State public-records system receives governmental income and contribution rulings

Plain-English summary

A state created a corporation to operate an electronic system that gives the public access to records required to be available under state open-records law. The corporation contracts with state agencies and political subdivisions, charges legislatively or agency-set access fees, pays part of those fees to the record providers and a contracted system manager, and may make grants only to state agencies and political subdivisions. Its board is dominated by government officials and gubernatorial appointees, its revenues must support its statutory purposes, and its assets must pass to government or another section 115 entity at dissolution. The IRS ruled that providing public access to government records is an essential governmental function and that the corporation's income accrues to the state or its political subdivisions, so the income is excluded under section 115(1). It also found that the corporation substantially satisfies the government-instrumentality factors. Contributions to it are therefore deductible under section 170 to the extent otherwise allowed.

Ruling snapshot

• Question: Is the public-records corporation's income excluded as governmental income, and are contributions to it deductible?
• Outcome: Approved on both questions
• Key authorities: IRC §§ 115(1), 170(a), 170(c)(1); Rev. Rul. 57-128; Rev. Rul. 75-359; Rev. Rul. 77-261; Rev. Rul. 90-74

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202443007 [Third Party Communication:
Release Date: 10/25/2024 Date of Communication: Month DD, YYYY]
Index Number: 115.00-00
Person To Contact:
----------------------------------------------- --------------------, ID No. -----------------
---------------------------------------------------------- Telephone Number:
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----------------------------------------------- Refer Reply To:
---------------------------- CC:EEE:EOET:EO1
PLR-102501-24
Date:
July 30, 2024

Taxpayer = -----------------------------------------------
State = ----------
Statute = -------------------------------
System Manager = -------------------------------------------------

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

This letter responds to a letter from your authorized representative, dated February 1,
2024, and subsequent correspondence requesting a ruling that Taxpayer’s income is
excludable from gross income under section 115(1) of the Internal Revenue Code
(Code),1 and that Taxpayer is an instrumentality of State for purposes of section
170(c)(1) to which contributions are deductible to the extent otherwise allowed by
section 170.

FACTS

Taxpayer is a corporation created by Statute under the laws of State. Statute provides
that Taxpayer’s purpose is to create and manage a system for the public to gain
electronic access to information required to be available to the public pursuant to State’s
open records law. Accordingly, Taxpayer contracts with State agencies and political
subdivisions which are required to provide access to certain public records and
information. Statute provides that State considers Taxpayer to be an instrumentality of
the state whose activities constitute the performance of an essential governmental
function. Taxpayer’s bylaws limit the distribution of Taxpayer's assets upon dissolution
to another organization whose income is excluded from gross income under section

1 Unless otherwise noted, all references in this letter ruling to “section” refer to the Internal Revenue Code

of 1986, as amended.

PLR-102501-24 2

115(1) for the performance of an essential governmental function or to State or a
political subdivision of State.

Statute establishing Taxpayer provides that Taxpayer shall be governed by a nine-
member board of directors and how it will be constituted. The directors include a
statewide elected official, seven persons appointed directly by the governor of State,
and one person, an employee of State selected by the governor, who serves ex officio.
The majority of the members of the board are government officials representing
governmental interests. Pursuant to Taxpayer’s bylaws, the board annually elects three
officers from among its own members. Taxpayer also has two employees, an Executive
Director responsible for the overall management and oversight of Taxpayer's
operations, including work performed by the System Manager, and a Chief
Administrative Officer, who assists the Executive Director in the day-to-day operations
of Taxpayer.

Taxpayer has adopted a conflict of interest policy that imposes a duty on its directors,
officers, committee members, and employees. They are required to disclose any
financial interest they have, directly or indirectly, such as through a business,
investment or family member, in any entity with which Taxpayer has a transaction or
arrangement, any compensation arrangement with Taxpayer or an entity or individual
with which Taxpayer has a transaction or arrangement, or any potential ownership or
investment interest in, or compensation arrangement with, any entity or individual with
which Taxpayer is negotiating a transaction or arrangement. Each person subject to the
conflict of interest policy must annually sign a statement that he or she has received a
copy of the conflict of interest policy, has read and understands the policy, and has
agreed to comply with the policy.

Under Statute, Taxpayer is required to hire an individual or entity to direct and supervise
the day-to-day operations and expansion of a computer network to conduct Taxpayer’s
obligations and responsibilities. Taxpayer hired System Manager after soliciting bids for
the contract through State’s negotiated procurement process dictated by State law. The
contract between Taxpayer and System Manager permits Taxpayer to terminate the
contract and rebid it at any time with notice to System Manager. System Manager
develops, in consultation with Taxpayer’s staff, a detailed annual business plan, tracks
all projects, and provides monthly reports to Taxpayer. No director, officer, committee
member, or employee of Taxpayer is a director, officer, committee member, or
employee of, or has a financial interest in or compensation agreement with, System
Manager.

