During December 1982, P established a voluntary employees' beneficiary association (VEBA) which qualified for exemption under
1. HELD, P is not automatically entitled to the safe harbor percentages of
2. HELD, FURTHER, P's CIBU's for 1986 and 1987 are based upon stipulated percentages of its qualified direct costs for each year. See
3. HELD, FURTHER, the creation of a reserve under
4. HELD, FURTHER, because P's contributions to its VEBA during 1986 did not result in the creation of a reserve for postretirement medical benefits for its employees, P is not entitled to an increase in its account limit for 1986 pursuant to
5. HELD, FURTHER, the limit of
109 T.C. 200">*201 OPINION
WELLS, CHIEF JUDGE: The instant cases were consolidated for purposes of trial, briefing, and opinion (hereinafter referred to as the instant case). The instant case is before the Court on the parties' cross-motions for 1997 U.S. Tax Ct. LEXIS 61">*63 partial summary judgment. We must decide whether petitioner's contribution to its trust created as part of its voluntary employees' beneficiary association (VEBA) plan for the 1986 taxable year is deductible. Specifically, we must decide: (1) Whether petitioner is entitled to the safe harbor limits of
BACKGROUND
Some of the facts and certain exhibits have been stipulated by 1997 U.S. Tax Ct. LEXIS 61">*64 the parties for the purpose of the instant motion. The stipulation of facts is incorporated in this Opinion by reference. When its petition was filed, petitioner's principal office was located in Palatine, Illinois. Petitioner is a worldwide manufacturer of electrical distribution and control equipment and electronic materials, components, products, and systems for industrial and construction markets. Petitioner is an accrual basis taxpayer and uses a calendar yearend. Prior to June 1991, petitioner's common stock was traded on the New York Stock Exchange.
ESTABLISHMENT OF THE VEBA TRUST
On December 22, 1982, petitioner established the Square D Company and Subsidiaries Employee Welfare Benefit Trust (the VEBA Trust) to serve as the funding vehicle for a single welfare benefit plan, known as the Square D Company and Subsidiaries Employee Welfare Benefit Plan (the Plan). The Plan provided for medical, dental, accident, sickness (short-term disability), and long-term disability benefits for eligible employees and retirees of petitioner and its subsidiaries. The trustees of the VEBA Trust were Dexter S. Free, James M. Vetta, and Donald E. Wilson, all of whom are officers of petitioner. The 1997 U.S. Tax Ct. LEXIS 61">*65 trust agreement authorized the establishment of a depository account for trust assets. Funds of the VEBA Trust were deposited in an account with First Interstate Bank of Washington, N.A., pursuant to a custodial agreement dated December 31, 1982. The VEBA Trust was a "welfare benefit fund" under
109 T.C. 200">*203 Prior to 1985, petitioner funded the VEBA Trust during each year for that year's employee benefit liabilities (and administrative costs) as they were incurred (although it could also have made a contribution for the following year's expected liabilities). Petitioner also funded the VEBA Trust at yearend for employee benefit claims that were incurred but unpaid (CIBU's) and associated administrative costs based on actuarial assumptions made by Prudential Insurance Co. (Prudential), petitioner's medical claims adjuster, with respect to medical, dental, accident, and sickness claims, and the Wyatt Co. (Wyatt), petitioner's actuarial firm, with respect to long-term disability claims. Those assumptions were then reviewed by petitioner's risk management department. Prior to 1985, the VEBA Trust was not funded for any other liabilities. Petitioner contributed 1997 U.S. Tax Ct. LEXIS 61">*66 a total of $57,992,061 to the VEBA Trust between December 31, 1982, and December 31, 1984, as follows:
Trust Yearend Amount of Contribution
_____________ ______________________
Dec. 31, 1982 $4,806,000
Dec. 31, 1983 25,761,346
Dec. 31, 1984 27,424,715
PETITIONER'S 1985 VEBA TRUST CONTRIBUTIONS
During November 1985, the VEBA Trust filed with respondent a Form 1128 to change its taxable year from a calendar year to a fiscal year ending November 30. This change was approved by respondent and became effective as of November 30, 1985. An internal memorandum dated October 3, 1985, from R.G. Halliday, a member of petitioner's tax department, to Dexter S. Free, an officer of petitioner and trustee of the VEBA Trust, stated that
The change in the Trust year would allow the contribution to be made in December of future years, thus providing a permanent deferral of the related tax liability. This change is necessary because the limit on the addition to a qualified asset account is tested at the Trust's year end. With the contribution in December, a full year's funding could be made, and therefore, 1997 U.S. Tax Ct. LEXIS 61">*67 the addition to asset account limits would be satisfied (at November 30), and the deduction would still fall within Square D's calendar year.
