A governmental self-insurance pool's income is excluded under § 115

Plain-English summary

An unincorporated association of local governments runs a group self-insurance pool that provides workers' compensation and liability coverage to its member governments and their employees. Only political subdivisions and government agencies can be members, no private parties, and on dissolution the assets go back to the member governments. After merging with a similar workers' compensation pool, the association asked the IRS to confirm its pool income is still tax-free. The IRS ruled that operating this pool is an essential governmental function and its income accrues to political subdivisions, so the income is excluded from gross income under IRC § 115(1). Any benefit to private parties (like covered employees) is only incidental. The ruling relies on Rev. Rul. 90-74 and Rev. Rul. 77-261.

Ruling snapshot

• Question: Is the income of a local-government self-insurance pool excludable from gross income under § 115(1)?
• Outcome: Approved
• Key authorities: IRC § 115(1); Rev. Rul. 90-74; Rev. Rul. 77-261

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202102003 Third Party Communication: None
Release Date: 1/15/2021 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-110519-20
Date:
October 20, 2020

Association = --------------------------------------------
State = ----------
Statute = --------------------------------------------------------------
A = ---------------------------------------------------------------------
B = ----------------------------------
Date 1 = ---------------------------
Date 2 = --------------------------
Date 3 = -----------------

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

This letter responds to a letter from your authorized representative, dated April 17,
2020, and subsequent correspondence requesting a ruling that Association’s income is
excludable from gross income under section 115 of the Internal Revenue Code (Code).
Association represents the facts as follows.

                                                FACTS

Association is an unincorporated association of political subdivisions and agencies of
political subdivisions in State (Pool Members). Association was organized to create and
administer a group self-insurance pool pursuant to Statute. A operates a
comprehensive workers’ compensation insurance program for State municipalities and
other governmental entities located in State. On Date 1, Association received a ruling
that its income from the operation of its group self-insurance pool is excludable from
gross income under section 115 of the Code. On Date 2, A received a ruling that its
income from the operation of its workers’ compensation program is excludable from
gross income under section 115. On Date 3, Association and A merged, with
Association surviving the merger. The purpose of the merger was to improve risk
sharing and to develop greater overall efficiencies by combining overhead expenses,
administration, and management.
PLR-110519-20 2

Association continues the insurance programs that it and A operated prior to the merger
using a group self-insurance pool (Pool). More specifically, the Pool provides risk
management services and insurance for the Pool Members and employees of the Pool
Members for acts or failures to act occurring during the performance of their
employment duties. Membership in Association and participation in the Pool is
restricted to political subdivisions and agencies of political subdivisions in State. No
private persons or organizations can be members of Association.

Association is governed by a supervisory board consisting of six to nine members that
are elected by the Pool Members. In addition to the elected board members, the
executive director of B is as an ex-officio board member. B is an organization described
in section 501(c)(4) of the Code and it was created by various State cities, towns, and
counties to promote their welfare. With the exception of the executive director of B,
board members must be governing officials or chief administrative officials of political
subdivisions that are members of the Pool. Board members cannot be an owner,
officer, or employee of a provider of certain services, within the meaning of the Statute,
to Association.

Association’s income consists of contributions and fees received from the Pool
Members, as well as investment income. Association’s expenses consist of claim
payments, premium payments on certain reinsurance, and the cost of administering the
Pool. Any surplus resulting from an excess of income over expenses is retained by
Association for use with respect to future claims and other expenses; however, such
surplus, or a portion thereof, may be returned to the Pool Members upon the approval of
State’s insurance commission. No portion of Association’s income inures to the benefit
of any private person, except as reasonable compensation for goods or services
rendered. Upon dissolution or termination, Association’s assets must be distributed to
the Pool Members.

                              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
PLR-110519-20 3

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.

Association’s activities subsequent to its merger with A consist of the activities both it
and A performed prior to the merger. Association was created to provide certain
insurance to the Pool Members, which are required to be political subdivisions and
agencies of political subdivisions in State. Providing such insurance to such
governmental entities constitutes the performance of an essential government function.
See Rev. Rul. 90-74 and Rev. Rul. 77-261.

Association’s income accrues to political subdivisions of State. Private interests benefit
only incidentally. See Rev. Rul. 90-74. In no event, including upon termination, will
Association’s assets be distributed or revert to any entity that is not a state, a political
subdivision of a state, or another entity the income of which is excludable from its gross
income by application of section 115(1) of the Code.

                                      RULING

Based on the information and representations submitted on behalf of Association, we
conclude that, because Association derives its income from the exercise of an essential
governmental function, and because Association’s income accrues to a state or a
political subdivision of a state, Association’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 Association 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
PLR-110519-20 4

a continuing action or series of actions, the controlling facts change during the course of
the transaction. See Rev. Proc. 2020-1, 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 Association. Section 6110(k)(3) of the Code provides that
this ruling 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 Association’s authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, if Association files its returns electronically, Association 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)

cc: