County hospital trust's income is tax-exempt as an essential government function

Plain-English summary

A county hospital authority, a political subdivision of its state, planned to sell hospital assets to a for-profit operator. State law required it to park the net sale proceeds in an irrevocable trust used only to fund hospital care for the county's indigent residents, with the authority itself serving as trustee. The trustee asked the IRS three questions: is the trust's income tax-free, are donations to it deductible, and does it have to file a federal income tax return? The IRS ruled favorably on all three. First, the trust's income is excluded from gross income under § 115(1) because funding indigent hospital care is an essential governmental function and the income accrues to the authority, with no private benefit. Second, because the trust is a wholly-owned instrumentality of a political subdivision (measured against the six factors of Rev. Rul. 57-128), contributions to it are deductible as charitable gifts "for the use of" a political subdivision under § 170. Third, since all its income is excluded under § 115, the trust need not file an annual return under § 6012(a)(4). Governments setting up public trusts from privatization proceeds would care: this confirms the income stays untaxed and donations remain deductible.

Ruling snapshot

• Question: Is a county hospital authority's indigent-care trust exempt under § 115(1), are contributions to it deductible under § 170, and must it file a return under § 6012(a)(4)?
• Outcome: approved (all three rulings favorable)
• Key authorities: IRC § 115(1); IRC § 170(a), (c)(1); IRC § 6012(a)(4); Treas. Reg. § 301.7701-4(a); Rev. Rul. 57-128; Rev. Rul. 75-359; Rev. Rul. 90-74

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 201837011                                                 Third Party Communication: None
Release Date: 9/14/2018                                           Date of Communication: Not Applicable
Index Number: 115.00-00, 170.09-01,
              6012.05-01                                          Person To Contact:
                                                                  [redacted], ID No. [redacted]
[redacted]                              Telephone Number:
[redacted]                                           [redacted]
[redacted]                           Refer Reply To:
[redacted]                                      CC:TEGE:EOEG:EO1
[redacted]                                PLR-136857-17
                                                                  Date:
                                                                  June 07, 2018




         Authority:                 [redacted]

         Trust:                     [redacted]

         Act:                       [redacted]

         County:                    [redacted]

         City:                      [redacted]

         Hospital:                  [redacted] [redacted]
                                    [redacted]

         Year:                      [redacted]


Dear [redacted]:

This letter responds to a letter from your authorized representative dated December 7,
2017, as supplemented, submitted on behalf of the Trustee, requesting rulings that (1)
the Trust's income is excludable from gross income under § 115(1) of the Internal
Revenue Code (Code), (2) contributions to the Trust are deductible as charitable
contributions under § 170(a) of the Code, and (3) the Trust is not required by
§ 6012(a)(4) of the Code to file an annual federal income tax return. The Trustee
represents the facts as follows.

                                                     FACTS
The Authority was formed under the Act as a political subdivision of a state or local
government, as defined by § 1.103-1(b) of the Income Tax Regulations. See PLR-

124275-17 (December 21, 2017). The County created the Authority for the general
purposes of the Act, including the provision of health care services within the County.
The Authority currently owns an acute care general hospital located in the City, which it
leases to the Hospital under a long-term lease.
The Authority is governed by a nine-member Board of Trustees (the Board), the
members of which are appointed by the County's commissioners. The members may
serve an unlimited number of terms. The Board is responsible under the Act for
managing the affairs of the Authority, including the appointment of the Authority's
officers. The Authority is required by the Act to file an annual report and budget with the
County, along with the results of an annual audit.
The Authority intends to sell certain of its assets to a for-profit hospital in the County.
As required by the Act, the Authority created the Trust to receive the net proceeds from
this sale, to be used exclusively to fund hospital care for the indigent residents of the
County. The Trust is administered by the Authority, acting as Trustee. The Trustee
represents that no private interests will participate in, or benefit from, the Trust, except
in a manner incidental to the public benefit provided by the Trust.
The Trustee has the power under the Trust agreement to invest Trust funds as
permitted by applicable law. The Act provides that Trust assets "may be invested in the
same way that public moneys may be invested generally pursuant to general law".
The Trust is intended to be perpetual. Should the Trust terminate, however, the assets
of the Trust will be distributed to the Authority if it still exists, and if not, then to the
County, to be used for the purposes of the Trust. The Trust agreement provides that in
no event will Trust assets 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 under
§ 115 of the Code.

