IRS written determination 201442064

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Number: 201442064
Release
Date: 10/17/2014
Date: July 21, 2014
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:
UIL: 419.00-00;
419A.OO-OO; 4976.00-00; 4976.01-00;
61.00-00
Legend:
TaxQa~er
=
Trust
=
ComQan~A
=
ComQan~ B
=
ComQan~ C
=
ComQan~ D
=
PlanA
=
Plan B
=
Union(s)
=
Date 1
=
Date 2
=
Date 3
=
Year1
=
Year2
=
Dear
This responds to your letter dated December 30, 2011, requesting rulings regarding the tax
consequences
of a proposed transaction involving Trust. The assets in Trust are currently held
to provide retiree life insurance benefits to Union-represented retirees
of TaxQa~er. The
transaction addressed
in this ruling would permit the assets in Trust also to be used to provide
retiree health benefits to Union-represented retirees.
FACTS
TaxQa~er is organized as a Delaware corporation and was formed through the merger of
several companies. TaxQa~er is the successor of ComQan~ A, ComQan~ B, and ComQan~ C.

2
Xxxxxxx Xxxxxx Xxxxxx
Taxpayer provides life, health, and other welfare benefits to active and retired employees (and
their eligible spouses and dependents) through several welfare benefit plans, including Plan A
and
Plan
B. Plan A provides group term life insurance, supplemental life insurance, and
accidental death and dismemberment insurance to active employees, and also provides group
term life insurance and supplemental life insurance to retired and disabled employees. The
covered employees are,
or were before their retirement, represented by Unions. Plan B
provides retiree medical and dental benefits to certain retired employees who were, before their
retirement, represented by Unions.
Trust assets have been used
or held in a reserve to provide retiree life insurance benefits for
Union-represented retirees under Plan
A. No assets of Trust have been used to pay other
benefits.
Taxpayer and its predecessors negotiated the benefits
currently provided under Plans A and
Plan B through arm's-length bargaining with Unions. The benefits for retired employees under
these plans are provided under a series
of collective bargaining agreements that were in effect
when the covered individuals retired. The collective bargaining agreements satisfy the
requirements
of section 7701 (a)(46).
Trust has received a determination letter indicating that it is a voluntary employees' beneficiary
association under section
501 (c)(9). The assets held in Trust were accumulated in retired lives
reserves maintained as separate accounts under group-term life insurance policies issued to
Company B's predecessor, Company
D, and its affiliates. Effective Date 1, when Company D
spun off Company B and the other companies, Company D
allocated the policy reserves among
the spun-off companies. Company B
established separate retiree life insurance plans for
management and non-management employees effective Date
2, and maintained the policies
and retired lives reserves to provide life insurance benefits under the plans. Company B
established Trust effective Date
3, and insurance policies and retired lives reserves attributable
to Union-represented employees and retirees covered by Plan A were transferred to Trust.
Trust was funded solely with the transferred retired lives reserves, and no contributions have
been made to Trust since it was
established.
Records maintained by Company B show that no contributions were made to the retired lives
reserves after Year
1. However, Taxpayer has not been able to determine whether any
contributions were made to the retired lives reserves from Year
2, when the reserves were
transferred, through Year
1. Taxpayer believes that most of the assets in the retired lives
reserves were attributable to the policy reserves accumulated before Year 2 and transferred to
Company B by Company
D. Taxpayer has assumed for purposes of this request that Trust
might hold some assets attributable to contributions made after December 31, 1985, when the
welfare benefit fund provisions
of the Deficit Reduction Act of 1984 (DEFRA) became effective.
Taxpayer intends to create an umbrella welfare benefits plan that will provide medical, dental,
vision, and life insurance benefits to certain active and retired Union-represented employees
of
Taxpayer through component plans. Plan A and Plan B will become component plans. Trust
will be amended to permit the assets originally transferred from retired lives reserves under
group insurance policies to be used to provide retiree health benefits to Union-represented
retirees who are covered by Plan
B. Assets from the existing retiree life insurance reserve

3
Xxxxxxx Xxxxxx Xxxxxx
would be transferred to a retiree health reserve
in Trust, and the assets would be paid out from
the retiree health reserve as needed to provide medical and dental benefits to Union-
represented retirees who are covered by the Plan
8 component of the umbrella plan. Any
assets remaining
in the retiree life insurance reserve will continue to be used to provide retiree
life insurance benefits for Union-represented retirees who are covered by the Plan A component
of the umbrella plan.
