Opinion ID: 568068
Heading Depth: 2
Heading Rank: 1

Heading: Creation of the Plan and Lima Trust

Text: 3 In 1983, the Employer adopted the Plan and executed with Huntington National Bank the Lima Surgical Associates, Inc. Voluntary Employees' Beneficiary Association Plan Trust Agreement (Trust Agreement), thus creating the trust that is the plaintiff Lima Trust. The Plan provides, inter alia, severance pay to any participant in the plan terminated for any reason except death. Benefits paid under the Plan are based on length of service and salary.B. Tax Status of the Plan 4 In August of 1984, Lima Trust filed an application with the Internal Revenue Service (IRS) for tax exempt status for the Plan under 26 U.S.C. § 501(c)(9), which exempts from taxation certain organizations known in tax parlance as VEBAs, about which more will be said below. In response, the IRS denied Lima Trust's application. Due to this denial, Lima Trust paid income taxes for the 1984 calendar year. Lima Trust then sought, through the usual administrative process, a refund of the taxes paid, continuing to argue that it qualified as an exempt VEBA under 26 U.S.C. § 501(c)(9). Because the IRS failed to respond within 6 months of Lima Trust's filing, Lima Trust commenced an action in the Claims Court. See 26 C.F.R. § 601.103(c)(3) (1985). 5 C. The Internal Revenue Code and Regulations 6 The controlling provision in the Code appears as a short paragraph in a subsection of section 501. The title to section 501 is Exemption from tax on corporations, certain trusts, etc. The section begins with the general statement that organizations described in the subsections that follow are exempt from taxation under the subtitle (which deals with income taxes). The following subsections then list and describe a wide variety of such exempt organizations, with the qualifications and caveats which have become an expected part of tax code writing. 7 The paragraph, paragraph 9, which describes what are known as VEBAs states rather simply: 2 8 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. 9 26 U.S.C. § 501(c)(9). 10 Treasury regulations, however, do not leave the matter there. They describe in considerable detail what the IRS understands a tax exempt VEBA to be, and what must be done to qualify as one. The general rule, as set out by the Treasury in 26 C.F.R. § 1.501(c)(9)-1, tracks the statute and describes the four conditions that must be met to qualify as a tax exempt VEBA: 11 To be described in section 501(c)(9) an organization must meet all of the following requirements: 12 (a) The organization is an employees' association, 13 (b) Membership in the association is voluntary, 14 (c) The organization provides for the payment of life, sick, accident, or other benefits to its members or their dependents or designated beneficiaries, and substantially all of its operations are in furtherance of providing such benefits, and 15 (d) No part of the net earnings of the organization inures, other than by payment of the benefits referred to in paragraph (c) of this section, to the benefit of any private shareholder or individual. 16 In subsequent paragraphs, the IRS explains in detail what these four requirements mean, and gives examples. It is the application of these specific details to the Lima Trust that brings this case here. D. The Claims Court Proceedings 17 In the Claims Court, the Government argued that Lima Trust fails to meet the requirements for a tax exempt VEBA for three reasons: (1) it is not controlled by an independent trustee, one of the requirements contained in the regulations for a VEBA of this type if it is to be considered a voluntary association of employees--see 26 C.F.R. § 1.501(c)(9)-2(c)(3) (defining the term of employees to require certain forms of control); (2) the benefits provided under the plan were not limited to the type of benefits specified in the regulations for a tax exempt VEBA--see 26 C.F.R. § 1.501(c)(9)-3 (on the meaning of the term other benefits); and (3), the benefit scheme established under the trust provided disproportionate benefits to the doctor-owners, violating the prohibition against private inurement of benefits. The trial judge, on cross-motions for summary judgment, in an extensive opinion, held for the Government on all three issues, and granted summary judgment.