Issue 1 - § 115(1)

                                   LAW AND ANALYSIS

Section 115(1) of the Code 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
§ 115(1) of the Code, 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 authority 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) of the
Code 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) of the Code, because the
organization was performing an essential governmental function. The 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 will provide hospital care to indigent residents of the County. Such an
activity, as required by the Act and within the purposes and powers of the Authority
under the Act, constitutes the performance of an essential governmental function. Rev.
Rul. 90-74 and Rev. Rul. 77-261.

Providing hospital care for indigents through the Trust satisfies the purposes and
powers of the Authority to provide such care. As such, the income of the Trust accrues
to the Authority. No private interests participate in, or benefit from, the operation of the
Trust other than as providers of goods and services as may be required to carry out the
functions of the Trust. Upon termination, any amounts remaining in the Trust after all
trust liabilities have been satisfied shall be distributed to the Authority or the County for
public purposes. 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 of the Code. Rev. Rul. 90-74.

Issue 2 - § 170

                                    LAW & ANALYSIS

Section 170(a)(1) of the Code provides that there shall be allowed as a deduction any
charitable contribution (as defined in § 170(c) of the Code) payment of which is made
within the tax year.

Section 170(c)(1) of the Code states that, for purposes of § 170 of the Code, the term
"charitable contribution" means a contribution or gift to or for the use of a state, a
possession of the United States, or any political subdivision of any of the foregoing, or

the United States or the District of Columbia, but only if the contribution or gift is made
for exclusively public purposes.

Rev. Rul. 57-128, 1957-1 C.B. 311, provides that, in cases involving the status of an
organization as a wholly-owned instrumentality of a state or political subdivision, the
following factors are considered -

       (1) whether the organization is used for a governmental purpose and performs a
           governmental function;
       (2) whether the organization's function is performed on behalf of a state or
           political subdivision;
       (3) whether any private interests are involved, or whether a state or political
           subdivision has the powers and interests of an owner;
       (4) whether the control and supervision of the organization is vested in a public
           authority;
       (5) whether express or implied statutory or other authority is necessary for the
           creation or use of the organization, and whether such authority exists; and
       (6) the degree of the organization's financial autonomy and the source of its
           operating expenses.

Rev. Rul. 75-359, 1975-2 C.B. 79, found that a voluntary association of counties was
separate from its member counties and qualified as a wholly-owned instrumentality of
those counties, which were political subdivisions, and that it was formed and operated
exclusively for the public purposes of the member counties. Therefore, the ruling held
that contributions to the association were deductible as contributions for the use of
political subdivisions, subject to the limitation of § 170(b)(1)(B) of the Code.

Rev. Rul. 69-453, 1969-2 C.B. 182, applied the six factors of Rev. Rul. 57-128 to hold
that a soil and water conservation district formed as a private non-stock corporation by
private individuals was not an instrumentality of the state. The ruling found that the
state had no authority or control over the district's expenditures, that it had no authority
to remove any member of the district's board, and that the district funded its operations
through fees that it charged landowners for work done for the purpose of soil
conservation. The ruling noted that the state had no claim to the district's assets after
the district's dissolution.