System Manager employs a project manager, web developer, designer, systems
administrator, software engineers, and developers to implement projects approved by
Taxpayer’s board of directors and staffs a help desk for Taxpayer’s customers. System
Manager is also responsible for all aspects of managing the network, including
acquisition, installation, operation, maintenance, and testing of all hardware, software,

PLR-102501-24 3

and enhancements thereto, and the provision of backup, support, and network service
to Taxpayer.

Statute requires that Taxpayer fund its operations from revenues and contributions and
use its revenues solely in furtherance of Taxpayer’s statutory purposes. Taxpayer earns
income from fees paid by commercial, professional, and public users that pay fees to
access public information supplied by State agencies, elected official offices, counties,
the judicial branch, and other State entities. Fees for public records are set by the State
legislature and/or the State agency that creates or maintains the public record.
Taxpayer pays the State agencies and political subdivisions a portion of each fee as
agreed to in the contract with the agency or political subdivision. Taxpayer reimburses
itself any processing fee and then pays a portion of the remaining net revenue to
System Manager and retains the rest. Taxpayer and System Manager have
renegotiated the fee structures several times to address the different risks and costs
inherent in the business at different points in time. Taxpayer is permitted to, and does,
make grants only to State agencies and political subdivisions of State to enable the
recipient to increase access to information and improve the quality of the information
delivered.

RULINGS REQUESTED

1. Taxpayer’s income is excludable from gross income under section 115(1)
   because all of Taxpayer’s income is derived from its performance of an essential
   governmental function and accrues to a state or other political subdivision
   thereof.

2. Contributions to Taxpayer are deductible to the extent otherwise allowed by
   section 170, because Taxpayer is an instrumentality for purposes of section
   170(c)(1).

LAW

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

Section 170(c)(1) states that, for purposes of section 170, 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.

PLR-102501-24 4

Revenue Ruling 57-128, 1957-1 C.B. 311, provides six factors to consider when
determining whether an organization is a wholly owned instrumentality of one or more
states or political subdivisions. The revenue ruling’s factors are: (1) whether the
organization is used for a governmental purpose and performs a governmental function;
(2) whether performance of the organization’s function is on behalf of one or more
states or political subdivisions; (3) whether there are any private interests involved, or
whether the states or political subdivisions involved have the powers and interests of an
owner; (4) whether control and supervision of the organization is vested in public
authority or authorities; (5) if express or implied statutory or other authority is necessary
for the creation and/or use of such an instrumentality and whether such authority exists;
and (6) the degree of financial autonomy and the source of the organization’s operating
expenses. Not all factors need be present to be an instrumentality within the purview of
Revenue Ruling 57-128.

Revenue Ruling 75-359, 1975-2 C.B. 79, provides that a voluntary association of
counties is separate from its member counties and qualifies as a wholly owned
instrumentality of those counties, which are political subdivisions, and is formed and
operated exclusively for the public purposes of the member counties. Therefore, the
revenue ruling holds that contributions to the association are deductible as contributions
for the use of political subdivisions, subject to the limitation of section 170(b)(1)(B).

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) 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) 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.

PLR-102501-24 5

ANALYSIS

Ruling Request 1

Taxpayer was created under State law to facilitate public access to State public records
required by State law to be made available to the public. Providing access to State
public records is an essential governmental function. See Rev. Rul. 90-74 and Rev. Rul.
77-261.

Taxpayer’s income accrues to political subdivisions of State. Taxpayer benefits private
interests only incidentally. See Rev. Rul. 90-74. In no event will Taxpayer’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). Upon dissolution, Taxpayer’s bylaws provide that all assets are required
to be distributed, or shall revert to, State, a political subdivision of State, or another
entity the income of which is excludable from its gross income by application of section
115(1) that performs an essential governmental function.

Ruling Request 2

Section 170(c)(1) generally defines the term “charitable contribution,” for purposes of
section 170(a)(1), to include a contribution or gift to or for the use of a state or any
political subdivision of a state, provided the contribution or gift is made for exclusively
public purposes. Contributions to Taxpayer cannot constitute charitable contributions to
a state or political subdivision of a state for purposes of section 170(c)(1), because
Taxpayer is neither a state nor a political subdivision of a state. However, pursuant to
Revenue Ruling 75-359, contributions to Taxpayer may constitute charitable
contributions for the use of a state or political subdivisions of a state, if Taxpayer
qualifies as a separate, wholly owned instrumentality of one or more political
subdivisions of State. In that event, contributions to Taxpayer are deductible under
section 170(a), subject to the limitation of section 170(b)(1)(B). A determination of
whether Taxpayer is a wholly owned instrumentality of one or more political subdivisions
of State is made by considering the factors set forth in Revenue Ruling 57-128.

