MAY 07 INQUIRY ON IRS TAX FILING REQUIREMENTS. (Note all identifying information as to individuals, states and pools, except “Pumford” and “OMAG” have been redacted and a word, phrase or – placed in ( ) where this occurred).

1. AGRiP received an inquiry from a member pool as to how many pools file IRS 1120 forms. The inquiry also stated, “It is a corporate tax return, that in our tax counsel's opinion applies to pools. We have not historically filed this form and I am trying to figure out how many pools do.” The inquirer later provided additional information as follows: “I am forwarding an excerpt from our tax counsel's letter that addresses filing requirements. You need to know that the advice was not given for the (pool) but rather, another entity created under the (state) Interlocal Cooperation Act. So we believe the advice may apply to (us) as well.

(Excerpt for tax counsel letter referred to above) “ Filing Requirement ”

Section 6012(a)(2) of the Code provides that returns with respect to income taxes under subtitle A shall be made by every corporation subject to taxation under subtitle A. A corporation must file a return regardless of whether it has taxable income and regardless of the amount of its gross income.[1][1]. The regulations clarify that the term “corporation” for purposes of section 7701 includes entities in two categories, both of which apply to the XXX.

 A business entity organized under a Federal or State statute, or under a statute of a federally recognized Indian tribe, if the statute describes or refers to the entity as incorporated or as a corporation, body corporate, or body politic;[2][2] and

 A business entity wholly owned by a State or any political subdivision thereof, or a business entity wholly owned by a foreign government or any other entity described in §1.892-2T.[3][3]

Rev. Rul. 77-261 (discussed above) holds that, despite the fact the income of the investment fund was excludable from gross income under section 115, the fund must file a federal income tax return every year because it was classified as a corporation.

Like the fund in Rev. Rul. 77-261, the XXX is classified as a corporation under the default rules set forth in section 7701 of the Code and the regulations thereunder. The Interlocal Act is a (--) state statute, and while it may not use the specific term “body politic,” the types of administrative agencies contemplated in the statute would certainly fit that description. The XXX is also clearly “wholly owned” by its Members, which are themselves local government entities, or political subdivisions of the state of (--)s. Under either of these provisions, the XXX would fall within the definition of “corporation” for classification purposes, and thus the filing requirement of section 6012(a)(2) applies. Therefore, under Rev. Rul. 77-261, even though the XXX has no taxable income to report, it must file a Federal income tax return on Form 1120 each year. So long as the XXX’s income is derived exclusively from the performance of essential governmental functions, it will have no gross income, and thus no taxable income.”

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D:\Docs\2017-12-13\07b4fa7585c9b464b664732e7199b8c1.doc 2. AGRiP CEO Harold Pumford then contacted a number of pool executives and individuals who provide accounting or audit services for pools, which generated a number of responses. The person who made the inquiry also provided a compilation of comments they had received prior to contacting AGRiP. This compilation is reported in the section numbered “6” below. The following are the pertinent comments on this inquiry.

3. Pumford. I am aware of one pool with a 115 ruling issued in 1982 which expressly states that the pool (which is a Not-for-Profit Corporation) is not required to file a federal tax return. The IRS letter states: “. . . we conclude that the income of the Corporation is excludable from gross income under section 115 of the Code, provided that all of its members are ‘political subdivisions’ within the meaning of section 115 of the Internal Revenue Code. Also, the Corporation does not have to file a federal income tax return." (emphasis added). The letter went on to say, "This ruling is directed only to the taxpayer who requested it. Section 6110 (j) (3) of the Code provide that it may not be used or cited as precedent." The pool advises that they expressly asked about the need to file a federal income tax return in their request for a 115 ruling. I emphasized the phrase, provided that all of its members are political subdivisions, because it did not appear in the handful of other letters I have reviewed over the years.

As to other pools that do not file a federal income tax return, the “key” may be that while Corporations and Trusts are required to file an 1120, an unincorporated association is not. Most pools, formed under an interlocal, joint powers or similar state act, take the position that they are “an unincorporated association” and are therefore not subject to the 1120 filing rules.

