Rev. Rul. 57-128

Advice has been requested concerning the status for Federal employment tax purposes of an association organized and operated by the heads of the insurance departments of the several states in connection with the administration of the state insurance laws.

The instant association is a voluntary unincorporated organization formed by state insurance officials to promote uniformity in legislation affecting insurance, to encourage uniformity in departmental rulings under the insurance laws of the several states, to disseminate information to insurance supervisory officials, and to protect the interests of insurance policyholders of the various states, territories, and insular possessions of the United States. The membership of the association consists of commissioners, directors, superintendents, or other officials who by law are charged with the responsibility of supervising the insurance business within their respective states, territories, etc. The officers of the association are selected from members and their duties are prescribed by the bylaws. The managment of its affairs is vested in an executive committee consisting of eight members and ex officio the officers of the association. The income is derived principally from amounts assessed against insurance companies by the insurance departments of the various states and by state contributions. A small part of the income is derived from the sale of data prepared by the association on security valuations. No part of the net profits of the association inures to the benefit of any private individual.

Section 3121(b)(7) of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954) excepts from `employment' service performed in the employ of a state, or any political subdivision thereof, or any instrumentality of any one or more of the foregoing, which is wholly owned by one or more states or political subdivisions. Section 3306(c)(7) of the Federal Unemployment Tax Act (chapter 23, subtitle C of the Code) contains a similar provision.

In cases involving the status of an organization as an instrumentality of one or more states or political subdivisions, the following factors are taken into consideration: (1) whether it is used for a governmental purpose and performs a governmental function; (2) whether performance of its function is on behalf of one or more states or political subdivisions; (3) whether there are any private interests involved, or whether the states or political subdivisions involved have the powers and interests of an owner; (4) whether control and supervision of the organization is vested in public authority or authorities; (5) if express or implied statutory or other authority is necessary for the creation and/or use of such an instrumentality, and whether such authority exists; and (6) the degree of financial autonomy and the source of its operating expenses.

The association was formed and is used to further the governmental function of supervising the insurance business. It serves as a central unit in the performance of duties common to each member in his official capacity as head of the insurance department of his state. Further, it takes the place of a comparable administrative unit which would otherwise have to be maintained in the insurance department of each state. Consequently, it appears that the association constitutes a part of the state governmental machinery for the administration of the insurance laws of the respective states. No proprietary interest in the association exists other than those of the states themselves, which through the membership of their officers have the powers and interests of an owner. The states, through their officers, have the right collectively to dispose of the assets of the association. Therefore, it follows that the association is an instrumentality wholly owned by the states.

Accordingly, it is held that the association is an instrumentality wholly owned by the states and services performed in its employ are excepted from `employment' by reason of the provisions of section 3121(b)(7) of the Federal Insurance Contributions Act and section 3306(c)(7) of the Federal Unemployment Tax Act (chapters 21 and 23, respectively, subtitle C, Internal Revenue Code of 1954). Therefore, the remuneration for such services is not subject to the taxes imposed by such Acts. However, such remuneration is subject to the withholding of income tax under section 3402 of the Code.