Tuesday, September 13, 2011

Income from Governmental Employee Trust Ruled Non-taxable

In Private Letter Ruling 201136007 (May 16, 2011), 2011 PLR LEXIS 838 (released on September 9), the IRS ruled that the income of a governmental employee trust is excludable from gross income under section 115 of the Internal Revenue Code.  In this ruling, a governmental authority administered the water and wastewater utility of a city and county.  Both the city and the authority provided life insurance for their retired employees as part of their compensation package. The entities proposed to set up the trust to fund this post-employment benefit.  The trustees of the trust would consist of the members of the city’s investment committee (comprised of various government officials and other appointees).

In ruling that the income is excludible under Code section 115, the IRS reasoned that providing life insurance benefits to retired governmental employees and their beneficiaries constitutes the performance of an essential governmental function within the meaning of Code section 115.  Relying on Revenue Ruling 90-74, 1990-2 C.B. 34, and Revenue Ruling 77-261, 1977-2 C.B. 45, the private letter ruling states as follows:

The provision of life insurance benefits to retirees and their dependents satisfies the obligation of the Employer to provide those benefits as part of the employees' compensation; thus, the income of the Trust accrues to the benefit of the Employer, with the Authority and the City comprising the Employer being political subdivisions. No private interests participate in, or benefit from, the operation of the Trust, other than as providers of goods and services. Any amounts remaining in the Trust after all life insurance benefits, plus reasonable fees and expenses, have been paid shall in no event be paid to any entity other than a state, political subdivision, or section 115 entity. The benefit to retired employees of the Employer is incidental to the public benefit.

JRB

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