And, many pools have relied upon 115 rulings issued to similarly or identically situated pools rather than seeking their own ruling.

I have been provided another 115 letter received by a pool in 1987. However, I am not authorized to share the ruling with others. Much of the rationale in the letter is based on a Revenue Ruling related to an investment trust set up by public entities. It cites Rev Rul 78-316, 1978, C. B. 304, which clarified Rev Rul 77-261 – cited above. This later ruling stands for the proposition that the filing requirements do not apply to states or political subdivisions “with respect to activities conducted directly by them”. It goes onto to state that the subject investment trust, however, is required to file because its activities are not conducted directly by the member political subdivisions. And, it was a “trust”. It is from here that pools appear to pick up the unincorporated association rationale. The subject pool does not file a federal or state return. Pools with a 115 letter should see how this is addressed in your 115 ruling.

So, it appears that IF the (pool) is incorporated or established as a trust, then counsel has a strong argument. If, however, either are “an unincorporated association”, then it would be going against the PREVAILING practice within the public entity risk and benefits pooling “industry” to file using an 1120 form. I am advised that a property and casualty insurance company (corporation) would file using the 1120-PC Form, so I would presume that if the (pool) believes it should file, it would be on this form.

The Oklahoma Municipal Assurance Group has in file an opinion from tax counsel retained at that time (circa 1979-80) that the penalty for failing to file a return is based on a percentage of the tax due, and as there would be no tax due, there would be no penalty to pay. Of course, if circumstances changed that would result in taxable income, then tax and penalty would be due. OMAG does not file a return.

D:\Docs\2017-12-13\07b4fa7585c9b464b664732e7199b8c1.doc I have conferred with CPA’s that have quite a number of pool clients in CA, OR, OH, MI and MN. None of their pools file any form with IRS; except some who have organized as a not-for- profit or as a trust because risk or benefits pooling is not addressed under the state interlocal or joint powers authority. Even then, some may be required to file state tax forms, but have also qualified for 115 status with IRS and do not file an 1120, but may be required to file a Form 990 as a not-for-profit, where “unrelated business income” could be an issue. Three contacts advised me that NO public entity pools in CA file with the IRS.

As one CPA and I discussed, pooling is the joint exercise of authority already invested in individual public entities – or at least should be. A self-insured school district would not file with IRS, so why would a “joint self-funding” pool of schools be required to file? It was impressed on me many, many years ago that a key issue as to tax consideration (and filing) is that if upon dissolution of the pool the remaining funds go back to the member public entities, then the pool should consider itself to be operating the same as a public entity.

4. Comments from others:

A CPCU Director of Finance & Programs for a pool. “We have a ruling – got it in 1990. We don’t file tax returns and I am confident that we don’t have to.”

A pool Director of Financial Services and Administration. We do not file form 1120 or any other income tax forms with either the state or federal government. (The Pool) is not incorporated – if your other pool is, that might be the difference.

A CPA. I currently do not have any pools of local governments that file tax returns with the IRS, and cannot think of a reason why they should.

A pool Chief Financial Officer. Many years ago, (the pool) obtained a 115 ruling from the IRS. To my knowledge, (the pool) has never filed an 1120 form.

A CPA, ARM. Harold. I believe your conclusions are correct. Typically a corporation that receives a letter ruling that it is exempt from taxation on certain activities may file an 1120 and then put zero's in for the taxable activities and then "I suggest" attach a copy of the basis for the exemption" The IRS does not require "in general" governments exempted under IRC 115 to file returns.

Certain trusts may be under the reporting requirements for nonprofit organizations.

