City retiree health trust income is excluded under section 115

Plain-English summary

A city created a trust to fund health and welfare benefits for retired general employees, police officers, firefighters, and eligible family members. The city council served as trustee, and trust assets could be used only for benefits or transferred to a state, political subdivision, or another section 115 entity. The IRS concluded that providing these public-employee benefits was an essential governmental function and that any private benefit to employees was incidental to the public benefit. The trust's income therefore was excluded from gross income under section 115(1). Because it had no taxable gross income for section 6012(a)(4), the trust was not required to file an annual income tax return.

Ruling snapshot

• Question: Is the city retiree health trust's income excluded under section 115, and must it file annual income tax returns?
• Outcome: approved
• Key authorities: IRC §§ 115(1), 6012(a)(4); Treas. Reg. § 301.7701-4(a); Rev. Rul. 77-261; Rev. Rul. 90-74

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201742002                                             [Third Party Communication:
Release Date: 10/20/2017                                      Date of Communication: Month DD, YYYY]
Index Number: 115.00-00, 115.06-00,
              115.06-02                                       Person To Contact:
                                                              --------------------, ID No. ----------------------
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                                                              Telephone Number:
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                                                              Refer Reply To:
                                                              CC:TEGE:EOEG:E02
                                                              PLR-101791-17
                                                              Date:
                                                              July 13, 2017



City                      =     ------------------------------------------------------------------------------------
State                     =     --------------------------------------------------
Trust                     =     --------------------------------------------------------
Trustee                   =     ----------------------------------------------------
Mayor                     =     ------------------------------------------------------------------------------------
Effective Date            =     ------------------------------------------------------------------------------------
                                ----

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

This letter responds to a letter from Trust’s authorized representative dated November
15, 2016, and subsequent correspondence submitted on behalf of Trust, requesting a
ruling that Trust’s income is excludable from gross income under Internal Revenue
Code (IRC) section 115; and that Trust is not required to file annual tax returns.

Facts

Trust was established by City on Effective Date to provide health and welfare benefits to
retired general members, police officers, and firefighters and their eligible spouses and
dependents.

The Trustee is the City Council of the City. The City Council is comprised of the Mayor
and eight members elected by the voters of the City.

The Trust is a funding vehicle whereby the Trustee of the Trust will accept contributions
to the Trust for holding and administration. The Trustee holds, invests and reinvests the
assets of the Trust and pays benefits from the Trust solely to provide health and welfare
benefits to retirees and eligible spouses and dependents of retirees entitled to health
coverage under the City Code.
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The Trust provides that in no event will Trust assets be distributed to or revert to any
entity that is not a state, a political subdivision of a state or an entity whose income is
excluded from gross income under IRC section 115(1).

Law and Analysis

Issue 1- IRC section 115(1)

IRC 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.
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 IRC 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 (e.g., casualty, public
liability, workers’ compensation, and employees’ health) is excludable from gross
income under IRC section 115(1), 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.
Providing health and welfare benefits to current and former employees constitutes the
performance of an essential government function within the meaning of IRC section
115(1). Rev. Rul. 90-74 and Rev. Rul. 77-261.
The Trust’s income accrues to the City. No private interests will participate in, or benefit
from, the operation of Trust, other than as providers of goods or services. The benefit to
employees is incidental to the public benefit. See Rev. Rul. 90-74.
In no event, including dissolution, will the Trust’s assets be distributed or revert to any
entity that is not a state, a political subdivision of a state, or entity the income of which is
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excludable from its gross income by application of IRC section 115(1).

Issue 2 - IRC section 6012(a)(4)

Section 301.7701 -1(b) of the Procedure and Administration Regulations (Regulations)
provides that the classification of organizations that are recognized as separate entities
is determined under sections 301.7701-2, 301.7701-3, and 301.7701-4 of the
Regulations, unless a provision of the IRC provides for special treatment of that
organization.
Section 301.7701-4(a) of the Regulations provides that, in general, an arrangement will
be treated as a trust 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 beneficiaries of the Trust cannot share in the discharge of the Trustee’s
responsibility for the protection and conservation of property and, therefore, are not
associates in a joint enterprise for the conduct of business for profit.
IRC section 6012(a)(4) provides that every trust having for the taxable year any taxable
income or having gross income of $600 or more, regardless of the amount of taxable
income, shall make returns with respect to income taxes under Subtitle A.
Based solely on the facts and representations submitted by the Trust, we conclude that:

1. Because the income of the Trust derives from the exercise of an essential
governmental function and will accrue to a state or a political subdivision thereof, the
Trust’s income is excludable from gross income under IRC section 115(1).
2. The Trust is classified as a trust within the meaning of section 301.7701-4 (a) of the
Regulations. Because Trust’s income is excludable from gross income under IRC
section 115(1) the Trust is not required by IRC section 6012(a)(4) to file an annual
income tax return.
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 tax treatment of the Trust’s income and
may not be cited or relied upon by any taxpayer, including the City participating in the
Trust, and any recipients of benefits paid under the terms of the Trust, as to any matter
relating to the taxation of accident or health contributions or benefits.
This ruling is directed only to the taxpayer who requested it. IRC 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 your authorized representative.
PLR-101791-17                                 4

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.
The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. 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.

Sincerely,


James Zelasko
Assistant Branch Chief
Exempt Organizations Branch 2 (Tax Exempt and Government Entities)

Enclosures: 2