* * * * * * *
109 T.C. 200">*204 CONCLUSION
The delay in the enactment of the more stringent funding requirements passed by the Tax Reform Act of 1984 has left open a window of opportunity that will be closed on January 1, 1986. By accruing or actually making a payment to the VEBA, Square D will be able to accelerate a deduction which would otherwise be taken in the following year. Continuing this funding pattern in future years will allow Square D in essence to receive a permanent deferral of tax on the amount.
An internal memorandum dated December 17, 1985, from D.S. Free to D.E. Wilson and J.M. Vetta states:
The Tax Department has proposed that the Trust adopt a fiscal taxable year ending November 30th in order to avoid the new limitation on pre-funding of the Trust. Because the limit on additions to the Trust's reserves is tested at the Trust's year end, the fiscal year would allow the Trust to meet the test as of November 30th, which means Square D could pre-fund its entire liability for the following year in December of the current year.
Pre-funding of the Trust 1997 U.S. Tax Ct. LEXIS 61">*68 will allow Square D to accelerate the recognition, for tax purposes only, of $36,500,000 of 1986 expenses into 1985. Assuming the Company's contributions to the Trust do not decline in future years, we will have deferred payment of $18,250,000 of taxes permanently. If tax reform legislation produces a corporate tax decrease, this plan will also produce a permanent tax benefit.
Petitioner did not change the nature or type of medical, dental, accident, sickness, and long-term disability benefits paid through the VEBA Trust. Additionally, petitioner did not change the procedures for payment of such benefit claims by the VEBA Trust at the time the yearend was changed.
The VEBA Trust's account balance at First Interstate on November 30, 1985, was $1,835,475. On December 11 and 20, 1985, petitioner contributed $700,000 and $300,000, respectively, to the VEBA Trust. On December 27, 1985, petitioner contributed $36,600,000 to the VEBA Trust. Petitioner claimed a deduction on its 1985 Federal income tax return for these contributions ($37,600,000) and other contributions made earlier during 1985. Of the total deduction, $1,937,701 was disallowed by respondent as an amount in 1997 U.S. Tax Ct. LEXIS 61">*69 excess of petitioner's allowable deduction. In accordance with the trust agreement, the VEBA Trust's assets, including the December 1985 contributions and the VEBA Trust's investment income, were used to pay medical, dental, accident, sickness, and long-term disability benefits (and administrative costs) under the plan to petitioner's employees and retirees as those benefits 109 T.C. 200">*205 (and costs) came due during the 1986 plan year. 2 No contributions were made to the VEBA Trust from January 1986 through November 30, 1986. The VEBA's account balance at First Interstate on November 30, 1986, was $11,297,108.
PETITIONER'S 1986 VEBA TRUST CONTRIBUTION
During 1986, petitioner became aware that the regulations might remove the benefit of the VEBA Trust's yearend on November 30. An internal memorandum dated April 23, 1986, states:
the statute and the Committee Report could be interpreted as allowing the qualified asset account to be tested at the Trust's year end. Therefore, we changed the Trust's year end to November 30th. At November 30th, the Trust's reserves will always be low enough to meet the qualified 1997 U.S. Tax Ct. LEXIS 61">*70 asset account limit. The Trust can then be prefunded in December and a deduction for the contribution taken on Square D's return for the calendar year.
Pursuant to the regulations, the amount of an employer's deduction for contributions to a
Bob, it is obvious the IRS perceived the loophole created by the statute's ambiguity about whose taxable year, the trust's or the corporation's, should be used to measure the qualified cost has opened for taxpayers. It remains to be seen whether the IRS can correct this defect in the statute through regulations. We are going to contact our legal counsel to see if there is any merit in challenging the regulations. In the meantime, we are proceeding under the assumption that Square D Company 1997 U.S. Tax Ct. LEXIS 61">*71 will not be allowed to deduct contributions to the Trust in 1986.