Rev. Rul. 65-196, 1965-2 C.B. 388, held that a sports area commission formed pursuant
to an agreement (which was authorized by the enactment of a state law legalizing such
agreements) among a city and two villages to erect and operate an athletic stadium was
an instrumentality of political subdivisions of the state. The commission was composed
of members appointed by the councils of the city and the villages as their
representatives. Each member was required to be a citizen and resident of the state
and could not be a member of the governing body of the city or the villages. The sole
source of financing for the commission came from bonds issued by the city; the city was

authorized to issue bonds upon the request of the commission to fund the athletic
stadium. The ruling found that the commission was an instrumentality of the city and
the two villages by whose agreement it was formed, because it met substantially all of
the Rev. Rul. 57-128 factors: the commission was created by the city and the villages as
their instrumentality, and validated by state law; the commission members were
delegated certain authority under the terms of the agreement among the city and the
villages; control and supervision of the assets of the commission were in the hands of
the city and the villages; there were no private interests involved; and the city, upon the
commission's direction, was responsible for the project's finances.

Section 170(c)(1) of the Code generally defines the term "charitable contribution," for
purposes of § 170(a)(1) of the Code, to include a contribution or gift to or for the use of
a state or any political subdivision of the state, provided the contribution or gift is made
for exclusively public purposes

The Trust is not itself a political subdivision of the State. Therefore, contributions to the
Trust cannot constitute charitable contributions to a political subdivision of the State for
purposes of § 170(c)(1) of the Code. However, pursuant to Rev. Rul. 75-359,
contributions to the Trust may constitute charitable contributions for the use of a political
subdivision of the State, which are deductible under § 170(a) of the Code, subject to the
limitation of § 170(b)(1)(B) of the Code, if the Trust qualifies as a separate, wholly-
owned instrumentality of one or more political subdivisions of the State. Whether the
Trust is a wholly-owned instrumentality of a state or political subdivision of a state is
determined by applying the six factors of Rev. Rul. 57-128.

The first factor under Rev. Rul. 57-128 is whether the Trust is used for a governmental
purpose and performs a governmental function. The Authority was created by the
County as a political subdivision of the State, pursuant to the Act, to provide health care
to indigents in the County. The Trust, in turn, was created by the Authority pursuant to
the Act, which requires that Trust assets be used exclusively to fund hospital care for
the indigent residents of the County. Thus, the State, through its legislature, has
identified the setting aside of assets, in trust, for the provision of hospital care for the
indigent, as a legitimate function of the counties and their hospital authorities in the
State. Accordingly, we conclude that the Trust is used for a governmental purpose and
performs a governmental function.

The second factor under Rev. Rul. 57-128 is whether the performance of the Trust's
function is on behalf of a state or political subdivision. The Trust is administered by the
Authority, acting as Trustee, for the purpose of funding the provision of hospital care for
the indigent residents of the County. The Board of the Authority is appointed by the
County's commissioners pursuant to the Act to manage the Authority for the general
purpose of providing health care within the County. Therefore, the Trust's function is on
behalf of the County, acting through the Authority, which is also governed by the Board,
to provide health care to individuals living in the County. Consequently, we find that the

Trust's function is performed on behalf of the County, which is a political subdivision of
the State.

The third factor under Rev. Rul. 57-128 is whether any private interests are involved, or
whether a state or political subdivision has the powers and interests of an owner. The
Act requires that assets held in the Trust be used exclusively to fund hospital care for
indigent County residents. The Trust represents that no private interests will participate
in, or benefit from, the Trust, except in a manner incidental to the public benefit provided
by the Trust.

The Act provides that Trust assets may be invested in the same way that public funds
may be invested pursuant to general law. Moreover, the Trust instrument provides that
if the Trust ever terminates, the Board must distribute all property remaining in the Trust
to the Authority, if the Authority still exists, and if not, then to the County, to be used in a
manner consistent with the purposes of the Trust.

Consequently, we conclude that no private interests are involved in the Trust. Rather,
we find a political subdivision of the State has the powers and interests of an owner with
respect to the Trust.

The fourth factor under Rev. Rul. 57-128 is whether the control and supervision of the
Trust is vested in a public authority. The County created the Authority, which in turn
created the Trust. The Authority administers the Trust as Trustee. The Authority is
governed by the Board, the members of which are appointed by the County. The
Authority is required by the Act to provide the County with an annual report and budget,
along with the results of an annual audit. The Authority is accountable to the County for
using the Trust's assets in accordance with the purposes of the Trust under the Act.
Therefore, we conclude that the control and supervision of the Trust is vested in a public
authority.

