Sherwin-Williams Co. Emp. Health Plan Trust v. Comm'r of Internal Revenue, No. 21333–97.
| Decision Date | 09 November 2000 |
| Docket Number | No. 21333–97. |
| Citation | 115 T.C. No. 33,115 T.C. 440 |
| Parties | SHERWIN–WILLIAMS COMPANY EMPLOYEE HEALTH PLAN TRUST, Key Trust Company of Ohio, Trustee, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Trust (T), a tax-exempt voluntary employees' beneficiary association described in sec. 501(c)(9), I.R.C., set aside for each year at issue a certain amount of investment income to provide for the payment of reasonable costs of administration directly connected with providing for the payment of health care benefits (amount of investment income at issue).Held: In determining for each year at issue the unrelated business taxable income (UBTI) of T under sec. 512(a)(3)(A), I.R.C., the amount of investment income at issue is subject to the limitation prescribed by sec. 512(a)(3)(E)(i), I.R.C. Held, further, in calculating for each year at issue the limitation prescribed by sec. 512(a)(3)(E)(i), I.R.C., the amount of assets that T set aside to provide for the payment of health care benefits, including reasonable costs of administration directly connected with providing for the payment of such benefits, is not to be reduced by the amount of the reserve described in sec. 419A(c)(2)(A), I.R.C., for post-retirement medical benefits. Held, further, because of the limitation prescribed by sec. 512(a)(3)(E)(i), I.R.C., in determining for each year at issue the UBTI of T under sec. 512(a)(3)(A), I.R.C., the amount of investment income at issue may not be excluded as exempt function income.Michael T. Cummins and Robert K. Olson, for petitioner.
Mark L. Hulse, for respondent.
Respondent determined the following deficiencies in the Federal income tax (tax) of The Sherwin–Williams Company Employee Health Plan Trust (Trust):
+----------------+
¦Year¦Deficiency ¦
+----+-----------¦
¦1991¦$489,941 ¦
+----+-----------¦
¦1992¦339,924 ¦
+----------------+
The issues for decision are:
(1) In determining for each year at issue the unrelated business taxable income (UBTI) of the Trust under section 512(a)(3)(A),2 is the amount of investment income that the Trust set aside 3 to provide for the payment of reasonable costs of administration directly connected with providing for the payment of health care benefits subject to the limitation prescribed by section 512(a)(3)(E)(i)? We hold that it is.
(2) In calculating for each year at issue the limitation prescribed by section 512(a)(3)(E)(i), is the amount of assets that the Trust set aside to provide for the payment of health care benefits, including reasonable costs of administration directly connected with providing for the payment of such benefits, to be reduced by the amount of the reserve described in section 419A(c)(2)(A) for post-retirement medical benefits (reserve for post-retirement medical benefits)? We hold that it is not.
This case was submitted fully stipulated. The facts that have been stipulated are so found except as stated herein.
At the time of the filing of the petition, the Trust's address was in care of its trustee, Key Trust Company of Ohio, N.A. (Trustee), in Cleveland, Ohio.
On December 30, 1987, The Sherwin–Williams Company (Sherwin–Williams) established the Trust to fund health care benefits for participants in The Sherwin–Williams health care plan (Sherwin–Williams health care plan participants). On September 27, 1988, the Commissioner of Internal Revenue determined that the Trust was exempt from tax because it qualified as a voluntary employees' beneficiary association described in section 501(c)(9). The Trust maintained that qualification during the years at issue. (We shall refer to a tax-exempt voluntary employees' beneficiary association described in section 501(c)(9) as a VEBA.)
The Trust agreement establishing the Trust provided in pertinent part:
8.2 Payment of Benefits. * * * Any Trust Fund income not used in the year in which it was earned to provide life, sickness, accident or other benefits described in Section 501(c)(9) of the Code and the regulations thereunder or to pay reasonable administrative costs associated with the delivery of those benefits shall be set aside to provide for the payment of the benefits and benefit costs described in Section 512(a)(3)(B)(ii) of the Code and limited by Section 512(a)(3)(E) of the Code in the immediately following year. * * *
The Trust derived its income from (1) member contributions from Sherwin–Williams and Sherwin–Williams health care plan participants and (2) investment income. The Trust set aside, and subsequently expended, income to provide for the payment of health care benefits and reasonable costs of administration directly connected with providing for the payment of such benefits. The amounts of income that the Trust set aside to provide for the payment of reasonable costs of administration directly connected with providing for the payment of health care benefits equaled $1,580,455 for 1991 and $1,853,529 for 1992. 4
The amounts of assets that the Trust set aside as of the close of the years at issue to provide for the payment of health care benefits and reasonable costs of administration directly connected with providing for the payment of such benefits were $41,975,366 and $45,637,659, respectively.