On December 30, 1986, petitioner contributed $27 million to the VEBA Trust and claimed a deduction for the full amount of this contribution on its 1986 Federal income tax return. That $27 million contribution was petitioner's only contribution to the VEBA Trust during the 1986 calendar year. The amount of the 1986 contribution was based on an actuarial valuation by Wyatt. Wyatt ascertained that the maximum deductible contribution for 1986 for PRMB's was $ 109 T.C. 200">*206 25,391,059. Administrative expenses were considered to be 6.5 percent of the PRMB's, or $1,650,419, making the total deductible amount $27,041,478. Regarding the calculation of the deductible amounts, a December 24, 1986, letter to petitioner from Wyatt stated the following:
As mentioned on the phone, there are rulings several years old providing slim guidance to amounts which may be deducted for postretirement medical benefits. In general, deductible amounts are to be determined on an "actuarial basis", and are specified to be in one lump sum (or alternatively, over the remaining average lifetime) for persons who are already retired, and are specified as 1997 U.S. Tax Ct. LEXIS 61">*72 level amounts (or percentages) over the future WORKING lifetimes for persons who are currently actively at work.
These rules would apparently permit the full $ 20,446,059 to be deducted in 1986 for pensioners, and approximately $4,945,000 for currently active employees. Lesser amounts could, of course, be deducted for 1986.
Petitioner was obligated by the Plan to pay all medical, dental, accident, sickness, and long-term disability benefits offered under the plan. The VEBA Trust used its assets, including the 1986 contribution and its investment earnings, to pay such benefits (and administrative costs) to petitioner's employees and retirees as those benefits (and costs) came due (or arose) during the next 11 months of the Plan year. During the calendar year 1987, the VEBA Trust paid medical and dental benefit claims under the plan for retirees in the amount of $2,787,000. During the Plan year, the VEBA Trust paid benefit claims, including related expenses, in the amount of $31,572,854. The VEBA Trust's balance at First Interstate on November 30, 1987, was $7,992,215. The balance on December 31, 1986, was $35,058,670.
The parties have stipulated that the addition to the account 1997 U.S. Tax Ct. LEXIS 61">*73 limit for CIBU's for the trust year ended November 30, 1986, if based on the safe harbor limits of
PETITIONER'S 1987 VEBA TRUST CONTRIBUTION
Pursuant to an amendment to the VEBA Trust agreement on December 29, 1987, employee welfare benefits for collectively bargained employees ceased to be funded through the 109 T.C. 200">*207 VEBA Trust and were thereafter funded through a separate VEBA trust for collectively bargained employees. On December 29, 1987, petitioner contributed $12,400,000 to the VEBA Trust and $37,700,000 to the VEBA trust for the collectively bargained employees. The amounts contributed to the VEBA trust for the collectively bargained employees are not in issue in the instant case.
Petitioner calculated the amount of the 1987 contribution based on an actuarial valuation by Wyatt. Wyatt ascertained, as of November 30, 1987, that the maximum deductible combined contribution for 1987 for postretirement 1997 U.S. Tax Ct. LEXIS 61">*74 medical benefits was $22,476,975. Of that amount, $13,243,405 was attributable to employees and retirees not covered by collectively bargained agreements. In its report dated December 9, 1987, Wyatt stated:
The maximum tax deductible contribution for 1987 is equal to $22,476,975 plus the any sic contributions for postretirement medical paid but not previously deducted. This subtotal must further be reduced by any assets attributable to the postretirement medical plan remaining in the trust at the end of the plan year.
Wyatt offered no explanation as to why the associated administration expenses were not included.
The lump-sum present values, as of December 1, 1987, of future retiree medical benefits for current pensioners and for current active employees not covered by a collectively bargained agreement, were $10,732,153 and $23,766,492, respectively.
Pursuant to the VEBA Trust agreement, the VEBA Trust's assets, including the December 29, 1987, contribution, additional contributions made during 1988, and the trust's investment earnings, were used to pay the cost of providing welfare benefits under the Plan to petitioner's employees and retirees as those benefits (and costs) 1997 U.S. Tax Ct. LEXIS 61">*75 arose during the VEBA Trust's 1988 year. The VEBA Trust's balance on November 30, 1988, was $ 1,525,484. During the 1988 calendar year, the VEBA Trust paid benefit claims plus related expenses in the amount of $26,902,481, and medical and dental benefit claims under the Plan for retirees in the amount of $4,092,000.
