IRS written determination 201434025

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: 201434025
Release Date: 8/22/2014
Date: May 30, 2014
Legend:
Debtors
=
LLC
=
State
=
~
=
Dear
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:
UIL: 501.09-00; 512.00-00
512.09-03; 7701.00-00
This responds to your ruling request dated December
9, 2013 as to the federal tax
consequences of the proposed transactions under the Internal Revenue Code (I.R.C.) and the
Federal Tax Regulations.
FACTS
You are a trust, a voluntary employees' beneficiary association (VEBA), recognized as tax-
exempt as an organization described
under§ 501 (c)(9).
You were established as a result of a Settlement Agreement approved by the United States
Bankruptcy Court after Debtors filed voluntary petitions for relief under chapter
11 of title 11 of
the Bankruptcy Code. Debtors had historically provided a number
of benefits to their retired
employees and the retirees' surviving spouses and eligible dependents through various welfare
benefit programs ("Retiree Welfare Plans").
The Bankruptcy Court issued an order directing the Office of the United States Trustee to
appoint a Retiree Committee to represent the interests of the Retiree Welfare Plans' retirees
and beneficiaries. Following negotiations between Debtors and the Retiree Committee, the
Bankruptcy Court issued an order approving a Settlement Agreement
in which the parties
mutually agreed to the termination and termination date of the Retiree Welfare Plans. As part of
the Settlement Agreement, a Settlement Amount
of$~ would be paid to a limited liability
company ("LLC") whose single member is to
be you. LLC was required to hold the Settlement
Amount in its account for a minimum of five business days before distributions were to be made
to you
in your capacity as the single member of LLC.

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The Settlement Agreement further provided that the Retiree Committee intended that you
provide medical benefits to eligible retiree claim holders, based on an Apportionment
Methodology.
In accordance with the terms of the Settlement Agreement, the Retiree Committee established
you. Shortly thereafter, LLC was formed under the laws of State with you as the single member.
No election has been made
on a Form 8832, Entity Classification Election, to treat LLC as an
association taxable as a corporation.
The LLC Agreement provides that the sole purpose of LLC
is to function as a conduit by which
the consideration payable by Debtors under the Settlement Agreement is to be contributed to
you. The LLC Agreement further provides that
as soon as reasonably possible following LLC's
receipt of the
Settlement Amount from Debtors, and after paying or making reasonable provision
for any expenses,
liabilities, reserves or other contingencies, LLC shall distribute all available
funds to you. Moreover, upon dissolution of LLC, and after paying or making reasonable
provision for creditors, all remaining funds of LLC will
be distributed to you. The LLC Agreement
further provides that the management of LLC shall be vested solely in you but that you have the
right to delegate its management rights and powers.
Debtors paid an initial installment
of the Settlement Amount to LLC shortly after LLC was
formed. The following month, Debtors paid the balance of the Settlement Amount to LLC.
These amounts were deposited into an interest-bearing account maintained by LLC. The next
month, LLC distributed the full Settlement Amount to you, and the Retiree Welfare Plans were
terminated.
Pursuant to your trust documents and the Settlement Agreement, you will use the Settlement
Amount to provide healthcare reimbursement benefits to retiree participants, their spouses and
their dependents, as permitted
under§ 501 (c)(9), and based on the Apportionment
Methodology as set forth
in the Settlement Agreement
RULING REQUESTED
You have requested the following ruling:
LAW
That the Settlement Amount be treated as "exempt function income" under §
512(a)(3)(B), with the further result that no portion of the Settlement Amount will be
treated as "unrelated business taxable income" to you.
Section 501(a) provides that an organization described
in§ 501(c) (including a VEBA described
in§ 501 (c)(9)) shall be exempt from taxation unless the exemption is denied under§§ 502 or
503.
Section
511 imposes tax on the unrelated business taxable income (as described in§ 512) of