The Trust's account limit, as defined in section 419A(c), for its qualified asset account, as defined in section 419A(a), was $64,615,936 5 for 1991 and $84,192,933 for 1992. The foregoing account limits for 1991 and 1992 included $53,313,236 and $71,602,395, respectively, attributable to a reserve for post-retirement medical benefits.
The Trust filed Forms 990, Return of Organization Exempt From Income Tax (Form 990), and Forms 990–T, Exempt Organization Business Income Tax Return (Form 990–T), in which it reported as unrelated business income $1,851,399 and $1,155,793 of investment income for 1991 and 1992, respectively.6 In its Forms 990–T for 1991 and 1992, the Trust claimed as deductions directly connected with its unrelated business income (1) “Compensation of officers, directors, and trustees” in the amounts of $1,456,954 and $1,618,779, respectively, and (2) “Other deductions” in the amounts of $156,084 and $287,450, respectively. Of the foregoing total deductions claimed in the Trust's Forms 990–T for 1991 and 1992, $1,580,455 and $1,853,529, respectively, constitute reasonable costs of administration directly connected with providing for the payment of health care benefits for which the Trust set aside income within the meaning of section 512(a)(3)(B).7
The instructions to Forms 990–T stated in pertinent part:
Sections 501(c)(7), (9), (17), and (20) organizations will not be taxed on income set aside for:
1. Religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals;
2. The payment of life, sick, accident, or other benefits by a section 501(c)(9), (17), or (20) organization. The amount allowed as a set-aside may not exceed a limit determined using section 419A. See sections 419A and 512(a)(3)(E) for details;
3. Reasonable administration costs directly connected with 1 and 2 above.
In the notice of deficiency (notice) issued to the Trust, respondent determined that, in calculating its UBTI, the Trust erroneously deducted in Forms 990–T for 1991 and 1992(1) $1,424,371 and $1,588,555, respectively, as “Compensation of officers, directors, and trustees” and (2) $156,084 and $264,974, respectively, as “Other deductions”. Respondent made those determinations because the Trust failed to establish that those disallowed amounts constitute expenses directly related to, and therefore deductible from, its investment income that it reported as unrelated business income in Forms 990–T (i.e., $1,851,399 for 1991 and $1,155,793 for 1992).8
On brief, the Trustee abandons the position that the Trust took in Forms 990–T for 1991 and 1992 that, in calculating its UBTI, it is entitled to deduct from unrelated business gross income (1) “Compensation of officers, directors, and trustees” in the amounts of $1,456,954 and $1,618,779, respectively, and (2) “Other deductions” in the amounts of $156,084 and $287,450, respectively. Instead, the Trustee argues on brief that $1,580,455 of the Trust's income for 1991 9 and $1,853,529 of the Trust's income for 1992 10 constitute exempt function income, as defined in section 512(a)(3)(B), and that such amounts of income are excluded from the calculation of its UBTI under section 512(a)(3)(A). It is respondent's position that, because of the limitation prescribed by section 512(a)(3)(E)(i), the amounts of investment income that the Trust reported as unrelated business income in Forms 990–T for the years at issue are not excluded from the calculation of the Trust's UBTI. 11 Petitioner bears the burden of establishing that its position is correct. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212 (1933).
Before addressing the issues presented, we set forth the pertinent statutory provisions implicated by those issues.12 Although section 501(a) exempts a VEBA from tax, section 501(b) subjects a tax-exempt VEBA to tax to the extent provided in sections 511 through 515 relating to the tax on UBTI. Section 511(a) imposes a tax for each taxable year on the UBTI of a VEBA, as defined in section 512.
Section 512(a)(1) provides the following general definition of UBTI:
(1) General rule.—Except as otherwise provided in this subsection, the term “unrelated business taxable income” means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b).
Section 512(a)(3) provides the following special rules in defining the UBTI of a VEBA described in ...
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