A CPA. We are not aware of any CA pools formed under the government code that file 1120's. I am not aware of any that have applied for a IRC Section 115 ruling letter and have never been concerned since the code is so specific about excluding governmental source revenues from taxation. My memory recalls one (many years ago, can't remember which one) that had been filing an 1120 showing no income (or expenses) and citing code section 115, it may have been a pool formed under state corporations code with only governmental source revenues/membership. An IRS private letter ruling is only good for a specific applicant, is costly, and in my view unnecessary. Pools formed under a state’s corporations code would be subject to corporate tax filing requirements. We have several in CA that are formed for non-governmental membership, e.g. industry specific. In some states they can be formed under the government code but include non-governmental membership, such as non-profit, public benefit entities. These are subject to 1120-PC filings, usually w/o state tax return filing requirements. As a side note, the 1120-PC

D:\Docs\2017-12-13\07b4fa7585c9b464b664732e7199b8c1.doc requires attachment of the annual NAIC forms required for all insurance companies, however it is not required of pools. We attach a copy of the annual audit with a statement explaining why it is not attached.

The following thoughts are set forth just to help me develop and document a train of thought on this issue. I note that counsel’s opinion below refers to the term “business entity”, but does not provide a definition of that term.

5. Responses from NLC-RISC contacts.

A CPA, CFA, and pool Controller. The (pool) does file Form 1120, U.S. Corporation Income Tax Return. However. on line 11 (Total Income), line 30 (Taxable Income), Line 31 (Total Tax) and Line 34 (Tax Due), we insert "- 0 -". We attach the Income Statement and Balance Sheet. On the Income Statement the following note is added:

"Pursuant to a private letter ruling received from the Internal Revenue Service on February 22, 1980, the income is excluded from gross income under Section 115 of the Code".

We also attach the private revenue ruling issued by the IRS. The following is included in the ruling:

"Accordingly, your income is excludible from gross income under section 115 of the Code. Our holding is subject to the following conditions:

1. You are an association taxable as a corporation.

2. All your members are "political subdivisions" of a state within the meaning of section 115(1) of the Code."

It was determined that the Pool should file a corporate tax return based on the ruling, and the Pool continues to file the return to maintain consistency with the IRS. It seems that many Pools rely on section 115 for excluding their income from taxable income. However, all Pools don't file form 1120. It seems that the tax counsel advising the Pool in question to file form 1120 is relying on condition 1. above.

While Pools relying on section 115 is an established practice, some argue that Pools should not be subject to taxation under the same argument used by municipalities such as cities.

A pool Executive Director. We don’t file a 1120. We have a 115 "instrumentality of government" ruling from IRS.

A pool Executive Director replied that the pool has a 115 ruling and does not file a federal tax return.

A pool Administrator where the pool is a licensed mutual insurance company provided information from this CPA who stated: “As an insurance Company (the pool) is required to file Form 1120-PC instead of Form 1120. However, all income and expenses are excludable because they're attributable to "political subdivisions". Please see attachment #1 and #2 which

D:\Docs\2017-12-13\07b4fa7585c9b464b664732e7199b8c1.doc we attach to a Form 1120-PC with all 0's each year. Attachment #1 explains why everything is 0's, and attachment #2 explains why we still have to file a return at all.

“This is also what we used to file for (another pool mutual) back when we used to serve them. If there are any further questions please let me know.”

(Pool) Documentation regarding exclusion of income

Attachment #1

The (Pool) (the Corporation) was formed as a non-stock, nonprofit (state) municipal mutual insurance corporation pursuant to Chapter 611 of the (--) state statutes for the purpose of providing governmental entities of the State of (--) the opportunity to pool their insurance risks. The Corporation's members must be: (1) a “political subdivision” (as defined in Section 1.103- 1(b) of the Treasury Regulations) of the State of(--), (2) an organization constituting an integral part of a “political subdivision” of the State of(--), or (3) an entity whose income is excluded from gross income under Section 115 of the Internal Revenue Code.

With respect to the requirement in Section 115 of the Internal Revenue Code that the income accrue to the state or a political subdivision thereof; the income of the Corporation is to be used for the provision of insurance protection or the payment of insurance claims or is to be returned to the participating governmental entities. Upon termination of the Corporation and after the satisfaction of all the obligations, the members are entitled to a return of the remaining assets in proportion to their contributions. Accordingly, the Corporation's income accrues to the units of government (political subdivisions of a state) within the meaning of Section 115 of the Code.

Based on circumstances similar to those described above, Rev. Rul. 90-74, 1990-2 C.B. 34 has held that the income of such an organization is excludable from gross income under Section 115 of the Code.

