Cng Transmission Management Veba v. U.S.

• Decision Date: 14 December 2009
• Docket Number: No. 2009-5025.,2009-5025.
• Citation: 588 F.3d 1376
• Parties: CNG TRANSMISSION MANAGEMENT VEBA, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

588 F.3d 1376

CNG TRANSMISSION MANAGEMENT VEBA, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

No. 2009-5025.

United States Court of Appeals, Federal Circuit.

December 14, 2009.

Eric R. Fox, Ivins, Phillips & Barker, Chartered, of Washington, DC, argued for plaintiff-appellant. With him on the brief were Kevin P. O'Brien and Patrick J. Smith.

Kenneth L. Greene, Attorney, Appellate Section, Tax Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were John A. DiCicco, Acting Assistant Attorney General, Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, and Arthur T. Catterall, Attorney.

Before MAYER, LINN, and PROST, Circuit Judges.

MAYER, Circuit Judge.

CNG Transmission Management VEBA ("CNG") appeals the judgment of the United States Court of Federal Claims holding that a voluntary employees' beneficiary association ("VEBA") may not avoid the limitation on exempt function income in 26 U.S.C. § 512(a)(3)(E)(i) by allocating investment income to the payment of member benefits. See CNG Transmission Mgmt. VEBA v. United States, 84 Fed.Cl. 327 (2008). We affirm.

BACKGROUND

The relevant facts are not in dispute. CNG is a VEBA organized under section 501(c)(9) of the Internal Revenue Code. It was established by Consolidated Natural Gas Company in 1994. As an employer-funded VEBA, CNG "provid[es] for the payment of life, sick, accident, or other benefits to the members of [the] association or their dependents or designated beneficiaries." 26 U.S.C. § 501(c)(9).

At the beginning of 2000, CNG had total fund balances of $44,804,622. Over the course of the year, CNG generated $2,798,002 in investment income, received employer contributions of $12,684,454 and spent $7,429,878 on member benefits. At the end of 2000, it had total fund balances of $42,592,818.¹ In November 2001, CNG filed Internal Revenue Service Form 990-T, reporting $2,693,592² in unrelated business taxable income for 2000 and paying $1,065,684 in tax on this income. In 2004, however, it filed an amended Form 990-T, requesting a refund of the tax paid in 2000 on the ground that the amount it had reported as unrelated business taxable income was instead non-taxable exempt function income. Although CNG conceded that its year-end account balance exceeded the account limit specified in 26 U.S.C. § 512(a)(3)(E)(i), it contended that it was not obligated to pay tax on its investment income because it had spent that income on member benefits during the year.

The Internal Revenue Service denied CNG's refund claim and the Court of Federal Claims affirmed. In granting the government's motion for summary judgment, the court noted that pursuant to the formula provided in Temporary Treasury Regulation § 1.512(a)-5T, Q & A-3 ("Treasury Regulation § 1.512(a)-5T"), a VEBA will owe tax on the lesser of its investment income and the amount by which its year-end account balance exceeds the statutory account limit. 84 Fed.Cl. at 335. The court concluded, moreover, that a VEBA could not "avoid the limitation on exempt function income in 26 U.S.C. § 512(a)(3)(E)(i) merely by allocating investment income toward the payment of welfare benefits during the course of the tax year." Id. at 338. CNG appeals. We have jurisdiction under 28 U.S.C. § 1295(a)(3).

DISCUSSION

We review a grant of summary judgment by the Court of Federal Claims without deference and conduct a de novo review of all questions of statutory interpretation. Consolidation Coal Co. v. United States, 528 F.3d 1344, 1347 (Fed.Cir. 2008); Old Stone Corp. v. United States, 450 F.3d 1360, 1367 (Fed.Cir.2006). Here the only issue in dispute is the proper interpretation of 26 U.S.C. § 512(a)(3)(E)(i).

Organizations otherwise exempt from federal taxation pursuant to section 501(a) of the Internal Revenue Code are nonetheless subject to tax on their "unrelated business taxable income." 26 U.S.C. § 511(a). In the context of organizations such as VEBAs, unrelated business taxable income generally consists of all income other than "exempt function income." See id. § 512(a)(3)(B). Exempt function income is defined as:

the gross income from dues, fees, charges, or similar amounts paid by members of the organization as consideration for providing such members or their dependents or guests goods, facilities, or services in furtherance of the purposes constituting the basis for the exemption of the organization to which such income is paid. Such term also means all income . . . which is set aside . . . to provide for the payment of life, sick, accident, or other benefits. . . .

Id.

