United States Court of Appeals for the Federal Circuit 

2009-5025 

CNG TRANSMISSION MANAGEMENT VEBA, 

 

Plaintiff-Appellant, 

v. 

UNITED STATES, 

Defendant-Appellee. 

Eric R. Fox, Ivins, Phillips & Barker, Chartered, of Washington, DC, argued for 

plaintiff-appellant. With him on the brief were Kevin P. O’Brien and Patrick J. Smith. 

Kenneth L. Greene, Attorney, Appellate Section, Tax Division, United States 

Department of Justice, of Washington, DC, argued for defendant-appellee. With him on 

the brief were John A. DiCicco, Acting Assistant Attorney General, Gilbert S. Rothenberg, 

Acting Deputy Assistant Attorney General, and Arthur T. Catterall, Attorney. 

Appealed from: United States Court of Federal Claims 

Judge Lynn J. Bush
UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT 

 

 

2009-5025 

CNG TRANSMISSION MANAGEMENT VEBA, 

 Plaintiff- Appellant, 

v. 

UNITED STATES, 

 Defendant-Appellee. 

Appeal from the United States Court of Federal Claims in 06-CV-541, 

Judge Lynn J. Bush. 

 ________________________ 

 

 DECIDED: December 14, 2009 

 _________________________ 

Before MAYER, LINN, and PROST, Circuit Judges. 

MAYER, Circuit Judge. 

CNG Transmission Management VEBA (“CNG”) appeals the judgment of the 

United States Court of Federal Claims holding that a voluntary employees’ beneficiary 

association (“VEBA”) may not avoid the limitation on exempt function income in 26 

U.S.C. § 512(a)(3)(E)(i) by allocating investment income to the payment of member 

benefits. See CNG Transmission Mgmt. VEBA v. United States, 84 Fed. Cl. 

327 (2008). We affirm. 
BACKGROUND 

 The relevant facts are not in dispute. CNG is a VEBA organized under section 

501(c)(9) of the Internal Revenue Code. It was established by Consolidated Natural 

Gas Company in 1994. As an employer-funded VEBA, CNG “provid[es] for the 

payment of life, sick, accident, or other benefits to the members of [the] association or 

their dependents or designated beneficiaries.” 26 U.S.C. § 501(c)(9). 

At the beginning of 2000, CNG had total fund balances of $44,804,622. Over the 

course of the year, CNG generated $2,798,002 in investment income, received 

employer contributions of $12,684,454 and spent $7,429,878 on member benefits. At 

the end of 2000, it had total fund balances of $42,592,818.1

 In November 2001, CNG 

filed Internal Revenue Service Form 990-T, reporting $2,693,5922 in unrelated business 

taxable income for 2000 and paying $1,065,684 in tax on this income. In 2004, 

however, it filed an amended Form 990-T, requesting a refund of the tax paid in 2000 on 

the ground that the amount it had reported as unrelated business taxable income was 

instead non-taxable exempt function income. Although CNG conceded that its year-end 

account balance exceeded the account limit specified in 26 U.S.C. § 512(a)(3)(E)(i), it 

contended that it was not obligated to pay tax on its investment income because it had 

spent that income on member benefits during the year. 

 1

 In addition to expending funds on member benefits, CNG also transferred 

assets to another VEBA during 2000 and its year-end account balance reflects this 

transfer. 

2

 CNG originally reported investment income of $2,693,592, but now asserts that 

its 2000 investment income was actually $2,798,002. 

2009-5025 2
 The Internal Revenue Service denied CNG’s refund claim and the Court of 

Federal Claims affirmed. In granting the government’s motion for summary judgment, 

the court noted that pursuant to the formula provided in Temporary Treasury Regulation 

§ 1.512(a)-5T, Q&A-3 (“Treasury Regulation § 1.512(a)-5T”), a VEBA will owe tax on 

the lesser of its investment income and the amount by which its year-end account 

balance exceeds the statutory account limit. 84 Fed. Cl. at 335. The court concluded, 

moreover, that a VEBA could not “avoid the limitation on exempt function income in 26 

U.S.C. § 512(a)(3)(E)(i) merely by allocating investment income toward the payment of 

welfare benefits during the course of the tax year.” Id. at 338. CNG appeals. We have 

jurisdiction under 28 U.S.C. § 1295(a)(3). 

DISCUSSION 

We review a grant of summary judgment by the Court of Federal Claims without 

deference and conduct a de novo review of all questions of statutory interpretation. 

Consolidation Coal Co. v. United States, 528 F.3d 1344, 1347 (Fed. Cir. 2008); Old 

Stone Corp. v. United States, 450 F.3d 1360, 1367 (Fed. Cir. 2006). Here the only 

issue in dispute is the proper interpretation of 26 U.S.C. § 512(a)(3)(E)(i). 