Attachment #2

Rev. Rul. 78-316, 1978-2 C.B. 304, explains that the filing requirement of Section 6012(a)(2) of the Code does not apply to states and their political subdivisions, including municipalities, with respect to activities conducted directly by them.

However, an entity that is separate from a state or its political subdivisions, such as an investment fund classified as a corporation in Rev. Rul. 77-261, 1977-2 C.B. 45, or this Corporation, remains subject to the filing requirements under Section 6012(a) of the Code even though its income accrues to a political subdivision and is excludable under Section 115 of the Code.

Accordingly, the Corporation is fulfilling the appropriate income tax return filing requirements in the above-referenced provisions with the attached income tax return for insurance companies, Form 1120 PC.

A pool Director provided information he received from CPA who stated: “Form 1120 is the corporate income tax form that is required to be filed annually for corporations. Section 115 of the Internal Revenue Code is the section of the code that relates to governmental entities. Entities

D:\Docs\2017-12-13\07b4fa7585c9b464b664732e7199b8c1.doc that are exempt under Section 115 are not required to file Form 1120. In (state) some of the pools have requested a ruling from the IRS—this is a fairly complex process that takes some time.

(Pool’s) footnote (1) (f) states: “Income taxes: The Pool is an intergovernmental risk pool. Under various Internal Revenue Service rulings similar organizations have been determined to be exempt from income taxes. It is therefore management’s and their counsel’s belief that the Pool is also exempt from income taxes.”

A pool Deputy Director/Chief Financial Officer. “The (association) and its Risk pools have Section 115 rulings. Our auditing firm indicated we do not need to file any Federal income tax returns. We file Federal payroll tax returns (quarterly and year end) as well as Form 1096/1099 annually. That’s it!

A pool Ex VP/CFO. Let me provide you an excerpt from our IRS 115 Ruling Letter where we were able to get the filing returns issue addressed at the same time as the 115 ruling. Our attorneys asked specifically to have the filing issue addressed and here was the response.

"Based on the foregoing, we conclude that the income of the Corporation is excludable from gross income under section 115 of the Code, provided that all of its members are "political subdivisions" within the meaning of section 115 of the Internal Revenue Code. Also, the Corporation does not have to file a federal income tax return." They went on to say, "This ruling is directed only to the taxpayer who requested it. Section 6110 (j) (3) of the Code provide that it may not be used or cited as precedent."

6. Compilation of Responses to Survey Prior to Contacting AGRiP. Number of pools responding directly to (pool’s) inquiry: 13 Number of pools responding that they file Form 1120: 3 Number of pools responding that they do not file Form 1120: 10 (One pool) files a Form 1041.

Responses selected by Pumford.

►This is a U.S. Corporation Income Tax Form. We do not file since the Pool is established as a public entity under (--) law.

►We have always filed an 1120 since our inception, 1987, even though we also have a private letter ruling. Our accountant has insisted we do so.

►Our private letter ruling does not say anything about the forms. It is and has been the opinion of our CPA that we don’t have to file these forms. Our CPA requested and received a private letter ruling, on our behalf, granting our work comp trust tax exempt status. We are in the process of requesting the same thing for our new P&C Trust.

►Form 1120 is an informational return that many non-profits file instead of a tradition income tax return (since non-profits don’t pay income tax). (Our health plan) actually is required to file Form 1120 but (P&C pool) does not. (P&C pool) does not because they are a section 501C3 corporation; (Health pool) does because they are section 115.

D:\Docs\2017-12-13\07b4fa7585c9b464b664732e7199b8c1.doc ►We file a Form 1041 with the IRS (have for many years). We also file a (form #) with the State of (--). This form is for Estates and Trusts and both of our pools are trusts. A form 1120 is a corporation tax return. You need to file a tax return with the IRS, but which form depends on how your pools are set-up. One reason to file a return even if you do not owe taxes is to start the statute of limitations time. If you have never filed a tax return, the IRS can audit your records from the beginning of time. Once you file a tax return, the statute of limitations starts and they can only audit for a limited number of previous years (usually three unless there is fraud – then seven).

