expenses.

The Employer formed the Board, composed of a maximum of a members, to serve
perpetually and with staggered terms. Under the trust agreement, b are to be officers of
the Employer, b are to be representatives of the retirees, and the remainder may be
either officers or representatives. In conjunction with this ruling request, the Trustee
amended Provision c to clarify that the Employer may remove and replace Board
members at any time by written resolution.

The Board has the authority to make all decisions necessary for the operation of the
Trust on behalf of the Employer, except for decisions specifically reserved under the
trust agreement for the Employer acting as plan administrator. The Board may remove
the trustee at any time, with or without cause, and to appoint a new trustee.

The trust agreement may be amended at any time by the Board, as long as no such
amendment provides for the diversion of trust assets for any purpose other than
payment of fund liabilities for the exclusive benefits of plan participants. The Trust may
be terminated at any time by the Employer. In conjunction with this ruling request, the
Trustee amended Provision d, and agreed to amend Provisions e and f, to provided
that, upon termination, any assets in the Trust remaining after all benefit obligations,
administrative fees, and related liabilities have been satisfied shall revert to the
Employer. In no event will trust assets be transferred to an entity that is not a state, a

political subdivision of a state, or an entity the income of which is excluded from gross
income under § 115(1).

The Trustee represents that no private interests participate in, or benefit from, the
operation of the Trust, other than as providers of goods or services.

Issue 1 – § 115(1)

                              LAW AND ANALYSIS

Section 115(1) provides that gross income does not include income derived from any
public utility or the exercise of any essential government function and accruing to a state
or any political subdivision thereof.

Rev. Rul. 77-261, 1977-2 C.B. 45, held that the income generated by the subject
investment fund, which was established by the state to hold revenues in excess of the
amounts needed to meet current expenses, was excludable from gross income under
IRC section 115(1), because such investment constituted an essential governmental
function. The ruling stated that the statutory exclusion was 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 accrued to either a state or political
subdivision of a state. According to the ruling, 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. Pursuant to § 6012(a)(2) and the
underlying regulations, the investment fund, being classified as a corporation subject to
taxation under subtitle A of the Code, was required to file a federal income tax return
each year.

Rev. Rul. 90-74, 1990-2 C.B. 34, held that the income of the subject organization, which
was formed, funded, and operated by political subdivisions to pool various risks arising
from their obligations regarding public liability, workers’ compensation, or employees’
health, was excludable from gross income under § 115(1), because the organization
was performing an essential governmental function. The revenue ruling stated that the
income of the organization was excludable from gross income as long as private
interests did not participate in, 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.

The Trust provides life and health benefits to retired employees of the Employer and
their survivors and eligible dependents. Providing such benefits to former public
employees constitutes the performance of an essential governmental function. Rev.
Rul. 90-74 and Rev. Rul. 77-261.

The income of the Trust accrues to the Employer. No private interests participate in, or
benefit from, the operation of the Trust other than as providers of goods or services.
The benefit to retired employees of the Employer is incidental to the public benefit.
Upon termination of the Trust, any remaining assets will be used to provide life and
health benefits to retirees pursuant to the Plan. In no event will trust assets be
distributed to any entity that is not a state, a political subdivision of a state, or an entity
the income of which is excluded from gross income under § 115. Rev. Rul. 90-74.

Issue 2 – § 6012(a)(4)

                                 LAW & ANALYSIS

Section 301.7701-1(b) of the Procedure and Administration Regulations provides that
the classification of organizations that are recognized as separate entities is determined
under §§ 301.7701-2 through -4, unless a provision of the Code provides for special
treatment of that organization.

Section 301.7701-4(a) 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 Trust enables the Employer to set aside funds to provide post-employment life and
health benefits for their employees. The Trustee is charged with the responsibility to
protect and conserve trust assets for the benefit of trust beneficiaries. The beneficiaries
of the Trust cannot share in the discharge of the Trustees’ responsibility to protect and
conserve the property of the Trust 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).

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

                                      RULINGS

Based solely on the facts and representations submitted by the Trustee:

1. We conclude that the income of the Trust is derived from the exercise of an essential
   governmental function and will accrue to a state or a political subdivision thereof for
   purposes of § 115(1). Consequently, we rule that the Trust’s income is excludable from
   gross income under § 115(1).

2. We conclude that the Trust is classified as a trust within the meaning of § 7701(a)
   and § 301.7701-4(a). Because the Trust’s income is excludable from gross income
   under § 115(1), we rule that the Trust is not required by § 6012(a)(4) to file an annual
   income tax return.

Except for the specific rulings above, we express or imply no opinion concerning the
federal tax consequences of the facts of this case under any other provision of the
Code. Specifically, no representation is made that contributions or premiums paid on
behalf of, or benefits received by, employees, former employees, retirees, spouses,
dependents, or others will be tax-free. This ruling concerns only the federal tax
treatment of the Trust’s income and may not be cited or relied upon as to any matter
relating to the taxation of accident or health contributions or benefits.

Under a power of attorney on file with this office, we are sending a copy of this letter to
your authorized representative.

This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3),
this ruling may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant. A
taxpayer filing its return electronically may satisfy this requirement by including a
statement providing the date and control number of this ruling letter. All information and
representations submitted in support of a request for ruling are subject to verification
upon examination.

                                      Sincerely,




                                      James Zelasko
                                      Chief, Branch 2
                                      Exempt Organizations
                                      Office of Associate Chief Counsel
                                      (Tax Exempt & Government Entities)

enclosure: copy for § 6110 purposes

cc: