IRS written determination 201442065

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: 201442065
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:
Taxgayer
=
Trust =
ComganyA
=
Comgany B
=
Comgany C
=
Com12an;i D =
PlanA
=
Plan B
=
Plan C =
Union(s) =
Date 1 =
Date 2
=
Date 3
=
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. 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
Taxgayer
is organized as a Delaware corporation and was formed through the merger
of
several companies. Taxgayer is the successor of Comgany A, Comgany B, and Comgany C.

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Taxpayer provides life, health, and other welfare benefits to its active and retired employees
(and their eligible spouses and dependents) through several welfare benefit plans, including
Plan
A. Plan A is an umbrella welfare benefit plan that provides medical, dental, vision, and life
insurance benefits to certain active and retired Union-represented employees of Taxpayer and
its affiliates through several component plans. Plan B, a component plan under Plan A,
provides group term life insurance to retired employees of Company A who were, before their
retirement, represented by Unions.
Plan
C, consisting of two component plans under Plan A,
provides retiree medical and dental benefits to retired employees of Company A who were,
before their retirement, represented by Unions.
Taxpayer and its predecessors negotiated the benefits currently provided under Plans
Band
Plan C through arm's-length bargaining with Unions. The benefits 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 originally accumulated in
retired lives reserves maintained as separate accounts under group-term life insurance policies
issued to Company A's predecessor, Company D, and its affiliates. Effective Date 1, when
Company D spun off Company A and the other companies, Company D allocated the policy
reserves among the spun-off companies. Company A established Trust effective Date
2, and
policy reserves attributable to Union-represented retirees covered by Plan B were transferred
from the life insurance companies to Trust. The assets
in Trust are attributable entirely to the
policy reserves accumulated before 1984 and transferred to Company A by Company
D, and no
contributions have been made to Trust other than the transferred
policy reserves attributable to
Union-represented retirees covered by
Plan
B.
Company A amended Trust effective Date 3 to permit Trust to provide health benefits, as well
as life benefits, for non-management retirees and their beneficiaries. The authority conferred by
the Date 3 amendment has not been used. To date,
all of the assets
in Trust have been held in
a reserve to provide retiree life insurance benefits for Union-represented retirees under Plan B.
No assets of Trust have been used to pay retiree health benefits. The transaction addressed in
the ruling request would permit the assets in Trust to be transferred to the retiree health reserve
in Trust and used to provide retiree health benefits for Union-represented retirees who are
covered by Plan
A.
Taxpayer represents that:
1. All of the assets in Trust are derived from contributions originally made to retired lives
reserves before 1984, and no contributions have been made to Trust other than the transferred
policy reserves attributable to Union-represented retirees covered by Plan
B.
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

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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. Amounts contributed to the retired lives reserves 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. 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.
RULINGS REQUESTED
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-
represented retirees covered by Plan C 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.
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

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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. ld. 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. I d.
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.
I
d. 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 1.162-1
0 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.
Section 1.162-10T, 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(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 1.419-1T, Q&A-2(a) of the 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 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.

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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 employer 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
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.

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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 National
Bank, 460 U.S. at 385.
The proposed transaction involves using assets attributable to contributions made before 1984.
Any deductions for those 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 contributions to the retiree life insurance reserve 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 retiree life insurance reserve attributable to 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 the
contributions.
We conclude that 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 retiree
health benefits to Union-represented retirees under the proposed transaction.

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RULING REQUEST
3:
Taxpayer represents that all of the assets in Trust are attributable to contributions made before
1985. 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, 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 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.
2. The use of transferred assets to provide medical and dental benefits to Union-
represented retirees covered by Plan C 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.

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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