►We file this form because the Pool and Fund are incorporated. It’s a corporate tax return. All that is required is entering the total assets on the top of the first page and write “Exempt” in the revenue section. Then we attach a copy of the IRS determination letter to the return that shows our exemption under Section 115 – Instrumentality of the State”.

►The pools do not file anymore. They apparently did file early on but later confirmed with (accounting firm) tax folks that they did not need to file.

► (The association’s) pools do not file a tax return. They consulted their legal counsel who told them that under Section 115 that they are not subject to the IRS code. (The association) does file a Form 990 for the Association. (A CPA firm) [who does not perform their audit] reviews (the association) tax documents each year and they have never brought up anything regarding a tax filing for the pools.

►The pool’s 115 Ruling said that they are (1) an association taxed as a corporation and (2) that members are political subdivisions. They understood the language, "taxed as a corporation" to mean that they are to file a tax return although they are not subject to income tax.

7. 115 Letter with identifying references removed.

Staff note: This is a transcription of a letter produced by an attorney regarding the applicability of the Internal Revenue code Section 115 to a pool. It was reviewed by Mr. Pumford and at his direction it is preserved.

Dear Pool Administrator:

This letter is written to clarify that, by virtue of Internal Revenue Code Section 115, the NAME OF POOL is exempt from the payment of Federal Income Tax.

Specifically, Section 115 provides in pertinent part as follows: “Gross income does not include – (1) income derived from any public utility or the exercise of any essential governmental function and accruing to …any political subdivision….”

The NAME OF POOL is an interlocal governmental agency established pursuant to STATE CODE CITED. Subsection ___ of that Act states that its purpose is “to permit local governmental units to make the most efficient use of their powers by enabling them to cooperate with other local governmental units on a basis of mutual advantage and thereby to provide services and facilities in a manner and pursuant to forms of

D:\Docs\2017-12-13\07b4fa7585c9b464b664732e7199b8c1.doc governmental organization that will accord best with geographic economic, population and factors influencing the needs and development of local communities.”

The Interlocal Agreement creating the NAME OF POOL references STATE CONSTITUTION AND CODE CITED.

The STATE CONSTITUTION provides that a political subdivision may (a) cooperate in the exercise of any function, power, or responsibility with, (b) share the services of any officer or facilities with, and (c) transfer or delegate any function, power responsibility, or duty of any officer to one or more other local government units, school district, the state of the United States.

The purposes of the Interlocal Cooperation Act are discussed above.

STATE CODE CITED provides that political subdivisions may procure insurance separately or jointly with other political subdivision and permits political subdivisions to use deductible or self-insurance plans wholly or in part as part of their plan to procure appropriate insurance. Consistent with these purposes, STATE CODE CITED permits employers to self-insure for coverage under STATE CODE CITED and to associate together in self-insurance pooled programs, subject to the regulatory authority of the STATE Department of Labor and Industry. And, STATE CODE CITED defines, in pertinent part, for the purposes of the Workers’ Compensation Act employers to include school districts and “other districts established by law”.

The NAME OF POOL operates as a group insurance or self-insurance program providing Workers’ Compensation insurance coverage required by applicable state law through its STATE PROGRAM. In addition, the NAME OF POOL is in the process of organizing separate programs to provide general liability and property insurance coverage which shall be group insurance or self-insurance programs. The workers’ compensation, general liability and property programs are available to members of the NAME OF POOL, which are defined as TYPES OF MEMBERS organized pursuant to the laws of the state. Both the TYPES OF MEMBERS are local governmental entities pursuant to STATE STATUTE.

The NAME OF POOL is engaged in the exercise of an essential governmental service as contemplated by Internal Revenue Code 115. Revenue Ruling 90-74, 1990-2 C.B. 34, directly discusses an entity similar to the NAME OF POOL in organizational structure, operation, and ultimate disposition of its assets. In this Revenue Ruling, a non-profit organization incorporated under the laws of a particular state was comprised of county governments which pooled casualty risks. The governing body of each county had to approve participation in the pooled risk program and the program was governed by a board of directors elected by representatives of the participating counties. Each participating county contributed money to the program based on its proportionate risk. The program received the investment income from any funds held by the program; the program reimbursed its members for any casualty losses; and in the event of dissolution of the program any remaining funds were to be returned to the member counties.