Organizations otherwise exempt from federal taxation pursuant to section 501(a) 

of the Internal Revenue Code are nonetheless subject to tax on their “unrelated 

business taxable income.” 26 U.S.C. § 511(a). In the context of organizations such as 

VEBAs, unrelated business taxable income generally consists of all income other than 

“exempt function income.” See id. § 512(a)(3)(B). Exempt function income is defined 

as: 

the gross income from dues, fees, charges, or similar amounts paid by 

members of the organization as consideration for providing such members 

2009-5025 3
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 . . . which is set aside . . . to provide for the payment of life, sick, 

accident, or other benefits . . . . 

Id.

 Under this provision, there are two classes of exempt function income: (1) member 

contributions to the VEBA, and (2) income which is “set aside” for the payment of life, 

sick, accident or other member benefits. In 1984, Congress restricted the amount of 

income that a VEBA could exclude as exempt function income, providing that a “setaside” for purposes of section 512(a)(3)(B) can be considered exempt function income 

“only to the extent that such set-aside does not result in an amount of assets set aside 

. . . in excess of the account limit determined under section 419A . . . for the taxable 

year.” See 26 U.S.C. § 512(a)(3)(E)(i).3 Pursuant to 26 U.S.C. § 419A, a VEBA’s 

account limit is generally the amount necessary to pay for incurred but unpaid benefit 

claims as of the end of the year as well as certain related administrative costs. 

Accordingly, a VEBA’s income is exempt from tax only to the extent that it does not 

result in a year-end account balance in excess of the amount necessary to satisfy 

incurred but unpaid member claims. 

 3

 In relevant part, section 512(a)(3)(E) provides: 

 Limitation on amount of set aside. . . . 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 [26 U.S.C. § 512(a)(3)(B)(ii)] 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 . . . 

for the taxable year. 

2009-5025 4
The crux of the present dispute is whether CNG’s investment income “result[ed] 

in an amount of assets set aside” in excess of the statutory account limit. See 26 

U.S.C. §§ 419A(c), 512(a)(3)(E)(i). CNG argues that its investment income did not 

result in any account overage because it spent that income during the year on member 

benefits. The government, however, contends that because CNG’s investment income 

caused its total fund balances to exceed the statutory account limit, that investment 

income cannot be classified as exempt function income. 

We agree with the government. The language of section 512(a)(3)(E) is clear 

and unambiguous: it provides that income does not qualify as exempt function income if 

it “result[s] in” an account balance that is “in excess” of the statutory account limit. The 

plain meaning of the term “results in” is “causes.” See Brown v. Gardner, 513 U.S. 115, 

119 (1994) (concluding that the term “as a result of” can be “naturally read simply to 

impose the requirement of a causal connection”); Murakami v. United States, 398 F.3d 

1342, 1352 (Fed. Cir. 2005) (construing the term “as a result of” to mean “as a 

consequence of”); Black Hills Aviation, Inc. v. United States, 34 F.3d 968, 975 (10th Cir. 

1994) (concluding that the term “as a result of” is “logically interpreted to mean ‘caused 

by’”). Here, CNG’s account overage was caused by, or occurred as a consequence of, 

the investment income it made in 2000. Thus, under the plain meaning of section 

512(a)(3)(E)(i) that investment income was not tax-exempt. 

We reject CNG’s argument that its investment income could not have resulted in 

any account overage because it “spent” all of its investment income on member benefits 

during the course of the tax year. Money is fungible, and CNG cannot avoid taxation by 

claiming that it spent money from investment income, rather than money from some 

2009-5025 5
other source, on member benefits. There is no requirement in section 512(a)(3)(E)(i) 

that a VEBA’s investment income can result in a year-end account overage only to the 

extent that the actual dollars in the account at year end are directly traceable to income 

made on investments. 

The legislative history of section 512(a)(3)(E)(i) supports this interpretation of the 

statutory language. The impetus for Congress’ enactment of changes to the tax 

treatment of funded welfare benefit plans was its concern about the “tax-shelter 

potential” of such plans. H.R. Rep. No. 98-432, pt. 2, at 1275 (1984). Specifically, 

