115 T.C. No. 33

UNITED STATES TAX COURT

SHERWIN-WILLIAMS COMPANY EMPLOYEE HEALTH PLAN TRUST, KEY TRUST

COMPANY OF OHIO, TRUSTEE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21333-97. Filed November 9, 2000.

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
- 2 -

1Unless otherwise indicated, our Opinion pertains to 1991

and 1992, the years at issue. 

2All section references are to the Internal Revenue Code

(Code) in effect for the years at issue. All Rule references are

to the Tax Court Rules of Practice and Procedure.

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.

OPINION1

CHIECHI, Judge: 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
- 3 -

3All references herein to an amount set aside are to an

amount set aside within the meaning of sec. 512(a)(3)(B).

set aside3 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.

Background

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 (SherwinWilliams) established the Trust to fund health care benefits for

participants in The Sherwin-Williams health care plan (Sherwin-
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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
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4The costs for 1992 ($1,853,529) were paid first from investment income for that year. 

5The parties stipulated that the Trust’s account limit for

1991, as defined in sec. 419A(c), was $65,652,991. However, that

stipulation is contrary to the record in this case. The record

establishes, and we have found, that that account limit was

$64,615,936. We may, and we shall in this instance, disregard a

stipulation between the parties where the stipulation is clearly

contrary to the facts established by the record. See Cal-Maine

Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989).

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 $64,615,9365 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 postretirement 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
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6The Trust reported in Forms 990 additional investment

income of $232,202 and $405,095 for 1991 and 1992, respectively,

which the Trust did not treat as unrelated business income in

those forms or in Forms 990-T for those years. 

7See supra note 4.

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.
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8Respondent made no determinations in the notice regarding

the amounts of unrelated business income that the Trust reported

in Forms 990-T for the years at issue. 

9The Trustee makes no argument about the balance of the

investment income (i.e., $270,944) that the Trust reported as

(continued...)

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

Discussion

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 19919 and $1,853,529 of the
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9(...continued)

unrelated business income in its Form 990-T for 1991. We find

that petitioner has failed to show that such remaining amount of

investment income for 1991 (1) constitutes exempt function

income, as defined in sec. 512(a)(3)(B), or (2) otherwise is not

subject to the tax on UBTI imposed by sec. 511(a). 

10On brief, the Trustee acknowledges that for 1992 not only

its investment income but also certain of its other income was

set aside, and subsequently expended, for $1,853,529 of reasonable costs of administration directly connected with providing

for the payment of health care benefits. The Trustee further

acknowledges that it reported in Form 990-T for 1992 only

$1,155,793 of its investment income for that year as unrelated

business income. Respondent made no determination in the notice

that the Trust’s remaining investment income for 1992 (i.e.,

$405,095), which the Trust did not treat as unrelated business

income in Form 990 and Form 990-T for that year, should be

included in calculating the Trust’s UBTI for that year. We

conclude that the only amount of the Trust’s income for 1992 that

is at issue in this case is $1,155,793 of investment income that

the Trust reported as unrelated business income in Form 990 and

Form 990-T for that year. Our references hereinafter to the

amount at issue for 1992 shall be to the correct amount at issue

for 1992, and not to the amount (i.e., $1,853,529) that the

Trustee claims on brief is at issue for that year. 

11Respondent also advances arguments on brief as to why

respondent’s determinations in the notice should be sustained. 

However, as noted above, the Trustee no longer contests those

(continued...)

Trust’s income for 199210 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
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11(...continued)

determinations. 

12Although the statutory provisions set forth below apply

not only to a VEBA but also to certain other organizations, our

discussion generally is limited to the application of those

provisions to a VEBA.

burden of establishing that its position is correct. See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (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 section 501(c)(9):

(3) Special rules applicable to organizations

described in paragraph (7), (9), (17), or (20) of

section 501(c).--
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(A) General rule.–-In the case of an organization described in paragraph (7), (9), (17), or

(20) of section 501(c), the term “unrelated business taxable income” means the gross income (excluding any exempt function income), less the

deductions allowed by this chapter which are directly connected with the production of the gross

income (excluding exempt function income) * * *.