Taxpayer represents that:
1. Most of the assets in Trust are derived from contributions originally accumulated in retired
lives reserves before 1985 (Pre-DEFRA Contributions), though Company
8 may have made
some contributions to the retired lives reserves after 1985 (Post-DEFRA Contributions).1
2. Trust is a separate welfare benefit fund that provides only retiree life insurance benefits
pursuant to collective bargaining agreements as described
in section 419A(f)(5). The retiree
health reserve will be a separate welfare benefit fund under a collective bargaining agreement
as described
in section 419A(f)(5), and assets to be transferred to the retiree health reserve will
provide retiree health benefits pursuant to collective bargaining agreements as described in
section 419A(f)(5).
3. Pre-DEFRA Contributions were deducted when made under section 162, and would have
been fully deductible under section 162 if the contributions had
in fact been made to provide
post-retirement health benefits.
4. Post-DEFRA Contributions would have been deducted pursuant to section 419A(f)(5)(A).
5. Under the terms of Trust and consistent with the prohibited inurement rules of section
501 (c)(9),Taxpayer is prevented from recovering assets held in Trust.
REQUESTED RULINGS
Taxpayer has requested that the Service rule as follows:
1. The transfer of assets from the retiree life insurance reserve to the retiree health reserve
in Trust will not cause Taxpayer to include any amount in gross income under section
61.
2. The use of transferred assets to provide medical and dental benefits to Union retirees
covered by Plan
8 will not cause Taxpayer to include any amount in gross income under
section 61.
1 Sections 419(a) and 419A, which were enacted as part of the Deficit Reduction Act of 1984, are generally
applicable
to contributions paid or accrued after December 31, 1985,
in taxable years ending after such date. For
purposes
of this ruling, contributions made to the retired lives reserves prior to January 1, 1986, are referred to as
Pre-DEFRA Contributions, and contributions made to the retired lives reserves after December 31, 1985, are referred
to as Post-DEFRA Contributions.

4
Xxxxxxx Xxxxxx Xxxxxx
3. The transfer of assets from the retiree life insurance reserve to the retiree health reserve ·
in Trust, and the use
of the transferred assets to provide retiree health benefits, will not
result
in any "disqualified benefit" within the meaning of section 4976(b)(1)(C), and will
not,
in and of itself, cause Taxpayer to be liable for the excise tax imposed by section
4976.
LAW
Section 61 (a) provides that, unless otherwise excepted, gross income includes all income from
whatever source derived.
Section
111 (a) provides that gross income does not include income attributable to the recovery
during the taxable year
of any amount deducted in any prior taxable year to the extent such
amount did not reduce the amount
of tax imposed by Chapter 1 of the Code.
Generally, the tax benefit rule requires a taxpayer
who received a tax benefit from a deduction
in an earlier year to recognize income
in a later year if an event occurs that is fundamentally
inconsistent with the premise on which the deduction was initially based. Hillsboro National
Bank
v. Commissioner, 460 U.S. 370 (1983); see also Hughes & Luce, LLP v. Commissioner,
70 F.3d 16 (5th Cir. 1995), cert. denied, 517 U.S. 1208 (1996). The term "tax benefit rule"
encompasses two concepts, an inclusionary part and an exclusionary part. Frederick
v.
Commissioner, 101 T.C. 35, 40-41 (1993). The inclusionary part has been developed in the
courts and requires a taxpayer to include a previously deducted amount
in the current year's
income when a fundamentally inconsistent event has occurred.
The exclusionary part is
partially codified at section
111 (a) and permits a taxpayer to exclude an amount that did not
previously provide a tax benefit when it was deducted; the exclusionary part cannot apply
unless the inclusionary part applies.
