IRS written determination 201440022

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: 201440022
Release Date: 10/3/2014
Date: July 10, 2014
Legend:
Tax(2ayer
=
Com12any X
=
Com(2any Y
=
PlanA
=
Plan B
=
Dear
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Contact Person:
Identification Number:
Telephone Number:
Taxpayer Identification Number:
Uniform Issue List
419.00-00
419A.OO-OO
511.00-00
512.00-00
This responds to your application, dated December 30, 2011, requesting a ruling as to the
federal tax consequences
of a proposed transaction under sections 501 (c)(9) and 511 of the
Internal Revenue Code (Code).
FACTS
Tax(2ayer is a voluntary employees' beneficiary association (VEBA) under section
501 (c)(9).
Tax(2ayer represents that it is a separate welfare benefit fund under a collective bargaining
agreement within the meaning
of section 419A(f)(5). Tax(2ayer provides only life insurance
benefits for retired employees
of Com(2any X and Com12any Y who are covered under Plan A.
The proposed transaction is the transfer of assets from a retiree life insurance reserve in
Tax(2ayer to a retiree health reserve in Taxpayer, with assets in the retiree health reserve to be
used to provide medical and dental benefits to retired employees covered under Plan
B.
Tax(2ayer represents that the retiree health reserve will be a separate welfare benefit fund under
a collective bargaining agreement within the meaning
of section 419A(f)(5). Tax(2ayer
represents that benefits under Plan A and Plan B were negotiated by
Com12any Y and its
predecessors and are provided under a series
of collective bargaining agreements that were in

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effect when the covered individuals retired. Taxpayer further represents that, if all of the assets
currently held
in Taxpayer are transferred to the retiree health reserve, it will take approximately
five months to exhaust the assets by paying retiree medical and dental benefits under Plan
B.
RULINGS REQUESTED
You requested the following rulings:
1. The proposed transaction will not cause Taxpayer to fail to be exempt from tax under
section
501 (a) as an organization described under section 501 (c)(9).
2. The income generated by the transferred assets held by Taxpayer will not be subject to
unrelated business income tax under section 511.
LAW
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.
Section 419(c)(1) defines the qualified cost of a welfare benefit fund for a taxable year 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.
Section 419( c)(2) provides that the qualified cost for any taxable year is reduced by the welfare
benefit fund's after-tax income for the taxable year.
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.
Section 419(e)(3) defines the term "fund" 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(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 419A(b) provides that no addition to any qualified asset account may be taken into
account under section 419(c)(1)(B) 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.

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Section 1.419-1T, Q&A-2(a}, of the Treasury Regulations 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 1.419-2T, Q&A-1 , provides 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, "90-percent" shall be substituted for "50-percent."

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Section
501 (c)(9) provides for the exemption from federal income tax
of voluntary employees'
beneficiary associations providing for the payment
of life, sick, accident, or other benefits to the
members
of such association or their dependents or designated beneficiaries if no part of the
net earnings
of such association inures (other than through such payments) to the benefit of any
private shareholder or
individual.
Section 1.501 (c)(9)-1 provides that for an organization to be described in section 501 (c)(9), it
must be an employees' association; membership in the association must be voluntary; the
organization must provide for the payment of life, sick, accident, or other benefits to its
members; and there can be no inurement (other than by payment
of permitted benefits) to the
benefit of any private shareholder or individual.
Section 1.501 (c)(9)-3(c) defines "sick and accident benefits" for purposes
of section 501 (c)(9)
as amounts furnished to or on behalf
of a member or a member's dependents in the event of
illness or injury to a member or a member's dependent. Such benefits may be provided through
reimbursement to a
member or a member's dependent for amounts expended because of
illness or personal injury, or through the payment of premiums to a medical benefit or health
insurance program.
Section 1.501 (c)(9)-4(a) provides, generally, that no part
of the net earnings of an employees'
association
may inure to the benefit of any private shareholder or individual other than through
the payment
of benefits permitted by section 1.501 (c)(9)-3.
Section 511 imposes a tax on the unrelated business taxable income
of organizations described
in section
501 (c)(9).
Section 512(a)(3)(A) provides that, in the case
of an organization described in section 501 (c)(9),
the term "unrelated business taxable income" means the gross income (excluding any exempt
function income), less the deductions allowed by Chapter 1 which are directly connected with
the production
of the gross income (excluding exempt function income), both computed with
modifications.
Section 512(a)(3)(B)(ii) provides that, in the case
of an organization described in section
501 (c)(9), "exempt function income" includes all income (other than an amount equal to the
gross income derived from any unrelated trade or business regularly carried on by such
organization computed as if the organization were subject to section 512(a)(1 )), which is set-
aside to provide
for the payment of life, sick, accident, or other benefits, including reasonable
costs
of administration directly connected with its exempt purpose.
Section 512(a)(3)(E)(i) provides that in general, in the case
of an organization described in
section 501(c)(9), a set-aside
for any purpose specified in section 512(a)(3)(B)(ii) may be taken
into account under subparagraph (B) only to the extent that it does not result in an
amount of
assets set aside for such purpose in excess of the account limit determined under section 419A
(without regard to subsection (f)(6) thereof) for the taxable year (not taking into account any
reserve described in section 419A(c)(2)(A) for post-retirement medical benefits).