(B) Exempt function income.–-For purposes of

subparagraph (A), the term “exempt function income” means the gross income from dues, fees,

charges, or similar amounts paid by members of the

organization as consideration for providing such

members or their dependents or guests goods, facilities, or services in furtherance of the purposes constituting the basis for the exemption 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 regularly carried on

by such organization computed as if the organization were subject to paragraph (1)), which is set

aside—-

(i) for a purpose specified in section

170(c)(4), or

(ii) in the case of an organization

described in paragraph (9) * * * of section

501(c), to provide for the payment of life,

sick, accident, or other benefits,

including reasonable costs of administration directly connected with a purpose described in

clause (i) or (ii). If during the taxable year,

an amount which is attributable to income so set

aside is used for a purpose other than that described in clause (i) or (ii), such amount shall

be included, under subparagraph (A), in unrelated

business taxable income for the taxable year.

* * * * * * *

(E) Limitation on amount of setaside in the

case of organizations described in paragraph (9) 

* * * of section 501(c).--
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13Sec. 419 prescribes rules governing the deductibility of

contributions paid or accrued by an employer to a welfare benefit

fund. The amount of such a deduction allowable under sec. 419 is

determined by reference to, inter alia, any addition to a qualified asset account determined under sec. 419A(b). Sec. 419A(b)

provides that no addition to any qualified asset account may be

taken into account for purposes of sec. 419 to the extent such

addition results in the amount in such account exceeding the

account limit, as defined in sec. 419A(c). 

(i) In general.–-In the case of any

organization described in paragraph (9) * * *

of section 501(c), a set-aside for any purpose specified in clause (ii) of subparagraph

(B) may be taken into account under subparagraph (B) only to the extent that such setaside 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).

The Trust as a VEBA that is funded by, inter alia, employer

contributions is subject to sections 41913 and 419A. Section

419A(a) provides:

SEC. 419A. QUALIFIED ASSET ACCOUNT; LIMITATION ON 

ADDITIONS TO ACCOUNT.

(a) General Rule.–-For purposes of this subpart

and section 512, the term “qualified asset account”

means any account consisting of assets set aside to

provide for the payment of--

* * * * * * *

(2) medical benefits * * *

Section 419A(c) imposes an account limit on the Trust’s

qualified asset account, as defined in section 419A(a). Section
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14See supra notes 4, 8, and 10.

419A(c) provides:

SEC. 419A. QUALIFIED ASSET ACCOUNT; LIMITATION ON 

ADDITIONS TO ACCOUNT.

(c) Account Limit.–-For purposes of this section–-

(1) In general.–-Except as otherwise provided in

this subsection, the account limit for any qualified

asset account for any taxable year is the amount reasonably and actuarially necessary to fund–-

(A) claims incurred but unpaid (as of the

close of such taxable year) for benefits referred

to in subsection (a), and

(B) administrative costs with respect to such

claims.

(2) Additional reserve for post-retirement medical

and life insurance benefits.–-The account limit for any

taxable year may include a reserve funded over the

working lives of the covered employees and actuarially

determined on a level basis (using assumptions that are

reasonable in the aggregate) as necessary for–-

(A) post-retirement medical benefits to be

provided to covered employees (determined on the

basis of current medical costs) * * * 

We turn now to the initial dispute between the parties over

whether, in determining for each year at issue the Trust’s UBTI

under section 512(a)(3)(A), the amount of investment income at

issue that the Trust set aside (i.e., $1,580,455 for 1991 and

$1,155,793 for 199214) to provide for the payment of reasonable

costs of administration directly connected with providing for the

payment of health care benefits is subject to the limitation

prescribed by section 512(a)(3)(E)(i). It is the position of the
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Trustee that that amount of investment income for each year at

issue is not subject to that limitation. That position rests

upon the contentions of the Trustee that the plain language of

section 512(a)(3)(B) identifies four independent sources or

components of exempt function income and that one of those

sources or components of exempt function income is reasonable

costs of administration directly connected with a purpose described in section 512(a)(3)(B)(i) or (ii). The Trustee posits

that the four sources of exempt function income identified by

section 512(a)(3)(B) are: 

(1) amounts paid by members of the association as

consideration for goods, facilities, or services; 

(2) amounts set aside for a charitable purpose;

(3) amounts set aside for the payment of life, sick,

accident, or other benefits; and

(4) reasonable costs of administration directly connected with components 2 and 3. 

According to the Trustee, “It is apparent from the plain language

of the statute [section 512(a)(3)(B)] that reasonable costs of

administration are an independent basis of Exempt Function

Income.” 

Proceeding from its premises that reasonable costs of

administration directly connected with a purpose described in

section 512(a)(3)(B)(i) or (ii) are one of the four independent

sources or components of exempt function income under section

512(a)(3)(B), the Trustee argues that the limitation in section
- 14 -

512(a)(3)(E)(i) is “plainly restricted to only set-asides for the

payment of benefits described in I.R.C. §512(a)(3)(B)(ii), and

thus, its application does not extend to Exempt Function Income

arising from member contributions, set-asides for charitable

purposes, or administrative costs.” 

Respondent counters that reasonable costs of administration

directly connected with a purpose described in section

512(a)(3)(B)(i) or (ii) do not constitute an independent source

or component of exempt function income under section

512(a)(3)(B). In support of that position, respondent argues:

It is clear the statute [section 512(a)(3)(B)] is

written so that the reasonable cost of administration

phrase did not have to be written twice, that is once

after clause (i) and again after clause (ii). This is

a common drafting technique used throughout the Internal Revenue Code. * * *

Another way of describing exempt function income

is income set-aside [sic] for a purpose specified in

section 170(c)(4) including administrative costs directly connected with this purpose or, in the case of

an organization described in paragraph (9), (17), or

(20) of section 501(c), to provide for the payment of

life, sick, accident, or other benefits, including

reasonable costs of administration directly connected

with this purpose. This is the clear meaning of this

section [512(a)(3)(B)]. Accordingly, administrative

costs are a part of the benefit costs which may be setaside [sic] under clauses (i) and (ii) of I.R.C. §

512(a)(3)(B), not a separate component thereof. 

We first address the premises of the Trustee’s position

under section 512(a)(3)(E)(i), namely, its contentions that the

plain language of section 512(a)(3)(B) identifies four sources or

components of exempt function income and that one of those
- 15 -

sources or components of exempt function income is reasonable

costs of administration directly connected with a purpose described in section 512(a)(3)(B)(i) or (ii). While we agree with

the Trustee that the language of section 512(a)(3)(B) is unambiguous, we conclude that the plain language of section 512(a)(3)(B)

rejects the Trustee’s contentions.

Section 512(a)(3)(B) unambiguously defines the term “exempt

function income” to mean gross income from two sources only. 

Moreover, section 512(a)(3)(B) plainly does not treat reasonable

costs of administration directly connected with a purpose described in section 512(a)(3)(B)(i) or (ii) as income or as a

source or component of income. 

The first source of gross income from which exempt function

income may be derived is specified in the first sentence of

section 512(a)(3)(B) as “gross income from dues, fees, charges,

or similar amounts paid by members of the organization”. However, in order to qualify as exempt function income, such gross

income specified in the first sentence of section 512(a)(3)(B)

must be paid by the organization’s members “as consideration for

providing such members or their dependents or guests goods,

facilities, or services in furtherance of the purposes constituting the basis for the exemption of the organization to which such

income is paid.” 

The second source of gross income from which exempt function
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15Sec. 513(a) defines the term “unrelated trade or business”

to mean, in general, any trade or business of the tax-exempt

organization the conduct of which is not substantially related to

the exercise or performance by such organization of its exempt

purposes.

income may be derived is specified in the second sentence of

section 512(a)(3)(B) as all other income (except an amount equal

to the gross income derived from any unrelated trade or

business15 regularly carried on by such organization and computed

as if the organization were subject to section 512(a)(1)). (For

convenience, we shall sometimes refer to the second source of

exempt function income specified in the second sentence of

section 512(a)(3)(B) as non-member income.) However, in order to

qualify as exempt function income, such non-member income specified in the second sentence of section 512(a)(3)(B) must be set

aside for a purpose described in section 512(a)(3)(B)(i) or (ii),

including reasonable costs of administration directly connected

with any such purpose. 

The phrase that appears at the end of the second sentence of

section 512(a)(3)(B), i.e., “including reasonable costs of

administration directly connected with a purpose described in

clause (i) or (ii)”, unambiguously pertains to and modifies both

section 512(a)(3)(B)(i) and (ii). That phrase plainly treats

non-member income (1) set aside to provide for the payment of

reasonable costs of administration directly connected with a

purpose described in section 512(a)(3)(B)(i) as set aside for a
- 17 -

16We need not resort to the legislative history of sec.

512(a)(3)(B) to determine the meaning of the phrase in question

that appears at the end of the second sentence of that section. 