D:\Docs\2017-12-13\07b4fa7585c9b464b664732e7199b8c1.doc In finding that the program was exempt from taxes under Internal Revenue Code 115 the Service found in pertinent part as follows: Political subdivisions insure against casualty risks and other risks arising from employee negligence, workers compensation statutes, and employee health obligations. Insuring against these risks satisfies governmental obligations. Any private benefit to employees from insuring against these various risks is incidental to the public benefit.

Pooling casualty risks…instead of purchasing commercial insurance fulfills the obligations of the political subdivisions to protect their financial integrity. (The program) is created under authority granted by the governing body of each participating county and State…Except for the incidental benefit to employees of the participating political subdivisions described in the preceding paragraph, no private interest participate in or benefit from the operation of (the program). Accordingly, (the program) performs and essential governmental function.

The income of (the program) is used to reimburse casualty losses incurred by the counties or to reduce the annual fees that the member counties would otherwise be required to pay to the organization. The income of (the program) does not benefit private interest. Furthermore, upon dissolution, (the program) will distribute its assets to its members. Therefore, the income of (the program) accrues to a political subdivision within the meaning of section 115(1) of the code.

The Revenue Ruling then concludes with the following holdings:

The income of an organization formed, operated and funded by political subdivisions to pool their casualty risks is excluded from gross income under section 115(1) of the code. Similarly, the income of an organization formed, operated, and funded by one or more political subdivisions…to pool their risks in lieu of purchasing insurance to cover their public liability, workers’ compensation, or employees’ health obligations is also excluded under section 115(1) if private interest do not, except for incidental benefits to employees of the participating state and political subdivisions, participate in or benefit from the organization.

Please note that in this regard it mattered not to the conclusion reached in Revenue Ruling 90-74 that the organization in question was incorporated under the laws of the state. There is no requirement that entities organized under the STATE CODE CITED be incorporated. As long as the entity created meets the requirements that it be comprised of local governmental organizations, that the entity created fulfills a function of governmental organizations, and no portion of the income inures to the benefit of private entities, except in a manner incidental to the purpose for which the entity was created, then the income received is not gross income subject to tax under the Internal Revenue Code.

D:\Docs\2017-12-13\07b4fa7585c9b464b664732e7199b8c1.doc The following letter is to a pool created by public entity pools for the primary purpose of reinsuring loss exposures. Identifying information has been redacted.

Dear: This is in response to your letter, dated XX,XX,XXXX, requesting a ruling that the income of Corporation will be excludable from gross income under section 115 of the Internal Revenue Code ("Code").

FACTS Corporation was incorporated as a nonprofit organization in X as a non-stock captive mutual insurance company under Act, for the purpose of providing reinsurance, insurance, and excess insurance to municipalities, counties, schools, and other public entities. Corporation has been granted authority to operate as a multi-line reinsurance company by Department.

Corporation enables public entities to secure stable and affordable reinsurance and insurance protection. Corporation provides coverage for such needs as workers' compensation, property coverage, employee benefits and liability reinsurance. Members of Corporation are municipalities, counties, public schools, public entity self- insured groups, and risk pools and captive insurers of public entities. Each member is an owner of Corporation and net income is returned to the member-owner. Corporation will not provide insurance to any entity other than the public entities which are its members.

Corporation is the outgrowth of Committee, composed of public entity representatives with experience in self-insurance, pooling and insurance. Committee was formed by Program, a nonprofit corporation whose members are governments, government agencies, public agencies, publicly chartered corporations, and organizations described in section 115 of the Code. Program allocated funds for the development of Corporation as a captive insurance company because such an entity would provide added benefits to the member public entities. Such benefits included the ability to specialize in the coverage needs of public entities, the ability to retain for the benefit of members any underwriting net income resulting from favorable loss experience, increased access to the reinsurance market, and investment income from loss reserves held for the benefit of public entity members.