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ANALYSIS AND CONCLUSION
RULING REQUEST
1:
You asked for a ruling that the proposed transaction will not cause Taxpayer to fail to be an
organization described under section
501 ( c)(9).
Section
501 (c)(9) provides for the exemption from federal income tax of VEBAs providing for the
payment of
life, sick, accident, or other benefits to the members of the association or their
dependents or designated beneficiaries if no part of the net earnings of such association inures
(other than through such payments) to the benefit of any private shareholder or
individual.
See
also Treas. Reg. section 1.501 (c)(9)-1.
The transaction
is the transfer of assets from a retiree life insurance reserve in Taxpayer to a
retiree health reserve in Taxpayer, with assets in the retiree health reserve to be used to provide
medical and dental benefits to retired employees covered under Plan B.
Section 1.501 (c)(9)-3(c) defines "sick and accident benefits" for purposes of section 501 (c)(9)
as amounts furnished to or on
behalf of a member or a member's dependents in the event of
illness or injury to a member or a member's dependent. Such benefits may be provided through
reimbursement to a member or a member's dependent for amounts expended because of
illness or personal injury, or through the payment of premiums to a medical benefit or health
insurance program.
Accordingly, the transfer of assets from a retiree life insurance reserve to the retiree health
reserve
in Taxpayer, and the use of assets to provide medical and dental benefits to retired
employees covered under Plan 8, will not cause Taxpayer to fail to be an organization
described
in section 501 (c)(9).
RULING REQUEST
2:
You asked for a ruling that the income generated by the assets that were transferred from the
retiree
life insurance reserve in Taxpayer to the retiree health reserve in Taxpayer will not be
subject to unrelated business income tax under section 511.
As indicated above, section
511 imposes income tax on the unrelated business taxable income
(UBTI) df certain tax-exempt organizations, including VEBAs. Under section 512(a)(3)(A), the
UBTI of a VEBA is the VEBA's gross income (excluding exempt function income), less certain
specified deductions, both computed with certain specified modifications.
Under section 512(a)(3)(B)(ii),
in the case of VEBAs, exempt function income generally means
all income set aside to provide for the payment of life, sick, accident, or other benefits, including
certain specified reasonable costs of administration. However, section 512(a)(3)(E)(i) places
limitations on the amount that may treated as exempt function income.
Under these limitations, a set-aside for any purpose specified
in section 512(a)(3)(B)(ii) may be
taken into account as exempt function income only to the extent that it does not result in an

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amount
of assets that exceeds the account limit determined under section 419A (without regard
to subsection (f)(6) thereof) for the taxable year (not taking into account any reserve described
in section 419A(c)(2)(A) for post-retirement medical benefits).
However, funds maintained pursuant to collective bargaining agreements come within the
special rule for collectively bargained plans under section 419A(f)(5). Pending the adoption of
final regulations to implement section 419A(f)(5), section 1.419A-2T, Q&A 1, provides that
amounts held
in welfare benefit funds that are maintained pursuant to a collective bargaining
agreement
will not be treated as exceeding the otherwise applicable limits
of sections 419(b),
419A(b),
or 512(a)(3)(E). After the publication of these temporary regulations, section
419A(f)(5) was amended in the Tax Reform Act of 1986, retroactive to the effective date of the
Tax Reform Act
of 1984, to provide that no account limits apply in the case of a qualified asset
account under a separate welfare benefit fund under a
collective bargaining agreement.
While
the Service has not issued
final regulations to clarify the precise scope
of section
419A(f)(5), as amended
in 1986, we conclude that pending the adoption of final regulations, and
based upon your representation that Taxpayer
is a separate welfare benefit fund under a
collective bargaining agreement within the meaning of section 419A(f)(5)(A), the assets held by
Taxpayer are not subject to account limits imposed by section 419A for purposes
of determining
unrelated business income under section 512(a)(3). Accordingly, the income generated by the
transferred assets held by Taxpayer will not be subject to unrelated business income tax under
section 511.1
RULINGS:
Based on the information submitted, representations made, and the authorities cited above, we
conclude that:
1. The proposed transaction will not cause Taxpayer to fail to be exempt from tax under
section
501 (a) as an organization described under section 501 (c)(9).
2. The income generated by the transferred assets held by Taxpayer will not be subject to
unrelated business income tax under section 511.
1 This
ruling only addresses UBTI on amounts that, but for the application of section 419A(f)(5) and the
regulations thereunder, would be subject to the limits of section 512(a)(3)(E). Specifically, Taxpayer
would be subject to UBTI on gross income derived from any unrelated trade or business (as defined in
section 513) regularly carried on by Taxpayer, computed as if Taxpayer were subject to section 512(a)(1 ).

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This ruling will be made available for public inspection under Code 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. Code 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.
Enclosure
Notice 437
Sincerely,
Michael Seto
Manager, EO Technical