School district property insurance pool may exclude its income

Plain-English summary

Public school districts formed an entity to self-insure their property and share casualty risks at a lower cost than commercial coverage. The entity maintains the risk-sharing pool, buys commercial insurance for excess risk, and is governed by representatives of participating school districts. Its agreement bars private parties from receiving earnings other than reasonable compensation and limits dissolution distributions to governmental or section 115 entities. The IRS found that providing collective property and casualty coverage to school districts is an essential governmental function. Because the income accrues to the state or its political subdivisions and private interests benefit only incidentally, the entity may exclude its income under section 115(1).

Ruling snapshot

• Question: Is the school districts' property and casualty risk pool's income excluded under section 115(1)?
• Outcome: Approved, the entity's income is excludable
• 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: 202445009 Third Party Communication: None
Release Date: 11/8/2024 Date of Communication: Not Applicable
Index Number: 115.00-00
Person To Contact:
------------------------------------- -------------------------, ID No. -----------------
--------------------------------- -----------------------------------------------------
----------------------- Telephone Number:
---------------------------------------------------- --------------------
Refer Reply To:
CC:EEE:EOET:EO3
PLR-103193-24
Date:
August 09, 2024

Taxpayer = ---------------------------------
State = ------------
Statute = --------------------------------------------------------

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

This letter responds to a letter from your authorized representative, dated February 9,
2024, and subsequent documentation dated June 4, 2024, and July 23, 2024,
requesting a ruling that Taxpayer’s income is excludable from gross income under
section 115(1) of the Internal Revenue Code (Code). Taxpayer represents the facts as
follows.

FACTS

Statute authorizes public agencies in State to work together to perform any lawful
activity. In accordance with Statute, certain school districts in State entered an
Agreement to establish Taxpayer for purposes of self-insuring property belonging to the
school districts. Taxpayer maintains that it helps the school districts protect against
casualty and property risks at a cost that is less than the price of purchasing insurance
from a commercial insurance company. To this end, Taxpayer maintains a self-funded
risk sharing pool on behalf of participating school districts. Taxpayer also purchases
commercial insurance to shield against excess risk.

A board of directors consisting of an administrator and at least five members governs
Taxpayer. Each director must be a representative of a participating school district. The
board of directors appoints officers to oversee Taxpayer’s activities.

The Agreement provides that no private interests can receive any net earnings or profit
from Taxpayer’s operations, except as reasonable compensation for services rendered
to or on behalf of Taxpayer. Upon dissolution, Taxpayer must distribute its remaining

PLR-103193-24 2

assets to State, a political subdivision of State, or an entity whose income is excludable
from gross income under section 115(1) of the Code.

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 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 section 115(1) of the Code,
because such investment constitutes an essential governmental function. The ruling
states 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 explains 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) of the Code, 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.

In this case, school districts in State formed Taxpayer to administer a program of
collective self-insurance to provide them with property and casualty insurance coverage.
By providing such insurance to participating school districts, Taxpayer performs an
essential governmental function. See Rev. Rul. 90-74.

Taxpayer’s income accrues to State or political subdivisions of State. Private interests
benefit only incidentally. In no event, including upon dissolution, will Taxpayer’s assets
be distributed to any entity that is not a state, a political subdivision of the state, or
another entity the income of which is excludable from its gross income by application of
section 115(1) of the Code.

PLR-103193-24 3

RULING

Based on the information and representations submitted on behalf of Taxpayer, we
conclude that, because Taxpayer derives its income from the exercise of an essential
governmental function, and because Taxpayer’s income accrues to a state or a political
subdivision of a state, Taxpayer’s income is excludable from gross income under
section 115(1) of the Code.

The ruling contained in this letter is based on information and representations submitted
by or on behalf of Taxpayer and accompanied by a penalty of perjury statement
executed by an appropriate party, and on the understanding that there will be no
material changes in the facts described above. While this office has not verified any of
the material submitted in support of the request for a ruling, the material is subject to
verification upon 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. 2024-1, section 11.05.

This letter does not address the applicability of any section of the Code or Treasury
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 aspect of any transaction or item of
income discussed or referenced in this letter.

This ruling is directed only to Taxpayer. Section 6110(k)(3) of the Code 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 Taxpayer’s authorized representative.

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

                                       Sincerely,

                                       __________________________________
                                       Kenneth M. Griffin
                                       Chief
                                       Exempt Organizations Branch 3
                                       (Employee Benefits, Exempt Organizations,
                                       and Employment Taxes)

PLR-103193-24 4

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