The tax benefit rule allays some of the inflexibilities of the annual accounting system under
specific circumstances. Hillsboro National Bank, 460 U.S.
at 377. The general purpose of the
tax benefit rule is to approximate the results produced by a tax system based on transactional
rather than annual accounting.
kt at 381. The tax benefit rule will "cancel out" an earlier
deduction when a later event is "fundamentally inconsistent" with the premise on which the
deduction was
initially based, even
in situations where there is no actual recovery of funds. kt
at 381-383. One must consider the facts and circumstances of each case in light of the purpose
and function
of the provisions granting the deductions. kt at 385. Although it is usually helpful
to determine whether the later event would have foreclosed the deduction if it had occurred
within the same tax year, that inquiry is not an exclusive test. See American Mutual Life
Insurance Co.
v. United States, 267 F.3d 1344, 1350 (Fed. Cir. 2001).
Section 162(a) provides,
in part, that there shall be allowed as a deduction all the ordinary and
necessary expenses paid
or incurred during the taxable year in carrying on any trade or
business.
Section 1.162-10 provides,
in part, that amounts paid or accrued within the taxable year for a
sickness, accident, hospitalization,
medical expense,
or similar benefit plan, are deductible
under section 162(a) if they are ordinary and necessary expenses
of the trade or business.

5
Xxxxxxx Xxxxxx Xxxxxx
Section 1.162-1
OT, Q&A-2, provides that section 419 generally applies to contributions paid or
accrued with respect to a welfare benefit fund after December 31, 1985,
in taxable years of
employers ending after that date.
Section 419(a) provides that contributions paid or accrued by an
employer to a welfare benefit
fund are not deductible under Chapter
1, but if they would otherwise be deductible, are (subject
to the limitation of section 419(b)) deductible under section 419 for the taxable year
in which
paid.
Section 419(b) limits the employer's deduction under section 419(a) to a welfare benefit
fund's qualified cost for the taxable year. The qualified cost of a welfare benefit fund for
a taxable year is defined
in section 419(c)(1) as the sum of the qualified direct cost for
the taxable year and, subject to the limitation of section 419A(b}, any addition to a
qualified asset account for the taxable year. Under section 419( c)(2), the qualified cost
for any taxable year is reduced by the welfare benefit fund's after-tax income for the
taxable year.
Section 419( c)(3)(A) provides that the term
"qualified direct cost" means, with respect to
any taxable year, the aggregate amount (including administrative expenses) that would
have been allowable as a deduction to the employer with respect to the benefits
provided during the taxable year, if those benefits were provided directly by the
employer and the employer used the cash receipts and disbursements method of
accounting.
Section 419( c)(3)(B) provides that, for purposes of section 419( c)(3)(A), a benefit is
treated as provided when that 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 Chapter 1 of the Code excluding that benefit from gross income).
Section 419A(a) defines the term "qualified asset account" to include any account
consisting of assets set aside to provide for the payment
of medical or life insurance
benefits.
Section 419(e)(1) defines the term
"welfare benefit fund" to include any fund through which the
employer provides welfare benefits to employees or their beneficiaries. The term "fund"
is
defined in section 419(e)(3) to include an organization described in section 501 (c)(9), and also,
to the extent provided
in regulations, any account held for an employer by any person.
Section 419A(b) provides that no addition to any
qualified asset account may be taken
into account under section 419(c)(1) to the extent such addition results
in the amount of
such account exceeding the account limit.
Section 419A(f)(5)(A) provides that no account limits shall apply
in the case of a
qualified asset account under a separate welfare benefit fund under a collective
bargaining agreement.
Section1.419-1T, Q&A-2(a) of the regulations, provides that section 419 generally

6
Xxxxxxx Xxxxxx Xxxxxx
applies to contributions paid or accrued with respect to a welfare benefit fund after December
31, 1985,
in taxable years of employers ending after that date.
Section 1.419-2T, Q&A-1 provides,
in pertinent part, that neither contributions to nor
reserves of a
collectively bargained welfare benefit fund shall be treated as exceeding the
otherwise applicable limits of section 419(b), 419A(b), or 512(a)(3)(E) until the
earlier of : (i) The date upon which the last of the collective bargaining agreements
relating to the fund
in effect on the date of issuance of final regulations concerning such
limits terminates, or (ii) the date three years after the issuance
of final regulations.