109 T.C. 200">*208 POST-1987 FACTS AND CIRCUMSTANCES
Petitioner ceased prefunding the VEBA Trust after the December 1987 contribution when, sometime during October 1988, the VEBA Trust assets were depleted. After that time, petitioner funded the VEBA Trust as the benefit claims were incurred. Because petitioner was no longer prefunding the VEBA Trust, during May 1990 it changed its VEBA Trust yearend from November 30 back to a calendar yearend.
Petitioner did not disclose in its financial reports that it funded a reserve for the provision of postretirement medical benefits. The only reference to the VEBA Trust in petitioner's financial reports was to the fact that petitioner received a deferred tax benefit as a result of prefunding its group health insurance trust. 31997 U.S. Tax Ct. LEXIS 61">*76
During 1988, for retirees and disabled employees, and during 1990, for active employees, petitioner began disclosing to such employees the existence of the VEBA Trust. No disclosure was ever made to retirees, employees, or collective bargaining units representing its employees that petitioner prefunded a reserve within the VEBA Trust to accumulate assets for PRMB's for employees.
Petitioner engaged the accounting firm of Touche Ross & Co. (Touche Ross) to audit 4 the VEBA Trust's financial statements as of December 31, 1986, and November 30, 1987. Petitioner informed Touche Ross of the liabilities of the VEBA Trust. Although petitioner did disclose to Touche Ross that there existed liabilities for unrevealed claims for medical, dental, short- and long-term disabilities, and associated administrative costs, petitioner did not disclose any "liabilities" of the VEBA Trust for PRMB's and did not disclose that any portion of the contributions made was for the purpose of funding a reserve. Consequently, 1997 U.S. Tax Ct. LEXIS 61">*77 the VEBA Trust's financial statements disclose neither a reserve nor a liability for a reserve for PRMB's.
Financial Accounting Standards Board (FASB) Statement No. 81, entitled "Disclosure of Post Retirement Health Care 109 T.C. 200">*209 and Life Insurance Benefits" (FASB 81), was in effect during petitioner's 1986 year. FASB section 81.06 provides that employers, at a minimum, must disclose (1) a description of the benefits provided and the employee groups covered; (2) a description of the accounting and funding policies followed for those benefits; and (3) the cost of those benefits recognized in the period. FASB 81 offers examples of appropriate disclosure statements. When benefits are annually funded based on estimated accruals, a proper disclosure could state: "The estimated cost of such benefits is accrued over the working lives of those employees expected to qualify for such benefits as a level percentage of their payroll costs". Alternatively, when benefit costs are expensed as paid, a proper disclosure could state: "The cost 1997 U.S. Tax Ct. LEXIS 61">*78 of retiree health care and life insurance benefits is recognized as an expense as claims are paid". Petitioner's disclosure for retiree health and life insurance benefits for its 1986 year stated: "The cost of retiree health coverage is recognized as an expense when claims are paid. The cost of life insurance benefits is recognized as an expense as premiums are paid."
The parties have stipulated that the addition to the account limit for incurred but unpaid claims for the VEBA Trust's year ended November 30, 1987, if based on the safe harbor limits of
DISCUSSION
Summary judgment may be granted if the pleadings and other materials demonstrate that no genuine issue exists as to any of the material facts and that a decision may be rendered as a matter of law. Rule 121(b);
109 T.C. 200">*210 LEGAL FRAMEWORK
In
SEC. 419. TREATMENT OF FUNDED WELFARE BENEFIT PLANS.
(a) General Rule. -- Contributions paid or accrued by an
employer to a welfare benefit fund --
(1) shall not be deductible under this chapter, but
(2) if they would otherwise be deductible, shall
(subject to the limitation of subsection (b)) be deductible
under this section for the taxable year in which paid.
(b) Limitation. -- The amount of the deduction allowable
under subsection (a)(2) for any taxable year shall not exceed
the welfare benefit fund's qualified cost for the taxable year.
