Government-beneficiary settlement trust is a QSF with income excluded under § 115
Plain-English summary
A statutory trust was set up under a court-approved bankruptcy plan to resolve
mass claims (public nuisance, consumer-protection, fraud, and similar claims)
against companies over a product tied to a public-health crisis. The only
beneficiaries are states, the District of Columbia, a U.S. possession, and
their local governments, and the trust exists to fund projects that abate the
harm. The trust asked the IRS for three rulings. The IRS held that: (1) the
trust is a "qualified settlement fund" (QSF) under Treas. Reg. § 1.468B-1(c)
because a court approved it, it resolves tort/statutory claims, and it is a
state-law trust; (2) the money transferred in to satisfy the liabilities is
excluded from the trust's modified gross income under Treas. Reg. § 1.468B-2(b)(1);
and (3) the trust's earnings are excluded from gross income under § 115 because
the trust performs an essential governmental function and its income accrues
only to governments. The net effect: the settlement money and the trust's
investment income are not taxed as the trust holds and deploys them for
government abatement work.
Ruling snapshot
- Question: Is the settlement trust a qualified settlement fund, are the transferred funds excluded from its modified gross income, and is its income excluded under § 115?
- Outcome: Approved (all three rulings granted)
- Key authorities: IRC § 468B(g); Treas. Reg. §§ 1.468B-1(c), 1.468B-2(b)(1); IRC § 115; § 7701(a)(10); Rev. Rul. 77-261; Rev. Rul. 90-74
Full text (IRS public release)
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 202624002
Release Date: 6/12/2026
Index Number: 468B.02-00, 115.06-01
Person To Contact:
-----------------, ID No. -----------------
Telephone Number:
Refer Reply To:
CC:ITA:B06
PLR-116022-25
Date:
March 17, 2026
LEGEND
Activities = -------------------------
Bankruptcy Chapter = ---------------
Court = --------------------------------------------------------------------------
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Date 1 = ----------------------
Date 2 = ---------------------
Date 3 = ------------------
Defendants = --------------------------------------------------------------
Dollar Amount = -----------------------
F = ---------------------------
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Guidelines = --------------------------------------------------------------------------
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Plan = --------------------------------------------------------------------------
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Product Z = --------------------
Related Projects = -----------------------------------------------------
State = ---------------
Trust = -----------------------------------------------------------
Trustee = ----------------------
Dear -------------:
This letter responds to the letter dated August 27, 2025, submitted on behalf of Trust, requesting certain rulings concerning the application of various sections of the Internal Revenue Code and the Income Tax Regulations to Trust. Specifically, you requested the following rulings:
1. Trust is a qualified settlement fund under § 1.468B-1(c);
2. Trust may exclude under § 1.468B-2(b)(1) from its modified gross income the assets received or to be received; and
3. The income earned by Trust will be excluded from its gross income under § 115.
FACTS
Prior to Date 1, the Defendants were defendants in numerous court cases alleging a variety of claims regarding the Defendants' Activities of Product Z. The claims included statutory and/or common law claims for public nuisance, violations of consumer protection or unfair trade practices laws, racketeering, fraud and negligence. Collectively, these claims are referred to as the Liabilities. The plaintiffs included the beneficiaries and local governments. The beneficiaries consist only of states of the United States, the District of Columbia, and the governments of a United States possession, within the meaning of § 115 (such beneficiaries collectively, the Beneficiaries). The local governments are political subdivisions of states of the United States, within the meaning of § 115 (such local governments collectively, the Local Governments).
On Date 1, the Defendants filed voluntary petitions for relief under Bankruptcy Chapter of the United States Bankruptcy Code in the Court. On Date 2, the Court approved the Defendants' Plan, which required the formation of Trust. The Plan reflected settlements with, or on behalf of, the Beneficiaries and Local Governments. Trust resolved the Liabilities of the Defendants with respect to the Beneficiaries' and Local Governments' claims against the Defendants for their Activities regarding Product Z.
Trust is a State statutory trust that was formed pursuant to the Plan and remains subject to the continuing jurisdiction of the Court. The trustee of Trust is Trustee.
On Date 3, the Defendants transferred Dollar Amount to Trust (the Transfer of Funds) pursuant to the Plan. Trust will not receive any other funding.