Section 1.419A-2T, Q&A-2 states:
(1) For purposes of Q&A-1, a collectively bargained welfare benefit fund is a
welfare benefit fund that is maintained pursuant to an agreement which the
Secretary of Labor determines to be a collective bargaining agreement and which
meets the requirements of the Secretary of the Treasury as set forth
in paragraph
(2) below.
(2) Notwithstanding a determination by the Secretary of Labor that an agreement
is a collective bargaining agreement, a welfare benefit fund
is considered to be
maintained pursuant to a
collective bargaining agreement only if the benefits
provided through the fund were the subject of arms-length negotiations between
the employee representatives and one or more employers, and if such
agreement between employee representatives and one or more employers
satisfies Code section
7701 (a)(46). Moreover, the circumstances surrounding a
collective bargaining agreement must evidence good faith bargaining between
adverse parties over the welfare benefits to be provided through the fund. Finally,
a welfare benefit fund is not considered to be maintained pursuant to a collective
bargaining agreement unless at least 50 percent of the employees eligible to
receive benefits under the fund are covered by the
collective bargaining
agreement.
(3)
In the case of a collectively bargained welfare benefit fund, only the portion of
the fund (as determined under allocation rules to be provided by the
Commissioner) attributable to employees covered by a collective bargaining
agreement, and from which benefits for such employees are provided, is
considered to
be maintained pursuant to a collective bargaining agreement.
(4) Notwithstanding the preceding paragraphs and pending the issuance of
regulations setting account limits for collectively bargained welfare funds, a
welfare benefit fund will not be treated as a collectively bargained welfare benefit
fund for purposes of Q&A-1 if and when, after July
1, 1985, the number of
employees who are not covered by a collective bargaining agreement and are
eligible to receive benefits under the fund increases by reason of an amendment,
merger, or other action
of the employer or the fund. In addition, pending the
issuance of such regulations, for purposes of applying the 50 percent test of
paragraph (2) to a
welfare benefit fund that is not
in existence on July 1, 1985,

.--------------------------
7
Xxxxxxx Xxxxxx Xxxxxx
"90-percent" shall be substituted for "50-percent."
Section 4976(a) imposes a 100 percent excise tax if an employer maintains a welfare benefit
fund and there is a disqualified benefit provided during any taxable year.
Section 4976(b)(1)(C) defines "disqualified benefit" to include any portion of a welfare benefit
fund reverting to the benefit of the employer.
Section 4976(b)(3) provides that section 4976(b)(1 )(C) does not apply to any amount
attributable to a contribution to the fund that is not allowable as a deduction under section 419
for the taxable year or any prior taxable year.
In Revenue Ruling 73-599, 1973-2 C.B. 40, modified by Rev. Rul. 77-92, 1977-1 C.B. 41, the
issue was whether the
balance
in a retired lives reserve had to be included in the gross income
of the employer
in the taxable year in which the employer terminated the insurance contract.
The balance was attributable to premiums paid by the employer and interest increments added
by the insurance company. At the time it terminated the insurance contract, the employer
directed that the insurance carrier should transfer the balance in the retired lives reserve to a
trust qualified as a VEBA under section
501 (c)(9). The employer had deducted the premiums
paid into a retired lives reserve during the years when it was maintaining the insurance contract
for the benefit of its
employees. The insurance contract provided that, upon cancellation or
other termination of the contract, any
balance
in the retired lives reserve could be distributed to
the er:nployer as a dividend
or, at the employer's option, transferred to a trust qualified under
section
501 (c)(9) for the purpose of providing insurance coverage for retired employees. Under
these facts, the ruling holds that the balance
in the retired lives reserve was includable in the
employer's gross income under section
61 (a) in the year of the transfer. The ruling states that,
because the insurance contract gave the employer a fixed right to receive the balance
in the
retired lives reserve
in the year in which it terminated its coverage under the policy, that balance
was includable in the employer's gross income for the year of the termination, notwithstanding
the fact that the
employer directed the insurance company to transfer the money to a section
501 (c)(9) trust. The ruling also holds that, in those cases in which the tax benefit rule under
section
111 applies, the rule applies only to that part of the balance that was accumulated out of
premiums; it does not
apply to that part of the accumulated balance that is the interest
increments.