Corporation is controlled by its member public entities and all major decisions regarding the operation of the Corporation are made by the members. Corporation currently has seven directors, who are elected by the member public entities. Each director must be a designated representative of a member, with the exception of two outside directors with management or consultant experience in captive insurance company or risk pool operations.

Participation in the Corporation is governed by a membership agreement. Under the membership agreement, Corporation's capitalization comes from surplus contributions of its public entity members. In order to become a member, each public entity must remit both a premium payment and a surplus contribution. The surplus assures the long-term

D:\Docs\2017-12-13\07b4fa7585c9b464b664732e7199b8c1.doc financial solvency of Corporation. Additional surplus contributions may be requested of members from time to time, as necessary to maintain adequate premium to surplus ratios, to cover unexpected losses and to comply with statutory and regulatory requirements. Each member is also required to pay annual premiums.

Any net income retained by the Corporation at the end of each fiscal year is added to the surplus, reduces premium payments, or is distributed to member public entities in the form of dividends. The membership agreement also provides for a surplus account for each member public entity. This account serves as a continuous accounting of each member's interest in and ownership of the net earnings of the Corporation. Each member is entitled to a return of its surplus account upon withdrawal from the Corporation, with certain limitations. As long as a withdrawing member has participated in the Corporation for X years, it will receive a return of its initial surplus contribution and any additional surplus contribution.

Upon dissolution of Corporation, the assets will be liquidated and distributed to the member public entities, after payment of liabilities and expenses.

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 political subdivision of a state.

When determining if section 115(1) of the Code applies, the Service considers all the facts and circumstances relating to the organization to determine: (1) whether the organization performs an essential governmental function, and (2) whether the income of the organization accrues to a state or political subdivision of a state. The determination whether a function is an essential governmental function depends on the facts and circumstances of each case.

Rev. Rul. 90-74, 1990-2 C.B. 34, concerns an organization formed, operated, and funded by political subdivisions to pool their casualty risks and other risks arising from their obligations concerning public liability, workers' compensation, or employees health obligations. The ruling states that the income of such an organization is excluded from gross income under section 115(1) of the Code 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.

Rev. Rul. 77-261, 1977-1 C.B. 45, holds that income from a fund established under a written declaration of trust by a state for the temporary investment of positive case balances of a state and its political subdivisions, is excludable from gross income under section 115(1) of the Code. The ruling reasons that the investment of positive cash balances by a state or political subdivision in order to receive some yield on the funds until needed to meet expenses is a necessary incident of the power of the state or political subdivision to collect taxes and raise revenue.

D:\Docs\2017-12-13\07b4fa7585c9b464b664732e7199b8c1.doc The Corporation was established to provide insurance and reinsurance for its members against liabilities arising from the conduct of governmental functions by member political entities and their employees. By obtaining insurance on a risk-sharing basis, the member public entities are carrying out their obligation to protect their financial integrity and protect their employees from liability while acting within their official duties. Any private benefit to employees is incidental to the public benefit. Corporation was created to further the legitimate governmental public functions of its member public entities. Based on Rev. Rul. 90-74 and Rev. Rul. 77-261, Corporation performs an essential government function within the meaning of section 115(1) of the Code.

In addition to the performance of an essential governmental function, for Corporation to qualify to exclude its income from gross income under section 115(1) of the Code, income of Corporation must accrue to State or a political subdivision of State. Corporation is owned by public entities, all of which are municipalities, counties, schools, public entity self-insured groups, risk pools and captive insurers of public entities. As such, all members of Corporation are political subdivisions or section 115 entities. No part of the net earnings of the Corporation inures to the benefit of or is distributed to a private entity or individual. Upon dissolution of the Corporation, all of its net assets will be distributed to the member public entities. Accordingly, the income of Corporation accrues to a State or a political subdivision of a State.

CONCLUSION Based on the information and representations submitted by Corporation, we hold that the income of Corporation is excludable from gross income for federal income tax purposes under section 115(1) of the Code.

No opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the Code.

This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) of the Code 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.

Sincerely, END

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