The fifth factor under Rev. Rul. 57-128 is whether express or implied statutory or other
authority is required to create or use the Trust, and whether such authority exists.
Pursuant to the Act, the proceeds from any sale or lease of a hospital authority or
political subdivision of the State generally must be held by the authority or political
subdivision in an irrevocable trust fund, such as the Trust. The Authority created the
Trust to receive the proceeds from the Authority's sale of certain of its assets to a for-
profit hospital operating within the County. The Act requires that assets held in the
Trust be used exclusively to fund hospital care for indigent County residents.
Consequently, we conclude that express statutory authority is necessary for the creation
and use of the Trust and that such authority does exist.

The sixth factor under Rev. Rul. 57-128 is the degree of the Trust's financial autonomy
and the source of its operating expenses. The financial affairs of the Trust are
managed by the Authority, through the Board, which is appointed by the County. The

assets of the Trust are treated as public funds and, under the Act, must be used
exclusively for the public purposes of the Trust. Therefore, we find the Trust is not
financially autonomous from any political subdivision of the State. Rather, the Trust's
assets consist entirely of public funds.

Thus, similar to the organization described in Rev. Rul. 65-196, and unlike the one in
Rev. Rul. 69-453, the Trust is used for a governmental purpose and performs a
governmental function; the Trust's function is on behalf of the County, which is a
political subdivision of the State; there are no private interests involved with the Trust,
and a political subdivision of the State has the powers and interests of an owner of the
Trust; the control and supervision of the Trust is vested in a public authority; express
statutory authority is necessary for the creation and use of the Trust, and such authority
exists; the Trust is not financially autonomous from one or more political subdivisions of
the State, but rather the Trust's assets consist entirely of public funds.

Issue 3 - § 6012(a)(4)

                                    LAW & ANALYSIS

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

Section 301.7701-4(a) of the 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 Trust enables the Authority to use funds from the sale of the Authority assets to
provide hospital care for indigents in the County. The Authority, acting as Trustee, is
responsible for protecting and conserving the Trust's assets for trust beneficiaries. The
beneficiaries of the Trust cannot share in the discharge of the Trustee's responsibility
and, therefore, are not associates in a joint enterprise for the conduct of a business for
profit. Thus, assuming that it is recognized as a separate entity under § 301.7701-1 of
the regulations, the Trust is treated as an ordinary trust under § 301.7701-4(a) of the
regulations.

Section 6012(a)(4) of the Code 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) of the Code. Consequently, we rule that the Trust's income is
excludable from gross income under § 115(1) of the Code.

2. We conclude that the Trust is a wholly-owned instrumentality of a political subdivision
of the State. Therefore, in accordance with Rev. Rul. 75-359, we rule that contributions
to the Trust constitute charitable contributions (within the meaning of § 170(c)(1) of the
Code) for the use of a political subdivision of the State, that are deductible under
§ 170(a) of the Code, subject to the limitation of § 170(b)(1)(B) of the Code.

3. Assuming that the Trust is a separate entity under § 301.7701-1 of the regulations,
we conclude that the Trust is classified as an ordinary trust under § 301.7701-4(a) of the
regulations. Because all of the Trust's income is excludable from gross income under
§ 115(1) of the Code, we rule that the Trust is not required by § 6012(a)(4) of the Code
to file an annual income tax return.

The rulings contained in this letter are based upon information and representations
submitted by or on behalf of the Trust and accompanied by a penalty of perjury
statement executed by an individual with authority to bind the 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. 2018-1, § 11.05.

This letter does not address the applicability of any section of the Code or its regulations
to the facts submitted other than with respect to the sections specifically described, and,
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.

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)
of the Code, this ruling may not be used or cited as precedent.


                                         Sincerely,




                                         Mary J. Salins
                                         Branch Chief
                                         Exempt Organizations Branch 1
                                         Office of Associate Chief Counsel
                                         (Tax Exempt & Government Entities)




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