Under this provision, there are two classes of exempt function income: (1) member contributions to the VEBA, and (2) income which is "set aside" for the payment of life, sick, accident or other member benefits. In 1984, Congress restricted the amount of income that a VEBA could exclude as exempt function income, providing that a "set-aside" for purposes of section 512(a)(3)(B) can be considered exempt function income "only to the extent that such set-aside does not result in an amount of assets set aside . . . in excess of the account limit determined under section 419A . . . for the taxable year." See 26 U.S.C. § 512(a)(3)(E)(i).³ Pursuant to 26 U.S.C. § 419A, a VEBA's account limit is generally the amount necessary to pay for incurred but unpaid benefit claims as of the end of the year as well as certain related administrative costs. Accordingly, a VEBA's income is exempt from tax only to the extent that it does not result in a year-end account balance in excess of the amount necessary to satisfy incurred but unpaid member claims.

The crux of the present dispute is whether CNG's investment income "result[ed] in an amount of assets set aside" in excess of the statutory account limit. See 26 U.S.C. §§ 419A(c), 512(a)(3)(E)(i). CNG argues that its investment income did not result in any account overage because it spent that income during the year on member benefits. The government, however, contends that because CNG's investment income caused its total fund balances to exceed the statutory account limit, that investment income cannot be classified as exempt function income.

We agree with the government. The language of section 512(a)(3)(E) is clear and unambiguous: it provides that income does not qualify as exempt function income if it "result[s] in" an account balance that is "in excess" of the statutory account limit. The plain meaning of the term "results in" is "causes." See Brown v. Gardner, 513 U.S. 115, 119, 115 S.Ct. 552, 130 L.Ed.2d 462 (1994) (concluding that the term "as a result of" can be "naturally read simply to impose the requirement of a causal connection"); Murakami v. United States, 398 F.3d 1342, 1352 (Fed.Cir. 2005) (construing the term "as a result of" to mean "as a consequence of"); Black Hills Aviation, Inc. v. United States, 34 F.3d 968, 975 (10th Cir.1994) (concluding that the term "as a result of" is "logically interpreted to mean `caused by'"). Here, CNG's account overage was caused by, or occurred as a consequence of, the investment income it made in 2000. Thus, under the plain meaning of section 512(a)(3)(E)(i) that investment income was not tax-exempt.

We reject CNG's argument that its investment income could not have resulted in any account overage because it "spent" all of its investment income on member benefits during the course of the tax year. Money is fungible, and CNG cannot avoid taxation by claiming that it spent money from investment income, rather than money from some other source, on member benefits. There is no requirement in section 512(a)(3)(E)(i) that a VEBA's investment income can result in a year-end account overage only to the extent that the actual dollars in the account at year end are directly traceable to income made on investments.

The legislative history of section 512(a)(3)(E)(i) supports this interpretation of the statutory language. The impetus for Congress' enactment of changes to the tax treatment of funded welfare benefit plans was its concern about the "tax-shelter potential" of such plans. H.R.Rep. No. 98-432, pt. 2, at 1275 (1984). Specifically, Congress feared that "the combination of advance deductions for contributions and the availability of tax exemption for certain employee benefit organizations (such as the voluntary employees' beneficiary association or VEBA) provides tax treatment very similar to that provided to qualified pension plans, but with far fewer restrictions." Id. It therefore enacted sections 419 and 419A to limit the extent to which a VEBA could deduct employer contributions and enacted section 512(a)(3)(E) to limit the extent to which a VEBA could set aside income on a tax-free basis. See id. at 1292 ("Present law does not specifically limit the amount of income that can be set aside" by a VEBA on a tax-exempt basis.); H.R.Rep. No. 98-861, at 1163 (1984) (Congress intended to impose "more specific limits" on VEBAs in order to ensure that "the amount set aside for an exempt purpose is generally not to exceed the qualified asset account limit."). Under CNG's interpretation of section 512(a)(3)(E)(i), however, a VEBA could avoid tax on its investment income simply by asserting that it had spent this income—rather than income from employee and employer contributions—on member benefits during the relevant tax year.

I. Treasury Regulation § 1.512(a)-5T

We find the language of section 512(a)(3)(E)(i) to be unambiguous, but even if it were not, we would be compelled to accord deference to the Treasury's reasonable interpretation of the statute. See Am. Express Co. v. United States, 262 F.3d 1376, 1383 (Fed.Cir.2001) ("In the context of tax cases, the IRS's reasonable interpretations of its own regulations and procedures are entitled to particular deference."); LTV Steel Co. v. United States, 215 F.3d 1275, 1279 (Fed.Cir.2000) ("When a term in the Internal...