Under the Plan, Trust will devote its entire operation to abating the F created by the Defendants' Activities regarding Product Z, a public health crisis, or funding Related Projects in accordance with the distribution procedures in the trust agreement for Trust that benefit the Beneficiaries and their citizens or residents. Under the Plan and in accordance with numerous state/local abatement sharing agreements, many of the Beneficiaries are required to distribute, or direct the distribution of, a portion of the amounts they receive from Trust to Local Governments for the Local Governments' use in the abatement of the F.
Trust may also hold, manage, and invest assets of Trust prior to their distribution to Beneficiaries. Other than payment for goods and services necessary for Trust to perform the task of abating the F and administering Trust for such purpose, none of Trust's income will revert to a private party. Under the terms of the trust agreement for Trust, Trustee may invest and reinvest the principal and income of Trust. The Transfer of Funds does not represent dividends on stock of a transferor (or related person), interest on debt of a transferor (or a related person), or payments in compensation for late or delayed transfers.
Distributions from Trust may only be made in accordance with the distribution procedures in the trust agreement. The Beneficiaries must use the funds distributed from Trust on approved abatement of the F, as defined in the Guidelines. The approved items for the abatement of the F were created by representatives of the Beneficiaries after careful research, consideration, and deliberation. The representatives of the Beneficiaries intended that the approved items would be effective at combating the F.
Upon dissolution, any assets remaining in Trust will be distributed only to the Beneficiaries or the Local Governments in accordance with the trust agreement for Trust, which includes provisions for distributions to Local Governments in accordance with the state/local abatement sharing agreements. None of Trust's assets will be distributed or revert to any entity whose income is not excludible from gross income under § 115. Under the Plan, neither the Defendants nor the reorganized Defendants retain any ownership or residual interest in the assets of Trust, any proceeds from those assets, or investment income from those assets.
RULINGS REQUESTED
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Trust is a qualified settlement fund under § 1.468B-1(c).
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Trust may exclude under § 1.468B-2(b)(1) from its modified gross income the assets received or to be received; and
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The income earned by Trust will be excluded from its gross income under § 115.
LAW & ANALYSIS
- Trust's Status as a Qualified Settlement Fund under § 1.468B-1(c)
Section 468B(g)(1) provides that "[n]othing in any provision of law shall be construed as providing that an escrow account, settlement fund, or similar fund is not subject to current income tax." § 468B(g)(1) authorizes the issuance of regulations providing for the taxation of any such account or fund whether as a grantor trust or otherwise. Sections 1.468B-1 through 1.468B-5 regarding qualified settlement funds were issued pursuant to § 468B(g).
Section 1.468B-1(a) provides that a qualified settlement fund is a fund, account, or trust that satisfies the three requirements of § 1.468B-1(c). First, § 1.468B-1(c)(1) requires that the fund, account, or trust is established pursuant to an order of, or it is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority. Second, § 1.468B-1(c)(2) requires that the fund, account, or trust is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability (i) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980; (ii) arising out of a tort, breach of contract, or violation of law; or (iii) designated by the Commissioner in a revenue ruling or revenue procedure. Third, § 1.468B-1(c)(3) provides that the fund, account, or trust must be a trust under applicable state law, or its assets must be otherwise segregated from other assets of the transferor (and related persons).
Based on the facts represented by Trust, the three requirements of § 1.468B-1(c) are satisfied, and as such, Trust is a qualified settlement fund for federal income tax purposes. First, the Court entered an order approving the establishment of Trust, and Trust remains subject to the continuing jurisdiction of the Court. See § 1.468B-1(c)(1). Second, Trust was established to resolve or satisfy claims of the Beneficiaries and Local Governments that arose from the Defendants' violations of statutory and/or common law and for the Activities regarding Product Z that have given rise to the Liabilities. See § 1.468B-1(c)(2). Third, Trust was organized as a trust under applicable state law. See § 1.468B-1(c)(3).
- Transferred Funds Excluded from Modified Gross Income under § 1.468B-2(b)(1)
Section 61(a) provides that gross income means all income from whatever source derived.
Section 1.468B-2(a) provides that a qualified settlement fund is a United States person and is subject to tax on its modified gross income for any taxable year at a rate equal to the maximum rate in effect for that taxable year under § 1(e).