Governmental Purpose and Function

The first factor under Revenue Ruling 57-128 is whether Taxpayer is used for a
governmental purpose and performs a governmental function. Taxpayer was
established by State to facilitate public access to State public records as required by
State law.

Performance on Behalf of Political Subdivisions

The second factor under Revenue Ruling 57-128 is whether the performance of
Taxpayer’s function is on behalf of one or more states or political subdivisions.

PLR-102501-24 6

Taxpayer was established pursuant to State Statute to facilitate public access to State
public records. Taxpayer’s board consists of nine members. One member is a statewide
elected official. The remaining eight are appointed by the governor. The majority of the
members represent governmental interests in operating Taxpayer. The statute
governing Taxpayer requires it to carry out the services it provides to the State and its
political subdivisions. Taxpayer is subject to State’s open meetings and records laws.

Private Interests Involved.

The third factor under Revenue Ruling 57-128 is whether there are any private interests
involved, or whether the state or political subdivisions involved have the powers and
interests of an owner. Taxpayer’s revenues accrue to State and may be deposited in the
State treasury or may be maintained in a State bank or savings and loan association
until expended pursuant to Statute. Taxpayer pays System Manager a fee for providing
management and operating services for Taxpayer. These fees are paid pursuant to a
contract that was negotiated under State’s public bidding laws. Taxpayer and System
Manager have renegotiated the fee structures several times to address the different
risks and costs inherent in the business at different points in time. Moreover, System
Manager is required to provide monthly reports to Taxpayer’s board of directors
regarding all planned and existing projects. Additionally, Taxpayer maintains a conflict
of interest policy and requires its directors to file an annual statement stating that they
understand and agree to comply with Taxpayer’s conflict of interest policy. Upon
dissolution, Taxpayer’s bylaws provide that all assets are required to be distributed, or
shall revert to, State, a political subdivision of State, or another entity the income of
which is excludable from its gross income by application of section 115(1) that performs
an essential governmental function.

Control and Supervision

The fourth factor under Revenue Ruling 57-128 is whether control and supervision of
Taxpayer is vested in public authority or authorities. Pursuant to State law, Taxpayer’s
board of directors consists of nine members. One director is a statewide elected official.
The remaining eight members are appointed by the governor. The majority of the
members represent governmental interests and will always have control of Taxpayer’s
board of directors. Moreover, as an entity established by the State legislature, the
Taxpayer inherently is accountable to the State legislature.

Statutory Authority

The fifth factor under Revenue Ruling 57-128 is whether express or implied statutory or
other authority is necessary for the creation and use of Taxpayer and whether such
authority exists. Taxpayer was established by State statute.

Financial Authority and Source of Operating Funds

PLR-102501-24 7

The sixth factor under Revenue Ruling 57-128 is the degree of Taxpayer’s financial
autonomy and the source of its operating expenses. Taxpayer derives its funding from
the fees it generates by providing access to State governmental records and information
required to be available to the public pursuant to State’s open records law. Although
Taxpayer has its own source of revenue, State law directs that Taxpayer must use
revenue from its activities solely in furtherance of its statutory purposes.

Taxpayer substantially satisfies the factors of Revenue Ruling 57-128. Consequently,
we conclude that Taxpayer is an instrumentality of State.

RULINGS

Based on the information and representations submitted on behalf of Taxpayer, we rule
that:

1. 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).

2. Taxpayer is an instrumentality for purposes of section 170(c)(1). Thus,
   contributions to Taxpayer are deductible to the extent otherwise allowed by
   section 170.

The rulings contained in this letter are based on information and representations
submitted by or on behalf of Taxpayer and accompanied by penalties of perjury
statements 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 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 the taxpayer requesting it. Section 6110(k)(3) provides that
this ruling may not be used or cited as precedent. In accordance with the power of

PLR-102501-24 8

attorney on file with this office, a copy of this letter is being sent to your authorized
representative.

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

If you have any questions about this letter ruling, please contact the person whose
name and telephone number are shown in the heading of this letter.

                                       Sincerely,



                                       Matthew Giuliano
                                       Branch Chief
                                       Exempt Organizations Branch 1
                                       (Employee Benefits, Exempt Organizations,
                                       and Employment Taxes)

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