(c) Qualified Cost. -- For purposes of this section --
(1) In general. -- Except as otherwise provided in this
subsection, the term "qualified cost" means, with respect
to any taxable year, the sum of --
(A) the qualified direct cost for such taxable
year, and
(B) subject to the limitation of section 419A(b),
any addition to a qualified asset account for the
taxable 1997 U.S. Tax Ct. LEXIS 61">*80 year.
(2) Reduction for funds after-tax income. -- In the
case
of any welfare benefit fund, the qualified cost for any
taxable year shall be reduced by such fund's after-tax
income for such taxable year.
(3) Qualified direct cost. --
(A) In general. -- The term "qualified direct
cost" means, with respect to any taxable year, the
aggregate amount (including administrative expenses)
which would have been allowable as a deduction to the
employer with respect to the benefits provided during
the taxable year, if --
(i) such benefits were provided directly by
the employer, and
(ii) the employer used the cash receipts and
disbursements method of accounting.
(B) Time when benefits provided. -- For purposes
of subparagraph (A), a benefit shall be treated as
provided when such benefit would be includible in the
gross income of the employee if provided directly by
the employer (or would be so includible but for any
provision of this chapter excluding such benefit from
gross income).
* * * * * * *
109 T.C. 200">*211 (d) Carryover of Excess Contributions. -- If --
(1) the amount of the contributions paid (or deemed
paid under this subsection) by the employer during any
taxable year to a welfare benefit fund, exceeds
(2) the limitation of subsection (b),
such excess shall be treated as an amount paid by the
employer to such fund during the succeeding taxable year.
The qualified cost is the sum of qualified direct cost (QDC) and any additions to a qualified asset account (QAA), subject to the limitations of
109 T.C. 200">*212
(a) General Rule. -- For purposes of this subpart and section 512, the term "qualified asset account" means any account consisting of assets set aside to provide for the payment of --
(1) disability benefits,
(2) medical benefits,
(3) SUB or severance pay benefits, or
(4) life insurance benefits.
(b) Limitation on Additions to Account. -- No addition to any qualified asset account may be taken into account under
(c) Account Limit. -- For purposes of this section --
(1) In general. -- Except as otherwise provided in this subsection, the account limit for any qualified asset account for any taxable year is the amount reasonably and actuarially necessary to fund --
(A) claims incurred but unpaid (as of the close of such taxable year) for benefits referred to in subsection (a), and
(B) administrative costs with respect to such claims.
(2) Additional reserve for post-retirement medical and life insurance benefits. -- The account limit for any taxable year may include a reserve funded over the working lives of the covered employees and actuarially determined on a level basis (using assumptions that are reasonable in the aggregate) as necessary for --
(A) post-retirement medical benefits to be provided to covered employees (determined on the basis of current medical costs), or
(B) post-retirement life insurance benefits to be provided to covered employees.
* * * * * * * (5) Special limitation where no actuarial certification. --
(A) In general. -- Unless there is an actuarial certification of the account limit determined under this subsection for any taxable year, the account 1997 U.S. Tax Ct. LEXIS 61">*84 limit for such taxable year shall not exceed the sum of the safe harbor limits for such taxable year.
(B) Safe harbor limits. --
(i) Short-term disability benefits. -- In the case of short-term disability benefits, the safe harbor limit for any taxable year is 17.5 percent of the qualified direct costs (other than insurance premiums) for the immediately preceding taxable year with respect to such benefits.
(ii) Medical benefits. -- In the case of medical benefits, the safe harbor limit for any taxable year is 35 percent of the qualified direct costs (other than insurance premiums) for the immediately preceding taxable year with respect to medical benefits.
* * * * * * *
109 T.C. 200">*213 (i) Regulations. -- The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subpart. Such regulations may provide that the plan administrator of any welfare benefit fund which is part of a plan to which more than 1 employer contributes shall submit such information to the employers contributing to the fund as may be necessary to enable the employers to comply with the provisions of this section.
A fund's QAA consists of any assets set aside to provide for the payment of (1) 1997 U.S. Tax Ct. LEXIS 61">*85 disability benefits, (2) medical benefits, (3) supplemental unemployment compensation benefits (SUB) or severance pay benefits, or (4) life insurance benefits.
The first element of the account limit is the amount reasonably and actuarially necessary to fund CIBU's as of the close of the taxable year, as well as administrative costs related to such claims.
