## Facts

- A nonprofit corporation (“X”) was formed under State A law to allow county governments (political subdivisions) to pool casualty risks.
- Each county’s governing body must authorize participation and appoint a representative to attend X’s meetings.
- X is controlled by a board of directors elected by and from the counties’ representatives.
- Member counties fund X by appropriating money from general revenues to pay an initial deposit and annual fees based on size and actuarially determined risk.
- X receives investment income in addition to member payments.
- X reimburses member counties for casualty losses and related governmental risk exposures.
- On dissolution, X must distribute its assets to its member counties.
- No private persons hold ownership interests in X; any employee benefit from coverage is incidental to public purposes.

## Issues

1. Whether X’s income is “derived from the exercise of any essential governmental function” for purposes of I.R.C. § 115(1).
2. Whether X’s income “accru[es] to a State or a political subdivision thereof” when X is formed, funded, and controlled solely by member counties.

## Decision

- The IRS concluded that X’s income is excluded from gross income under I.R.C. § 115(1).
- The IRS determined that pooling governmental casualty risks through X is an essential governmental function.
- The IRS determined that X’s income accrues to political subdivisions because only member counties benefit and they receive remaining assets upon dissolution.

## Legal Principles

- I.R.C. § 115(1) excludes from gross income income derived from the exercise of an essential governmental function and accruing to a state or political subdivision.
- Whether an activity is an essential governmental function is determined under a facts-and-circumstances analysis.
- Risk management through governmental self-insurance or intergovernmental risk pooling can qualify as an essential governmental function when it serves governmental obligations and protects governmental financial integrity.
- “Accrual” is satisfied when no private interests share in the entity’s net earnings or residual assets and the economic benefit is confined to governmental members, including through distribution of assets to members upon dissolution.
- Incidental benefits to governmental employees do not prevent § 115(1) treatment when the primary benefit is public and governmental.

## Conclusion

An intergovernmental nonprofit casualty risk pool that is created, funded, and controlled by counties, operates to reimburse governmental casualty losses, excludes private participation, and returns residual assets to its member counties has income excluded from federal gross income under I.R.C. § 115(1).


Rev. Rul. 90-74, 1990-2 C.B. 34 (1990)