Similarly,
in Revenue Ruling 77-92, a corporate employer with a group term insurance program
that included a retired lives reserve had the option to discontinue the insurance coverage and to
direct the insurance carrier to use the amount
in the retired lives reserve either to pay premiums
for insurance on the lives of retired employees or to pay a dividend to the employer. The
employer terminated the insurance contract and directed the insurance carrier to transfer the
balance
in the retired lives reserve to another insurance company to purchase insurance for
retired
employees. The ruling states that the facts presented are
in substance the same as
those contained
in Rev. Rul. 73-599, except that the right reserved to the employer in Rev. Rul.
77-92 to transfer the funds remaining
in the retired lives reserve consisted of the right to direct
payment to those funds to another insurance company rather than to a trust that qualified for
exemption under section
501 (c)(9). However, this difference was not considered material
because the taxpayer's right of control over the retired lives reserve was substantially
the same

8
Xxxxxxx Xxxxxx Xxxxxx
in both cases. Accordingly, the ruling concludes that the same basic federal income tax rules
apply to the transfers
in the two cases. The ruling also states that the portion of the transferred
reserve
accumulated out of premiums paid or incurred
in taxable years ending after June 17,
1969, is not includible
in the employer's income because such premiums were not deducted
since the employer retained the right of recapture.
ANALYSIS AND CONCLUSION
RULING REQUESTS 1 AND
2:
In this case, with regard to the transfer of assets from the existing retiree life insurance reserve
to a retiree
health reserve within Trust, Taxpayer represents that there are provisions prohibiting
the reversion of any Trust assets to Taxpayer. The provisions precluding Taxpayer from
receiving a reversion distinguishes this case from the situations considered
in Rev. Ruls. 73-599
and 77-92. Therefore, because Taxpayer does not have any right to a reversion of the existing
retiree life insurance reserve that will be transferred to a retiree health reserve within Trust, such
transfer will not cause Taxpayer to realize income under section
61 with respect to the balance
attributable to earnings on the retired lives reserve. Also, with respect to the balance
attributable to contributions, Taxpayer will not have income from the transfer unless the
inclusionary part of the tax benefit rule otherwise applies. As discussed below, the inclusionary
part of the tax benefit rule will not apply with respect to contributions.
As stated above, the tax benefit rule
is implicated when a taxpayer has taken a deduction in a
prior year, and
in a subsequent year an event occurs that is fundamentally inconsistent with the
premise of the deduction. The facts and circumstances of each case must be considered "in
light of the purpose and function of the provisions granting the deductions." Hillsboro, 460 U.S.
at 385.
The proposed transaction involves using assets attributable to both Pre-DEFRA and Post-
DEFRA Contributions.
Any deductions for Pre-DEFRA Contributions would have been taken by
Company D under section 162, limited by the rules set out
in Rev. Rul. 69-382, Rev. Rul. 69-
478, and Rev. Rul. 73-599. For deductions taken under section 162 for a contribution to a
welfare benefit fund, no distinction was made between the types of post-retirement welfare
benefits provided through the fund. Thus, the original deductions would not have been
foreclosed merely because the reserve amounts could be used for post-retirement health
benefits.
Taxpayer has represented that all of the Pre-DEFRA Contributions to the retired lives reserves
would have been fully deductible under section 162 if the contributions had
in fact been made to
provide post-retirement health benefits. Based on Taxpayer's representation, the original
deductions would not have been foreclosed had the proposed transaction occurred
in the
taxable year of the deductions. Moreover, this approach
is consistent with the purpose and
function of the law prior to the enactment of section 419. Accordingly, transferring funds from
the retired lives reserve attributable to Pre-DEFRA Contributions that were originally made to
fund post-retirement life insurance,
in order to now fund post-retirement health benefits, is not
fundamentally inconsistent with the deductions taken
in previous years with respect to those
assets. Therefore, the
inclusionary part of the tax benefit rule will not apply with respect to Pre-

9
Xxxxxxx Xxxxxx Xxxxxx
D~FRA Contributions.