In the event that a taxpayer did not fund a reserve for CIBU's or postretirement medical or life insurance benefits, the account limit for that taxable year would be zero. Any amount left in the VEBA Trust at yearend in such a case would cause a reduction in the deduction equal to that remaining balance because that amount would not qualify as QDC, for although the requirement that the contribution be made during the taxable is satisfied, such remaining funds were not used to provide welfare benefits during the taxable year.
109 T.C. 200">*214 ISSUES
The parties disagree as to whether petitioner is automatically (i.e., without having to show reasonableness) entitled to use the safe harbor limits of
Petitioner contends that there is no reasonableness requirement in
Petitioner contends that the phrase in
We disagree with petitioner. Although Congress sought to reduce the cost of compliance by allowing certain additions to the account limit to be made without having to incur the cost of obtaining actuarial certification, a taxpayer must still show that the additions to the account limit for CIBU's during the tax year are reasonable. In
In General Signal, we addressed and rejected much of the argument petitioner makes in the instant case. Petitioner neither cites nor addresses the analysis provided in General Signal. Our reasoning in General Signal is supported by the legislative history, and, because petitioner has neither 109 T.C. 200">*216 argued that the additions to the account limit based on the safe harbors are reasonable nor offered a compelling argument to abandon the General Signal reasoning in the instant case, we will not do so. Consequently, we grant respondent's motion for partial summary judgment with regard to the CIBU's, and deny petitioner's motion for partial summary judgment with regard thereto. In so doing, we conclude that petitioner is entitled to an increase in the account limit attributable to medical, dental and short-term disability CIBU's in the amounts of $7,619,925 (plus $395,683 of related administrative costs) and $5,290,729 1997 U.S. Tax Ct. LEXIS 61">*91 (plus $261,232 of related administrative costs) for the VEBA Trust years ended 1986 and 1987, respectively.
Petitioner argues that the phrase "reserve funded over the working lives of the covered employees" in
the plain language of
In both General Signal and Parker-Hannifin Corp., we found that no reserve had been created, obviating the need to consider 109 T.C. 200">*217 whether the contributions were excessive from an actuarial standpoint.
In General Signal, we stated that the phrase "reserve funded", on its face, "suggests that Congress intended this provision to allow the ACCUMULATION of funds by a welfare benefit fund for the purpose of providing postretirement benefits."
The relevant portion of the committee report states:
PREFUNDING OF LIFE INSURANCE, DEATH BENEFITS, OR MEDICAL BENEFITS FOR RETIREES. -- The qualified asset account limits allow amounts reasonably necessary to ACCUMULATE RESERVES under a welfare benefit plan so that the medical benefit or life insurance (including death benefit) PAYABLE TO A RETIRED EMPLOYEE DURING RETIREMENT IS FULLY FUNDED UPON RETIREMENT. * * * The conferees intend that the Treasury Department prescribe rules requiring that the funding of retiree benefits be based on reasonable and consistently applied actuarial cost methods * * * H. Conf. Rept. 98-861, at 1157 (1984), 1984-3 C.B. (Vol. 2) 1, 411; emphasis added.)
In General Signal, we concluded that Congress' intent was to allow for the accumulation of assets to fund certain postretirement benefits. In the instant case, petitioner has offered no arguments, beyond those made and rejected 1997 U.S. Tax Ct. LEXIS 61">*94 in
We consider all of the facts and circumstances in deciding whether a reserve funded over the working lives of covered employees for postretirement welfare benefits was created.
109 T.C. 200">*218 In General Signal, the taxpayer established its VEBA Trust to prefund benefit payments it expected to incur in the calendar year following the year during which the contribution was made. For contributions to a VEBA made after December 31, 1985, the employer's deduction was limited to the employer's qualified direct cost for the year, plus any contributions to a QAA reasonably necessary to fund CIBU's and/or to provide a reserve for postretirement medical or life insurance benefits.
In
In the instant case, respondent's position, simply stated, is that, considering all of the evidence, petitioner did not create a reserve.