That is because the terms of that statutory provision are unambiguous, and there are no exceptional circumstances warranting

our turning to that legislative history for guidance. See

Burlington N. R.R. Co. v. Oklahoma Tax Commn., 481 U.S. 454, 461

(1987); Fernandez v. Commissioner, 114 T.C. 324, 329-330 (2000). 

Nonetheless, it is noteworthy that, consistent with its plain

language, the legislative history of sec. 512(a)(3)(B) provides

that income will be treated as set aside for benefits specified

in that section where it is set aside and used not only for the

payment of those benefits but also for the payment of reasonable

costs of administration of providing those benefits. See S.

Rept. 91-552 (1969), at 72, 1969-3 C.B. 470. 

purpose described in that section and (2) set aside to provide

for the payment of reasonable costs of administration directly

connected with a purpose described in section 512(a)(3)(B)(ii) as

set aside for a purpose described in that section.16

To support its position that reasonable costs of administration directly connected with a purpose described in section

512(a)(3)(B)(i) or (ii) qualify as one of the four independent

sources or components of exempt function income under section

512(a)(3)(B), the Trustee relies not only on the language of

section 512(a)(3)(B), but also on the following statement in Phi

Delta Theta Fraternity v. Commissioner, 887 F.2d 1302, 1307 (6th

Cir. 1989), affg. 90 T.C. 1033 (1988): “Section 512(a)(3)(B),

however, does allow reasonable costs actually spent in administering a tax-exempt activity to be included in ‘exempt function

income.’” We find the Trustee’s reliance on that statement to be

misplaced. The United States Court of Appeals for the Sixth
- 18 -

17The taxpayer in Phi Delta Theta Fraternity v. Commissioner, 887 F.2d 1302 (6th Cir. 1989), affg. 90 T.C. 1033 (1988),

was a national college fraternity (fraternity) that was exempt

from tax as an organization described in sec. 501(c)(7). The

ultimate issue before the Court of Appeals was whether the

investment income of the fraternity qualified as exempt function

income for purposes of sec. 512(a)(3)(A) and (B). In resolving

that issue, the Court considered two questions: (1) Whether

there was a proper set aside by the fraternity within the meaning

of sec. 512(a)(3)(B); and (2) even if there was no proper set

aside within the meaning of that section, whether the fraternity

spent income on exempt purposes, and, if it did, whether that

income therefore qualified as exempt function income. Although

those questions are not presented here, it is noteworthy that in

resolving those matters the Court of Appeals in Phi Delta Theta

Fraternity quoted portions of sec. 512(a)(3)(B) as applicable to

the sec. 501(c)(7) fraternity involved in that case, as follows: 

Such term [exempt function income] also means all

income * * * which is set aside–- 

(i) for a purpose specified in section 170(c)(4)

* * * including reasonable costs of administration

directly connected with a purpose described in clause

(i) or (ii). * * *

Phi Delta Theta Fraternity v. Commissioner, supra at 1305. Thus,

the Court of Appeals recognized in Phi Delta Theta Fraternity

that the phrase “including reasonable costs of administration

directly connected with a purpose described in clause (i) or

(ii)” does not stand alone, but pertains to and modifies sec.

512(a)(3)(B)(i) as well as sec. 512(a)(3)(B)(ii). 

Circuit (Court of Appeals), the Court to which an appeal in the

instant case would normally lie, did not decide in Phi Delta

Theta Fraternity the issues under section 512(a)(3) that are

presented here.17 Moreover, the foregoing statement in Phi

Delta Theta Fraternity on which the Trustee relies in the instant

case is dictum. Finally, even if the statement in Phi Delta

Theta Fraternity were not dictum, we do not find that that
- 19 -

statement supports the Trustee’s position here that one of the

four independent sources or components of exempt function income

under section 512(a)(3)(B) is reasonable costs of administration

directly connected with a purpose described in section

512(a)(3)(B)(i) or (ii). 

In further support of its position that reasonable costs of

administration directly connected with a purpose described in

section 512(a)(3)(B)(i) or (ii) qualify as one of the four

independent sources or components of exempt function income under

section 512(a)(3)(B), the Trustee relies on the instructions to

Forms 990-T for the years at issue. Those instructions provided

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. 

We acknowledge that the foregoing instructions to Forms 990-

T are not as clearly stated as section 512(a)(3)(B) is. Nonetheless, we find those instructions to be consistent with the plain

language of section 512(a)(3)(B). We have held that section
- 20 -

512(a)(3)(B) plainly treats non-member income set aside for

reasonable costs of administration directly connected (1) with a

purpose described in section 512(a)(B)(3)(i) as set aside for a

purpose described in that section and (2) with a purpose described in section 512(a)(3)(B)(ii) as set aside for a purpose

described in that section. 