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organizations described
in § 501 (c).
Section 512(a)(3)(A) provides that,
in the case of an organization described in § 501 (c)(9), the
term "unrelated business taxable income" means the gross income (excluding any exempt
function income}, less the allowable deductions that are directly connected with the production
of gross income (excluding exempt function income), both computed with specified
modifications.
Section 512(a)(3)(B) provides that the term "exempt function income" means, for
a§ 501(c)(9)
organization, the gross income from dues, fees, charges, or similar amounts paid by members
of the organization as consideration for providing the members or their dependents or guests
goods,
facilities, or services
in furtherance of the organization to which such income is paid.
Such term
also means all income (other than
an amount equal to the gross income derived from
any unrelated trade or business carried on by the organization) which is set aside to provide for
the payment of
life, sick, accident, or other benefits, including reasonable costs of administration
directly connected with the provision of such benefits.
Section 512(a)(3)(E) provides that the amounts set aside as of the close of a taxable year for
the payment of life, sick, accident, or other benefits may not be taken into account for purposes
of determining
"exempt function income" to the extent that such amounts exceed the qualified
asset limit, determined
under§§ 419A(c) and 419A(f)(7), for such taxable year. In calculating
the qualified asset account limit for this purpose, a reserve for post-retirement medical benefits
under§ 419A(c)(2)(A) is not to be taken into account. See, also Temp. Treas. Reg. § 1.512(a)-
5T, Q&A-3(a}, and Prop. Treas.
Reg.§ 1.512(a)-5.
Treas.
Reg.§ 1.512(a)-5T, Q&A-3(b), provides that the exempt function income of a VEBA
includes certain amounts paid by members of the VEBA ("member contributions"). Member
contributions include both employee contributions and employer contributions to a VEBA.
Treas. Reg. § 301.7701-1 (a)(1) provides that the Code prescribes the classification
of various
organizations for federal tax purposes. Whether
an organization is an entity separate from its
owners for federal tax purposes is a matter of federal tax law and does not depend on whether
the organization is recognized as
an entity under local law.
Treas.
Reg.§ 301.7701-2(a) provides, in part, that a business entity is any entity recognized for
federal tax purposes (including a disregarded entity) that is not properly classified as a trust
under§ 301.7701-4 or otherwise subject to special treatment under the Code. A business entity
is domestic if it is created or organized
in the United States, or under the law of the United
States or of any State.
See§ 301.7701-5(a).
Treas.
Reg.§ 301.7701-3(a) provides, in part, that a business entity that is not classified as a
corporation
under§ 301.7701-2(b)(1), (3}, (4}, (5), (6), (7), or (8) (an eligible entity) can elect its
classification for federal tax purposes. An eligible entity with a single owner can elect to be
classified as
an association or to be disregarded as an entity separate from its owner.

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Treas. Reg. § 301. 7701-3(b)(1 )(ii) provides,
in part, that unless the entity elects otherwise, a
domestic eligible entity is disregarded as
an entity separate from its owner if it has a single
owner.
Treas. Reg. § 301. 7701-2(a) provides,
in part, that if the entity is disregarded, its activities are
treated
in the same manner as a sole proprietorship, branch, or division of the owner. However,
for employment and certain excise tax purposes, a disregarded entity is treated as a
corporation.
See§ 301.7701-2(c)(2)(iv) and (v).
Announcement
99-102, 1999-431.R.B. 545, provides that when the owner of an eligible entity
that is treated as a disregarded entity is exempt from taxation under section
501 (a) of the Code,
it must include, as its own, information pertaining to the finances and operation of the
disregarded entity
in its annual information return. Announcement 99-102 further states that
"when an entity is disregarded as separate from its owner, its operations are treated as a branch
or division of the owner."
ANALYSIS
Debtors contributed the Settlement Amount to LLC. Under the Settlement Agreement, LLC was
required after paying or making reasonable provision for any expenses, liabilities, reserves or
other contingencies, to distribute the remaining
Settlement Amount to you which you will use to
provide
medical benefits to participants (their spouses and eligible dependents)
of the
Reimbursement Plan. Pursuant to your trust documents and the Settlement Agreement, you
will use the Settlement Amount specifically to provide healthcare reimbursement benefits
permitted
under§ 501 (c)(9).
Based on the information provided, you are the single member of LLC and LLC has not made
an election to be treated as an association taxable as a corporation. Accordingly, LLC is
disregarded as an entity separate from its owner and its activities are treated as yours. As a
result, the Settlement Amount paid to LLC by Debtors is treated as if paid to you by Debtors.
Further, the retirees eligible to receive medical benefits from you had
been
employed by
Debtors and had
been
eligible to receive welfare benefits under Debtors' Retiree Benefit Plans.
Based on these facts, we conclude that the Settlement Amount is treated as employer
contributions to you.
Pursuant to Treas. Reg. § 1.512(a)-5T, Q&A-3(b), employer contributions to a VEBA are treated
as exempt function income and, therefore, excluded from the definition of "unrelated business
taxable income."
Accordingly, we conclude that the Settlement Amount is exempt function income under the first
sentence
of§ 512(a)(3)(B), with the further result that no portion of the Settlement Amount will
be treated as unrelated business taxable income to you.

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RULING:
Based on the information submitted, representations made, and the authorities cited above, we
rule that:
The Settlement Amount
is treated as "exempt function income" under§ 512(a)(3)(B),
with the further result that no portion of the Settlement Amount will be treated as
"unrelated business taxable income" to you.
This
ruling will be made available for public inspection
under§ 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 611 O(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