The VEBA Trust was created by petitioner during 1982. One of its purposes was to accelerate the company's deduction for CIBU's. During 1985, petitioner recognized that statutory amendments made by DEFRA, which did not become effective until January 1, 1986, would tighten the limitations governing the deduction of contributions to VEBA trusts. An internal memorandum dated December 17, 1985, indicates that petitioner believed that prefunding the VEBA Trust would allow an acceleration of $36,500,000 of 1986 expenses into 1985, producing, assuming continued contributions to the trust, a permanent deferral of taxes. The memorandum also notes that if tax reform legislation produced a corporate tax decrease, prefunding would produce additional tax 1997 U.S. Tax Ct. LEXIS 61">*98 benefits. Petitioner funded the VEBA Trust with contributions totaling $37,600,000 during December 1985. That contribution was the only contribution made to the VEBA Trust during its year ending November 30, 1986. The VEBA Trust's beginning balance on December 1, 1985, of $1,835,475, its investment income of $360,578, and the December contributions were used to pay medical, dental, accident, sickness, and long-term disability benefits under the plan as they were incurred during the year, leaving a yearend balance of $11,297,108 on November 30, 1986.
109 T.C. 200">*220 As discussed infra,
On December 30, 1986, petitioner contributed $27 million to the VEBA Trust. That contribution was the only one made to the VEBA Trust during the 1986 calendar year. The balance of the VEBA Trust on December 31, 1986, was $35,058,670. During the 1987 Plan year, the VEBA Trust paid benefit claims, including related expenses, of $31,572,854. During the 1987 Plan year, only $2,787,000 was paid by the VEBA Trust for benefit claims of retirees. The VEBA Trust's balance on November 30, 1987, was $7,992,215.
Wyatt calculated that the present value of petitioner's PRMB's, as of December 1, 1987, for retirees was $10,732,153, and for current active employees was $23,766,492, the deductible portion of which was $2,511,252, for a total deductible reserve contribution of $13,243,405.
On 1997 U.S. Tax Ct. LEXIS 61">*100 December 29, 1987, petitioner made a $12,400,000 contribution to the VEBA Trust. During the 1988 Plan year, the December 29, 1987, contribution, additional contributions made during 1988, and the VEBA Trust investment income were used to pay the cost of providing medical, dental, accident, sickness, and long-term disability benefits (and administrative costs) under the Plan to petitioner's employees and retirees as those benefits and costs came due during the VEBA Trust's 1988 year. During the 1988 calendar year, only $4,092,000 was actually paid by the VEBA Trust under the 109 T.C. 200">*221 plan for PRMB's. The VEBA Trust's balance on November 30, 1988, was $1,525,484.
If there had been an accumulation of assets, the balance would have reflected the reserve contributions for 1986 and 1987, less any amounts actually paid for PRMB's during 1986 and 1987. The 1986 deductible contribution amount (the amount actuarially determined as necessary to create a reserve for PRMB's) was $27,041,478. During the 1987 plan year, $2,787,000 was paid by the VEBA Trust for PRMB's. Accordingly, the beginning balance for the 1988 plan year should have been, if properly funded, $24,254,478 ($27,041,478 less 1997 U.S. Tax Ct. LEXIS 61">*101 $2,787,000). The yearend balance on November 30, 1987, was in fact only $7,992,215. The deductible contribution amount for the 1988 plan year was $13,243,405. 5 During the 1988 year, $4,092,000 was paid for PRMB's. Accordingly, the increase in the required reserve at the 1988 plan yearend is $9,151,405 ($13,243,405 less $4,092,000). Consequently, the total reserve balance should be $33,405,883 at the 1988 yearend ($24,254,478 plus $9,151,405). The November 30, 1988, yearend balance of the VEBA Trust, however, was $1,525,484, which supports a conclusion that, in fact, no reserve was funded.
Petitioner claims that it continued to fund the reserve for PRMB's during 1988. Petitioner, however, ceased funding the VEBA Trust for PRMB's after the December 1987 contribution, and sometime during October 1988, the VEBA Trust's assets were depleted. If petitioner had funded a reserve for the provision of PRMB's, it would not have depleted the VEBA Trust by October 1988. What apparently caused that depletion was that all of the assets of the VEBA Trust 1997 U.S. Tax Ct. LEXIS 61">*102 were used to pay welfare benefit claims incurred, which is inconsistent with funding a reserve.