In any event, we are not bound by the instructions to Forms

990-T for the years at issue. The authoritative sources of tax

law are statutes, regulations, and judicial decisions, and not

informal instructions published by the Internal Revenue Service. 

See Casa de La Jolla Park, Inc. v. Commissioner, 94 T.C. 384, 396

(1990). We find the Trustee’s reliance on the instructions to

Forms 990-T for the years at issue to be misplaced. 

We hold that section 512(a)(3)(B) treats non-member income

set aside to provide for the payment of reasonable costs of

administration directly connected with a purpose described in

section 512(a)(3)(B)(ii) as non-member income set aside for a

purpose described in section 512(a)(3(B)(ii). 

The Trustee’s contentions that section 512(a)(3)(B) identifies four independent sources or components of exempt function

income and that one of those sources or components is reasonable

costs of administration directly connected with a purpose described in section 512(a)(3)(B)(i) or (ii) constitute the premises on which the Trustee constructs its argument that non-
- 21 -

18It is noteworthy that the Trust agreement establishing the

Trust provided that such costs are subject to the limitation

prescribed by sec. 512(a)(3)(E)(i). That Trust agreement 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. * * * [Emphasis

added.] 

member investment income set aside by the Trust for the payment

of reasonable costs of administration directly connected with a

purpose described in section 512(a)(3)(B)(ii) is not subject to

the limitation prescribed by section 512(a)(3)(E)(i). We have

rejected those contentions, and therefore those premises are not

valid. We further reject the Trustee’s argument that the limitation prescribed by section 512(a)(3)(E)(i) does not apply to the

non-member investment income at issue that the Trust set aside to

provide for the payment of reasonable costs of administration

directly connected with a purpose described in section

512(a)(3)(B)(ii).18 

As a VEBA described in section 501(c)(9), a set-aside by the

Trust of non-member income for a purpose described in section

512(a)(3)(B)(ii) is to be taken into account as exempt function

income under section 512(a)(3)(B) only to the extent that such
- 22 -

set aside does not exceed the limitation prescribed by section

512(a)(3)(E)(i). See sec. 512(a)(3)(E)(i). We have held that

the plain language of section 512(a)(3)(B) treats non-member

income set aside to provide for the payment of reasonable costs

of administration directly connected with a purpose described in

section 512(a)(3)(B)(ii) as set aside for a purpose described in

that section. We further hold that “a set-aside for any purpose

specified in clause (ii) of subparagraph (B)” of section

512(a)(3) to which the limitation prescribed by section

512(a)(3)(E)(i) applies is a set-aside to provide for the payment

of life, sick, accident, or other benefits and reasonable costs

of administration directly connected with providing for the

payment of such benefits. We also hold that the limitation

prescribed by section 512(a)(3)(E)(i) applies to the amounts of

non-member income at issue 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. 

The Trustee advances an alternative argument in the event

that the Court were to hold, as we have, that the limitation

prescribed by section 512(a)(3)(E)(i) applies to the amounts of

non-member income at issue. According to the Trustee’s alternative argument, in calculating for each year at issue the limitation prescribed by section 512(a)(3)(E)(i), the plain language of

that section requires that not only the Trust’s account limit
- 23 -

determined under section 419A, but also the amount of assets set

aside by the Trust, be reduced by the amount of the reserve for

post-retirement medical benefits described in section

419A(c)(2)(A). 

The parties agree that (1) the Trust’s respective account

limits, determined under section 419A(c), were $64,615,936 and

$84,192,933 for 1991 and 1992; (2) those account limits for those

years included $53,313,236 and $71,602,395, respectively, attributable to a reserve for post-retirement medical benefits; (3) the

amounts of assets that the Trust set aside (i.e., the total asset

balances reported by the Trust in Forms 990) for 1991 and 1992

were $41,975,366 and $45,637,659, respectively; and (4) (a) for

1991 $7,342,383 and $34,632,983 of the amount of assets so set

aside were allocable to (i) incurred but unpaid health benefit

claims and reasonable costs directly connected with such claims

and (ii) the reserve for post-retirement medical benefits,

respectively, and (b) for 1992 $6,824,833 and $38,812,826 of the

amount of assets so set aside were allocable to (i) incurred but

unpaid health benefit claims and reasonable costs directly

connected with such claims and (ii) the reserve for post-retirement medical benefits, respectively. If the limitation prescribed by section 512(a)(3)(E)(i) were to be calculated in the

manner advocated by the Trustee, the amount of assets set aside

by the Trust as of the close of each year at issue would not
- 24 -

exceed that limitation. In that event, the amount of investment

income at issue 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 would

constitute exempt function income that is excluded under section

512(a)(3)(A) from the calculation of the Trust’s UBTI. 

