Compilation of Responses to Survey:

Do Risk Pools File IRS Forms 1120?

  • Number of pools responding directly to TASB’s inquiry: 13
  • Number of pools responding that they file Form 1120: 3 (Kansas Association of School Boards pool, Texas Municipal League Intergovernmental Risk Pool, Maryland Association of Boards of Education pool)
  • Number of pools responding that they do not file Form 1120: 10 (South Carolina files a Form 1041)
  • Specific responses/comments (the first 8 pools listed are all school pools; the other five are pools of other types):

Colorado: This is a U.S. Corporation Income Tax Form. We do not file since the Pool is established as a public entity under Colorado law.

Kansas: 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.

Mississippi: 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.

Vermont: 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). VEHI actually is required to file Form 1120 but VSBIT does not. VSBIT does not because they are a section 501C3 corporation; VEHI does because they are section 115.

Montana: Does not file

North Carolina:Does not file

South Carolina: We file a Form 1041 with the IRS (have for many years). We also file a SC1041 with the State of South Carolina. 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).

Maryland Association of Boards of Education: 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”.

Texas Water Conservation Association Pool and Texas MH/MR Pool: The pools do not file anymore. They apparently did file early on but later confirmed with E&Y tax folks that they did not need to file.

PDRMA: They have an IRS 115 letter ruling and have never filed a tax return. She said that when Coopers and Lybrand (formerly one of the big eight CPA firms) performed their tax review that they never said that they had to. She also said that their 115 letter specifically says that PDRMA's revenue is derived from tax and that filing is not necessary.

Texas Association of Counties Pools: TAC’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. TAC does file a Form 990 for the Association. E&Y (who does not perform their audit) reviews TAC's tax documents each year and they have never brought up anything regarding a tax filing for the pool.

TexasMunicipal League: 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.

  • TASB’s inquiry to AGRIP

Harold-- 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 TASB Risk Management Fund but rather, another TASB entity created under the Texas Interlocal Cooperation Act. Since the Fund was also created under the Interlocal Cooperation Act, we believe the advice may apply to the Fund as well. Since this is specific legal advice for our program,please don't distribute it further.

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 theXXX.

· 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, theXXX 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 Texas 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. TheXXX is also clearly “wholly owned” by its Members, which are themselves local government entities, or political subdivisions of the state of Texas. Under either of these provisions, theXXX 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 theXXX has no taxable income to report, it must file a Federal income tax return on Form 1120 each year. So long as theXXX’s income is derived exclusively from the performance of essential governmental functions, it will have no gross income, and thus no taxable income.

  • Harold Pumford’s findings/response to inquiry:

Colleagues: Thanks for assisting me the last two days in responding to a member request where they were being advised that they should be filing a corporate income tax form. Below are two messages I sent this pool based on information I received. I am sharing these with you in recognition of the response and guidance you provided to me on this matter. I am also working up a more formal compilation of all the information I received on this issue. If you disagree with my “key” conclusion or have other thoughts on the issue or my statements, I look forward to hearing further from you. And, I think I can smell a future conference session brewing. Thanks again. Harold

I may have found the “key”. Long story short – Corporations and Trusts are required to file an 1120, but 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.

I have been provided the “115” letter received in 1987 by a pool. 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 by your counsel. 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 they 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. You may want to see how this is addressed in your 115 ruling. So, it appears that IF the RMF or the investment pool on which the opinion you cite below 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. Incidentally, I am advised that a property and casualty insurance company (corporation) would file using the 1120-PC Form, so I would presume that if believes it should file, it would be on this form. Harold

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. Two persons have advised me that NO public entity pools in CA file with the IRS, and I am seeking confirmation from a third. I am awaiting responses from non-school pool finance officers in CO and IL.

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. Harold

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