Although petitioner did make reference to an insurance trust on its financial statements, it gave no notice to shareholders, employees, retirees or disabled employees of the existence of a reserve within the VEBA Trust for the accumulation of assets, i.e., the creation of a reserve, for the provision of postretirement medical benefits. This circumstance 109 T.C. 200">*222 also supports the conclusion that petitioner did not fund or create a reserve.
Petitioner engaged the services of Touche Ross to audit its VEBA Trust financial statements, but it did not disclose to Touche Ross the existence of a reserve or liabilities for the provision of PRMB's. Petitioner, however, did disclose its reserve for CIBU's, and it was reported on the VEBA Trust's financial statements.
Although FASB 81 requires disclosure of the funding policies followed for providing benefits and sets out an example of how a company could disclose the fact that it funded benefits on the basis of an accrual over the working lives of the covered employees, the funding method for the cost of retiree health coverage that petitioner actually disclosed 1997 U.S. Tax Ct. LEXIS 61">*103 was that claims would be expensed as they were incurred. This circumstance is additional support for the conclusion that petitioner did not fund a reserve for the provision of PRMB's.
In an attempt to distinguish
For the foregoing reasons, we hold that no reserve was created.
109 T.C. 200">*223 C.
The parties, on brief, agree that under
1. MECHANICS OF THE REGULATION
(b)(1) Pursuant to
The first sentence of the foregoing regulation reiterates the rule established by
In the instant case, the second sentence of the regulation would prevent petitioner's deduction on the basis of the following calculation. The fund balance on November 30, 1986, was $11,297,108. Petitioner contributed $27 million to the VEBA Trust during December 1986, which under the regulation is deemed part of the November 30, 1986, yearend balance, equal to $38,297,108. As was mentioned 1997 U.S. Tax Ct. LEXIS 61">*108 supra, any balance remaining in the VEBA Trust which is greater than the QAA account limit is not allowed as a deduction.
Petitioner contends that the limitation in the regulation is not supported by
2. REVIEW OF THE REGULATION
In
Generally, temporary regulations are accorded the same weight as 1997 U.S. Tax Ct. LEXIS 61">*110 final regulations.
109 T.C. 200">*226 If the intent of Congress on a matter is clear, then the Secretary must give effect to the unambiguously expressed intent of
3. LEGISLATIVE INTENT
In prescribing regulations relating to the definition of the term "fund," the conferees wish to emphasize that THE PRINCIPAL PURPOSE OF THIS PROVISION OF THE BILL IS TO PREVENT EMPLOYERS FROM TAKING PREMATURE DEDUCTIONS, FOR EXPENSES WHICH HAVE NOT YET BEEN INCURRED, by interposing an intermediary organization which holds assets which are used to provide benefits to the employees of the employer. * * * H. Conf. Rept. 98-861, at 1155 (1984), 1984-3 C.B. (Vol. 2) 1, 409; emphasis added.
Although the foregoing portion of the legislative history specifically deals with
Both
Because the regulation is consistent with the intent of DEFRA, and because it permissibly fills a gap created by
To reflect the foregoing,
An appropriate order will be issued.
FOOTNOTES
END OF FOOTNOTES
1. All Code and section references are to the Internal Revenue Code in effect for the year at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. References to VEBA Trust years after the yearend change include December of the previous year.↩
3. For example, petitioner's 1986 annual report indicates that $12,420,000 of Federal income taxes (46 percent of petitioner's $27 million contribution) was deferred by prefunding the company's group health insurance trust, and the deferral of the tax effect of prefunding in l985 in the amount of $13,648,000 was reversed.
4. Touche Ross's audit was limited, and it did not express an opinion as to certain elements of the financial statements. Those areas are not relevant to the instant case.↩
5. This figure represents only the deductible contribution amount for employees not covered by collectively bargained agreements.↩
6. This amount comprises the Dec. 30, 1986, contribution of $27 million and the $1,937,701 disallowed in 1985 and deemed to have been contributed on Jan. 1, 1986.↩
7. The $8,447,418 addition to the QAA comprises CIBU's of $7,619,725, associated administrative costs of $395,683, and an increase pursuant to
8. See also
9. Based on our analysis infra, we find it unnecessary to decide whether the regulations are interpretive or legislative.↩
10. Respondent also argues that the deduction limited by the regulation would not otherwise be allowable, as required by