It is the position of respondent that, in calculating for

each year at issue the limitation prescribed by section

512(a)(3)(E)(i), only the account limit determined under section

419A, and not the amount of assets set aside by the Trust, must

be reduced by the reserve for post-retirement medical benefits

described in section 419A(c)(2)(A). 

Although we have quoted section 512(a)(3)(E)(i) above, for

convenience we restate it here in addressing the contentions of

the parties with respect to the Trustee’s alternative argument. 

Section 512(a)(3)(E)(i) provides:

(E) Limitation on amount of setaside in the case

of organizations described in paragraph (9), (17), or

(20) of section 501(c).--

(i) In general.–-In the case of any organization described in paragraph (9), (17), or (20) of

section 501(c), a set-aside for any purpose specified in clause (ii) of subparagraph (B) may be

taken into account under subparagraph (B) only to

the extent that such set-aside 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 bene-
- 25 -

fits).

We find the Trustee’s interpretation of section

512(a)(3)(E)(i) (viz., the parenthetical phrase “(not taking into

account any reserve described in section 419A(c)(2)(A) for postretirement medical benefits)” modifies both “an amount of assets

set aside” and “the account limit determined under section 419A”

referred to in section 512(a)(3)(E)(i)) to be a strained and

unreasonable interpretation. We reject that interpretation. We

conclude that the parenthetical phrase appearing at the end of

section 512(a)(3)(E)(i), as reasonably and properly construed,

modifies only “the account limit determined under section 419(A)”

referred to in section 512(a)(3)(E)(i). Our construction is

supported by the temporary regulations under section

512(a)(3)(E)(i). 

 Section 1.512(a)-5T, Q&A-3(a), Temporary Income Tax Regs.,

51 Fed. Reg. 4332 (Feb. 4, 1986), as amended by 51 Fed. Reg.

11303 (Apr. 2, 1986) (Q&A-3(a)), provides in pertinent part:

Q-3: What amount of income may a VEBA, SUB or

GLSO set aside for exempt purposes?

A-3: (a) Pursuant to section 512(a)(3)(E)(i), the

amounts set aside in a VEBA, SUB, or GLSO (including a

VEBA, SUB, or GLSO that is part of a 10 or more employer plan, as defined in section 419A(f)(6)(B)) as of

the close of a taxable year of such VEBA, SUB, or GLSO

to provide 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

account limit, determined under sections 419A(c) and

419A(f)(7), for such taxable year of the VEBA, SUB, or
- 26 -

GLSO. In calculating the qualified asset account limit

for this purpose, a reserve for post-retirement medical

benefits under section 419A(c)(2)(A) is not to be taken

into account. [Emphasis added.]

Q&A-3(a) plainly provides that, for purposes of determining

the limitation prescribed by section 512(a)(3)(E)(i), a reserve

for post-retirement medical benefits described in section

419A(c)(2)(A) is not to be taken into account in “calculating the

qualified asset account limit”. Q&A-3(a) does not indicate that,

for those purposes, such a reserve is not to be taken into

account in calculating the amount of assets set aside as of the

close of a taxable year. 

Our interpretation regarding the parenthetical phrase

appearing at the end of section 512(a)(3)(E)(i) also is supported

by the General Explanation of the Revenue Provisions of the

Deficit Reduction Act of 1984 that was prepared by the Staff of

the Joint Committee on Internal Revenue Taxation (General Explanation). Congress enacted section 512(a)(3)(E)(i) into the Code

as part of the Deficit Reduction Act of 1984. See Deficit

Reduction Act of 1984, Pub. L. 98-369, sec. 511(b), 98 Stat. 860. 