Taxpayer has represented that Post-DEFRA Contributions would have been deducted pursuant
to section 419A(f)(5)(A).
In computing Taxpayer's deduction for contributions to the retired lives
reserve, those contributions are not treated as exceeding the qualified cost limitation of section
419(b). As a
result, if the proposed transaction had occurred within the same taxable year as
the deduction, the deduction would not have been foreclosed.
We conclude that the
inclusionary part of the tax benefit rule will not apply with respect to any Post-DEFRA
Contributions.
We conclude that the proposed transaction is not fundamentally inconsistent with the premise
on which the deductions were based, and the tax benefit
rule does not require Taxpayer to
include any amount
in income as a result of the transfer and use of transferred assets to provide
medical and dental benefits to Union-represented retirees.
RULING REQUEST
3:
Taxpayer represents that all deductions made with respect to Pre-DEFRA Contributions were
made
in accordance with section 162. With respect to amounts attributable to Pre-DEFRA
Contributions, under section 4976(b)(3), section 4976(b)(1)(C) does not apply to amounts
attributable to contributions to a fund that were not allowable as a deduction under section 419.
Accordingly, amounts attributable to contributions made prior to the effective date of section 419
are not subject to the section 4976(b)(1)(C) excise tax.
Consequently, with respect to the
transfer of assets attributable to Pre-DEFRA Contributions from the retiree life insurance
reserve to the retiree health reserve
in Trust, and the use of the transferred assets to provide
retiree health benefits, will not result
in a "disqualified benefit" within the meaning of section
4976(b)(1 )(C), and therefore will not
in and of itself cause Taxpayer to be liable for the excise
tax imposed by section 4976.
Taxpayer represents that all deductions for Post-DEFRA Contributions to Trust were
in
accordance with section 419A(f)(5). Amounts attributable to Post-DEFRA Contributions will not
revert to Taxpayer because those amounts will be used by Trust to provide collectively
bargained post-retirement medical benefits. Consequently, with respect to Post-DEFRA
Contributions, the transfer of such assets from the retiree life insurance reserve
in Trust to the
retiree health reserve
in Trust, and the use of the transferred assets to provide retiree health
benefits, will not result
in a "disqualified benefit" within the meaning of section 4976(b)(1)(C),
and therefore will not
in and of itself cause Taxpayer to be liable for the excise tax imposed by
section 4976.
RULINGS:
Based on the information submitted, representations made, and the authorities cited above, we
conclude that;
1. The transfer of assets from the retiree life insurance reserve to the retiree health reserve
in Trust will not cause Taxpayer to include any amount in gross income under section
61.

10
Xxxxxxx Xxxxxx Xxxxxx
2. The use of transferred assets to provide medical and dental benefits to Union retirees
covered by Plan B will not cause Taxpayer to include any amount
in gross income under
section 61.
3. The transfer of assets from the retiree life insurance reserve to the retiree health reserve
in Trust, and the use of the transferred assets to provide retiree health benefits, will not
result
in any "disqualified benefit" within the meaning of section 4976(b)(1)(C), and will
not,
in and of itself, cause Taxpayer to be liable for the excise tax imposed by section
4976.
This
ruling will be made available for public inspection under section 6110 after certain deletions
of identifying information are made. For details, see enclosed Notice 437, Notice of Intention to
Disclose. A copy of this ruling with deletions that we intend to make available for public
inspection is attached to Notice 437. If you disagree with our proposed deletions, you should
follow the instructions
in Notice 437.
This
ruling
is directed only to the organization that requested it. Section 6110(k)(3) provides
that it may not be used or cited by others as precedent.
This ruling is based on the facts as they were presented and on the understanding that there will
be no material changes
in these facts. This ruling does not address the applicability of any
section of the Code or regulations to the facts submitted other than with respect to the sections
described. Because it
could help resolve questions concerning your federal income tax status,
this
ruling should be kept
in your permanent records.
If you have any questions about this ruling, please contact the person whose name and
telephone number are shown
in the heading of this letter.
In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we
are sending a copy
of this letter to your authorized representative.
Enclosure
Notice 437
Sincerely,
Michael Seto
Manager, EO Technical