Congress feared that “the combination of advance deductions for contributions and the 

availability of tax exemption for certain employee benefit organizations (such as the 

voluntary employees’ beneficiary association or VEBA) provides tax treatment very 

similar to that provided to qualified pension plans, but with far fewer restrictions.” Id. It 

therefore enacted sections 419 and 419A to limit the extent to which a VEBA could 

deduct employer contributions and enacted section 512(a)(3)(E) to limit the extent to 

which a VEBA could set aside income on a tax-free basis. See id. at 1292 (“Present 

law does not specifically limit the amount of income that can be set aside” by a VEBA 

on a tax-exempt basis.); H.R. Rep. No. 98-861, at 1163 (1984) (Congress intended to 

impose “more specific limits” on VEBAs in order to ensure that “the amount set aside for 

an exempt purpose is generally not to exceed the qualified asset account limit.”). Under 

CNG’s interpretation of section 512(a)(3)(E)(i), however, a VEBA could avoid tax on its 

investment income simply by asserting that it had spent this income—rather than 

income from employee and employer contributions—on member benefits during the 

relevant tax year. 

2009-5025 6
I. Treasury Regulation § 1.512(a)-5T 

We find the language of section 512(a)(3)(E)(i) to be unambiguous, but even if it 

were not, we would be compelled to accord deference to the Treasury’s reasonable 

interpretation of the statute. See Am. Express Co. v. United States, 262 F.3d 1376, 

1383 (Fed. Cir. 2001) (“In the context of tax cases, the IRS’s reasonable interpretations 

of its own regulations and procedures are entitled to particular deference.”); LTV Steel 

Co. v. United States, 215 F.3d 1275, 1279 (Fed. Cir. 2000) (“When a term in the Internal 

Revenue Code is ambiguous, but is defined in a Treasury Regulation, we are instructed 

to defer to the Treasury Regulation as long as its interpretation of the Code is 

reasonable.”); see also Cottage Sav. Ass’n v. Comm’r, 499 U.S. 554, 560-61 (1991)

(“Because Congress has delegated to the Commissioner the power to promulgate all 

needful rules and regulations for the enforcement of [the Internal Revenue Code], we 

must defer to his regulatory interpretations of the Code so long as they are reasonable.” 

(citations and internal quotation marks omitted)). Soon after section 512(a)(3)(E)(i) was 

enacted, the agency issued Treasury Regulation § 1.512(a)-5T, which clarifies how 

much income a VEBA may set aside on a tax-free basis. Under this provision, a 

VEBA’s unrelated business taxable income will generally “equal the lesser” of “the 

income of the VEBA” and “the excess of the total amount set aside as of the close of the 

taxable year . . . over the qualified asset account limit.” 26 C.F.R. § 1.512(a)-5T. In 

other words, a VEBA will pay tax on the lesser of: (1) its investment income, and (2) the 

amount by which its set aside exceeds the statutory account limit.4

 The formula 

 4

 Since Treasury Regulation § 1.512(a)-5T imposes tax on the lesser of a 

VEBA’s investment income and its excess total set aside over the applicable account 

limit, CNG may have been able to shield its investment income from tax if it had 

2009-5025 7
contained in Treasury Regulation § 1.512(a)-5T does not provide for the allocation of 

income from a particular source to a particular expense. Thus, under this formula, a 

VEBA may not avoid taxation on its investment income by allocating that income to the 

payment of member benefits during the tax year. 

On appeal, CNG argues that Treasury Regulation § 1.512(a)-5T is procedurally 

and substantively invalid under the Administrative Procedure Act (“APA”). See 5 U.S.C. 

§§ 553, 706. Because CNG did not properly raise this argument at the trial court, 

however, we decline to consider it here. See 84 Fed. Cl. at 335 n.5 (“For the first time 

at oral argument, [CNG] suggested that [Treasury Regulation § 1.512(a)-5T was] 

‘clearly invalid.’ This argument is untimely and waived.” (citations omitted)); see also 

Singleton v. Wulff, 428 U.S. 106, 120 (1976) (“It is the general rule, of course, that a 

federal appellate court does not consider an issue not passed upon below.”); Rentrop v. 

Spectranetics Corp., 550 F.3d 1112, 1117 (Fed. Cir. 2008) (noting that “appellate courts 

do not consider a party’s new theories, lodged first on appeal” (citations and internal 

quotation marks omitted)). Indeed, when it was before the Court of Federal Claims, 

 

established that the amount by which its total set aside exceeded the account limit was 

less than its investment income. CNG, however, failed to present any evidence 

regarding the amount by which its set aside exceeded the statutory limit. As the Court 

of Federal Claims explained: 

[CNG] has conceded that it exceeded the account limit for its qualified 

asset account at the end of 2000. Because there has been an excess 

over the account limit described in 26 U.S.C. § 419A(c), [CNG’s unrelated 

business taxable income] would be the lesser of CNG’s investment 

income, or CNG’s excess over the account limit . . . . [CNG] has chosen, 

however, to not put in any evidence of the amount of its excess over the 

account limit . . . for the 2000 tax year. 