The General Explanation provides in pertinent part with respect

to section 512(a)(3)(E)(i):

The [Deficit Reduction] Act [of 1984] provides a

specific annual limit on the amount of income of a taxexempt VEBA * * * that may be considered a permissible

set aside. Under the Act, the amount of such an organization’s income for a year that may be considered set

aside as exempt function income is generally not to

increase the total amount that is set aside to an
- 27 -

19If we were to accept the Trustee’s alternative position

that for each year at issue not only the account limit, as

(continued...)

amount in excess of the account limit for the taxable

year determined under the deduction limits provided by

the Act (sec. 419A(c) and (f)). The limit on the setaside is intended to apply to more-than-10-employer

VEBAs which are exempt from the deduction limitations.

* * *

In general, the rules applicable in computing the

account limit under the deduction rules [section 419],

such as the special reserve limits for collectively

bargained plans, also are applicable in determining the

set-aside allowed for purposes of the unrelated business income tax. However, for purposes of determining

the limit on the set aside, the account limit is not to

include any amount with respect to reserves to provide

post-retirement medical benefits. The limit on the

amount set aside as exempt function income does not

include a reserve for post-retirement medical benefits

because, in view of the advance deductions provided to

employers for these benefits, it was determined that

the allowance of such a tax-exempt reserve would provide an unnecessary tax incentive with respect to these

benefits. [Footnote ref. omitted; emphasis added.] 

Staff of Joint Comm. on Taxation, General Explanation of the

Revenue Provisions of the Deficit Reduction Act of 1984, at 791

(J. Comm. Print 1984).

The General Explanation plainly provides that, in determining the limitation prescribed by section 512(a)(3)(E)(i), a

reserve for post-retirement medical benefits is not to be taken

into account in determining the account limit. The General

Explanation does not indicate that, in making that determination,

such a reserve is not to be taken into account in calculating the

amount of assets set aside at the close of a taxable year.19 
- 28 -

19(...continued)

defined in sec. 419A(c), but also the amount of assets set aside

by the Trust are to be determined without regard to the reserve

for post-retirement medical benefits, we would undermine the

reason set forth in the General Explanation why Congress decided

to require the account limit to exclude any amount with respect

to such a reserve in determining the limitation prescribed by

sec. 512(a)(3)(E)(i). See Staff of Joint Comm. on Taxation,

General Explanation of the Revenue Provisions of the Deficit

Reduction Act of 1984, at 791 (J. Comm. Print 1984). 

We hold that, in calculating for each year at issue the

limitation prescribed by section 512(a)(3)(E)(i), that section

does not require that the amount of assets that the Trust set

aside as of the close of each such year be reduced by the amount

of the reserve for post-retirement medical benefits. The parties

agree that for each year at issue 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,

exceeded the account limit, as defined in section 419A(c),

determined without regard to section 419A(f)(6) and without

taking into account the reserve for post-retirement medical

benefits described in section 419A(c)(2)(A). We hold that, in

determining for each year at issue the UBTI of the Trust under

section 512(a)(3)(A), the amount of investment income at issue

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 may not be excluded as exempt
- 29 -

20We shall briefly address one of those arguments. The

Trustee argues that the Trust’s investment income at issue is not

subject to the unrelated business income tax because the investment income of a VEBA described in sec. 501(c)(9) “is not taxable

if spent in furtherance of its exempt purpose.” In support of

that argument, the Trustee relies on certain legislative history

of the Tax Reform Act of 1969 which enacted sec. 512(a)(3)(A) and

(B) into the Code. The Trustee’s reliance on that legislative

history is misplaced. When Congress enacted sec. 512(a)(3)(A)

and (B) in 1969, it placed no specific limitation on the amount

of income that may be set aside by a VEBA. See Tax Reform Act of

1969, Pub. L. 91-172, sec. 121(b), 83 Stat. 537. However, in

1984 Congress decided to impose a limitation on the amount of

income that may be set aside when it enacted sec. 512(a)(3)(E)(i)

into the Code. See Deficit Reduction Act of 1984, Pub. L. 98-

369, sec. 511(b), 98 Stat. 860; H. Conf. Rept. 98-861, at 1161-

1163 (1984), 1984-3 C.B. (Vol. 2) 415-417; see also Staff of

Joint Comm. on Taxation, General Explanation of the Revenue

Provisions of the Deficit Reduction Act of 1984, at 790-791 (J.

Comm. Print 1984). 

function income. 

We have considered all of the contentions and arguments of

the Trustee that are not discussed herein, and we find them to be

without merit and/or irrelevant.20

To reflect the foregoing,

Decision will be entered for

respondent.