Public-school workers' compensation trust may exclude its income

Plain-English summary

A trust pools workers' compensation liabilities for public school districts and similar public entities in one state. Each member must be a political subdivision, an integral part of one, or an entity whose income is already excludable under section 115(1). The trust's governing documents prohibit private parties from receiving its earnings and require remaining assets at dissolution to go only to governmental or section 115 entities. The IRS found that administering self-insured workers' compensation coverage for political subdivisions is an essential governmental function. Because the income accrues to the state or its political subdivisions and private interests receive no more than incidental benefits, the trust may exclude its income from gross income under section 115(1).

Ruling snapshot

• Question: Is the trust's income excluded because it performs an essential governmental function for public entities?
• Outcome: Approved, the trust's income is excludable under section 115(1)
• 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: 202445010 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:EO1
PLR-103676-24
Date:
August 09, 2024

Legend

Trust = --------------------------------------------------------------
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State = ------------
Association = ------------------------------------------------------------
Group Members = ----------------------------------------------------------------------------------
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Dear ---------------:

This letter ruling responds to a request dated February 9, 2024, and subsequent
correspondence submitted on behalf of Trust, requesting a ruling that the income of
Trust is excludable from gross income under section 115(1) of the Internal Revenue
Code (Code)1 because all of Trust’s income is derived from the exercise of an essential
governmental function and accrues to a state or political subdivision thereof.

FACTS

Trust was formed under a Declaration of Trust and Bylaws to provide self-insured
workers’ compensation coverage to State school districts and similar public entities
(hereafter, Group Members), all of which are also members of Association, a section
501(c)(4) tax-exempt corporation formed under the laws of State. Trust allows school

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

of 1986, as amended.

PLR-103676-24 2

districts to pool their workers’ compensation liabilities to qualify as self-insurers under
State law. Trust is governed by a 10-member Board of Trustees, half of which are
current or former officers of Association, and half of which are appointed from among
school administrators or at large.

All school districts in State are Group Members. The Declaration of Trust and Bylaws
provides that each Group Member must be a political subdivision of State, an integral
part of a political subdivision of State, or an entity whose entire income is excludable
from gross income under section 115(1). Each Group Member, as an employer in State,
is required by State law to provide workers’ compensation insurance. Trust is
administered by Association pursuant to a services agreement under the direction of
Trust’s Board of Trustees. The Board of Trustees sets the premiums to be paid for
workers’ compensation coverage, collects the premiums and administers the fund, and
processes workers’ compensation claims.

The Declaration of Trust and Bylaws expressly prohibits any trustee, officer, employee,
member of a committee, person connected with Trust, or any individual or entity other
than State, a political subdivision thereof, or an entity the income of which is excludable
from gross income under section 115(1) from receiving at any time any of the net
earnings or pecuniary profit from Trust. It also provides that upon dissolution of Trust,
the remaining assets of Trust, after all debts have been satisfied, shall be distributed,
transferred, conveyed, delivered, and paid over exclusively to State, a political
subdivision of State, or an entity the income of which is excludable from its gross
income under section 115(1).

RULING REQUEST

Trust requests a ruling that it exercises an essential governmental function and its
income is excludable from gross income under section 115(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, or the District of Columbia.

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

PLR-103676-24 3

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.

ANALYSIS

Trust provides self-insured workers’ compensation coverage to public school districts in
State. Trust’s administration of a self-insured workers’ compensation fund for political
subdivisions constitutes the performance of an essential governmental function within
the meaning of section 115(1). See Rev. Rul. 90-74 and Rev. Rul. 77-261.

Trust’s income accrues to the benefit of State or political subdivisions of State. No
private interests will participate in, or benefit more than incidentally from, the operation
of Trust, as required under Rev. Rul. 90-74.

In no event, including upon dissolution, will Trust assets be transferred to or revert to an
entity that is not State, a political subdivision of State, or an entity whose income is
excludable from gross income under section 115(1).

RULING

Based on the information and representations submitted on behalf of Trust, we have
determined that Trust exercises an essential governmental function under section
115(1). Thus, because Trust derives its income from the exercise of an essential
governmental function and Trust’s income accrues to State or political subdivisions of
State, Trust’s income is excludable from gross income under section 115(1).

The ruling contained in this letter is based upon information and representations
submitted by or on behalf of Trust and accompanied by penalties of perjury statements
executed by individuals 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 Chief Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes) will revoke or modify a letter ruling and apply
the revocation retroactively if there has been a misstatement or omission of controlling

PLR-103676-24 4

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, 2024-1 I.R.B. 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 those sections specifically described.
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.

Because it could help resolve questions concerning federal income tax status, this letter
should be kept in Trust’s permanent records and must be attached to any tax return to
which it is relevant. Trust may attach a statement to the return that provides the date
and control number of this letter.

This ruling is directed only to 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 Trust’s authorized
representatives.

If you have any questions about this 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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