 84 Fed. Cl. at 338 (citations omitted). 

2009-5025 8
CNG affirmatively relied on Treasury Regulation § 1.512(a)-5T to support its argument 

that its investment income was exempt from tax. See 84 Fed. Cl. at 335. 

II. Section 419 and Sherwin-Williams

In an effort to avoid the plain language of section 512(a)(3)(E)(i) and Treasury 

Regulation § 1.512(a)-5T, CNG argues that 26 U.S.C. § 419 contains an “ordering rule” 

which should be applied to section 512(a)(3)(E)(i). According to CNG, section 419 

treats a VEBA’s investment income as the first source of funds to pay current member 

benefits and this same rule should be extended to section 512(a)(3)(E)(i). 

We find this argument unpersuasive. As a preliminary matter, section 419(c) is 

prefaced by the phrase “[f]or purposes of this section” and there is nothing to indicate 

that section 419’s alleged ordering rule should be applied to section 512. Furthermore, 

sections 419 and 512 were enacted to deal with two fundamentally different problems. 

While the former addresses the problem of excessive employer deductions for 

contributions to a VEBA, the latter addresses the problem of allowing a VEBA to 

generate excessive tax-free income. Section 419 limits the extent to which an employer 

can deduct contributions to a VEBA by limiting the deduction to the VEBA’s “qualified 

cost” for the year.5

 See 26 U.S.C. § 419. Nowhere, however, does it indicate that in 

determining the amount of tax-exempt set aside available under section 512(a)(3)(E)(i), 

investment income must be the first source used to pay member benefits. 

 5

 Pursuant to section 419, a VEBA’s “qualified cost” generally equals amounts 

expended on benefits plus any “addition” to the VEBA for the year, to the extent that 

such addition does not result in an account balance in excess of the account limit 

specified in section 419A. A VEBA’s qualified cost is then reduced by its after-tax 

income. See 26 U.S.C. § 419(c). 

2009-5025 9
 We likewise reject CNG’s argument based on Sherwin-Williams Co. Employee 

Health Plan Trust v. Comm’r, 330 F.3d 449 (6th Cir. 2003). That case is clearly 

distinguishable on its facts, because the parties there stipulated that the investment 

income at issue had been spent on administrative costs. See id. at 452 (“This case 

requires us to determine whether passive income that [a VEBA] set aside and actually 

spent on administrative costs during the year counts against § 512(a)(3)(E)’s limit.”); id.

at 454 (“The parties agree that [the VEBA’s] investment income . . . was set aside and 

spent on administrative costs directly connected with the provision of benefits.”). Here, 

however, there has not been an equivalent stipulation. To the contrary, the pivotal issue 

before us is whether a VEBA can avoid taxation by purporting to spend income from 

investments, rather than income from some other source, in providing member benefits. 

We disagree, moreover, with the Sixth Circuit’s conclusion that section 

512(a)(3)(E)(i) imposes a limit on a VEBA’s “accumulated funds” rather than its setaside funds. See Sherwin-Williams, 330 F.3d at 454 (“The question presented here is 

whether the limit is meant to cap the total amount of income that a VEBA may set aside 

under § 512(a)(3)(B) over the course of a year, or whether it acts as a cap only on the 

amount of income that the VEBA may accumulate, by setting aside an amount in 

excess of the amount needed to cover the costs of administration during the course of a 

year.”). As the Court of Federal Claims correctly noted, “[t]he term ‘accumulated’ 

appears nowhere” in section 512(a)(3)(E). 84 Fed. Cl. at 337. By its plain terms, 

section 512(a)(3)(E) applies to amounts “set aside” to pay for welfare benefits, not to 

amounts “accumulated” after expenses have been paid. See 26 U.S.C. § 512(a)(3)(B) 

(defining “exempt function income” as income which is “set aside . . . for the payment of 

2009-5025 10
2009-5025 11

life, sick, accident, or other benefits”); id. § 512(a)(3)(E)(i) (providing that a “set aside” 

will be tax exempt only “to the extent that such set-aside does not result in an amount of 

assets set aside . . . in excess of the account limit determined under section 419A”). 

Furthermore, in analyzing section 512(a)(3)(E), the Sixth Circuit did not take account of 

the formula contained in Treasury Regulation § 1.512(a)-5T, which, as we have said, 

imposes tax on the lesser of a VEBA’s investment income and its excess over statutory 

account limits, regardless of whether income is spent on member benefits during the 

year. 

CONCLUSION 

Accordingly, the judgment of the Court of Federal Claims is affirmed. 

AFFIRMED