Section 1.468B-2(b) provides that the term modified gross income means "gross income," as defined in § 61, computed with certain modifications.
Under § 1.468B-2(b)(1), amounts transferred to the qualified settlement fund by, or on behalf of, a transferor to resolve or satisfy a liability for which the fund is established are excluded from gross income. However, dividends on stock of a transferor (or a related person), interest on debt of a transferor (or a related person), and payments in compensation for late or delayed transfers are not excluded from gross income.
Trust was established to resolve or satisfy claims of the Beneficiaries and Local Governments that arose from the Defendants' Activities regarding Product Z and violations of statutory and/or common laws. The Transfer of Funds was made to resolve or satisfy the related Liabilities. Such transfer was made by the Defendants to Trust in accordance with the terms of the Plan. As represented by Trust, the Transfer of Funds does not fall within the three specific exceptions to the general provision in § 1.468B-2(b)(1) that excludes transfers into Trust from Trust's gross income.
Accordingly, based on the information submitted and representations made, we conclude that Trust may exclude the Transfer of Funds from its modified gross income because Trust may exclude such transfer from its gross income under § 1.468B-2(b)(1).
- Exclusion from Gross Income under § 115
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.
Section 115(2) provides that gross income does not include income accruing to the government of any possession of the United States, or any political subdivision thereof. Section 7701(a)(10) provides that the term "State" shall be construed to include the District of Columbia, where such construction is necessary to carry out provisions of this title.
Rev. Rul. 77-261, 1977-2 C. B. 45, holds that income from an investment fund, established under a written declaration of trust by a state, for the temporary investment of cash balances of the state and its participating political subdivisions, is excludable from gross income for federal income tax purposes under § 115(1). The ruling reasons that the investment of cash balances by a state or political subdivision thereof in order to receive some yield on the funds until needed to meet expenses is a necessary incident of the power of the state or political subdivision to collect taxes and other revenue to fund government expenses. 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 which are within the ambit of a sovereign to properly conduct.
In Rev. Rul. 90-74, 1990-2 C.B. 34, the Service determined 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 § 115(1). In Rev. Rul. 90-74, private interests neither materially participate in the organization nor benefit more than incidentally from the organization.
Trust will use its assets and income thereof to mitigate the effects of the F suffered by the Beneficiaries and their citizens as a result of Product Z. All Beneficiaries are either a state or a political subdivision thereof (including Local Governments), the District of Columbia, or a government of a possession of the United States within the meaning of § 115. By carrying on this activity, Trust is performing an essential governmental function.
Trust will devote its entire operation to the purpose of funding projects to abate the F for the benefit of the Beneficiaries and their citizens or residents. Other than payments for goods and services necessary for Trust to perform the task of mitigating the F and for administering Trust for this purpose, none of Trust's income will revert to a private party.
Upon dissolution, Trust shall distribute any funds not needed for the expenses incurred to wind up and dissolve Trust solely among the Beneficiaries and Local Governments in accordance with the prescribed schedule of the distribution procedures in the trust agreement for Trust, which includes a provision for distributions to Local Governments in accordance with the state/local abatement sharing agreements. None of Trust's assets will be distributed or revert to any entity that is not a state or a political subdivision thereof, the District of Columbia, or a government of a possession of the United States within the meaning of § 115.
Based solely on the facts and representations, we conclude that Trust is exercising an essential governmental function, with its income accruing to a state or a political subdivision thereof, the District of Columbia, or a government of any possession of the United States. Therefore, Trust's income is excludable from gross income under § 115.
The ruling contained in this letter is based upon information and representations submitted by or on behalf of Trust and accompanied by a penalty of perjury statement executed by an individual with authority to bind 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 this ruling, 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. 2025-1, section 11.05.
No opinion is expressed concerning the federal tax consequences under any Code provision other than the provisions specifically cited above. 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 income tax treatment of Trust's income and may not be cited or relied upon by any other taxpayer, including Trust's beneficiaries.
This ruling is directed only to Trust as the taxpayer requesting it. 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 each of Trust's authorized representatives.
Sincerely,
ANNA W. GLEYSTEEN
Senior Technician Reviewer, Branch 6
(Income Tax & Accounting)
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