[Federal Register Volume 84, Number 237 (Tuesday, December 10, 2019)]
[Rules and Regulations]
[Pages 67370-67375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26274]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9886]
RIN 1545-BJ92
Calculation of UBTI for Certain Exempt Organizations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation and removal of temporary regulation.
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SUMMARY: This document contains a final regulation providing guidance
on how certain organizations that provide employee benefits must
calculate unrelated business taxable income (UBTI).
DATES:
Effective Date: This regulation is effective December 10, 2019.
Applicability Date: This regulation applies to taxable years
beginning on or after December 10, 2019. For rules that apply to
earlier periods, see Sec. 1.512(a)-
[[Page 67371]]
5T as contained in 26 CFR part 1, revised April 1, 2019.
FOR FURTHER INFORMATION CONTACT: Jennifer Solomon or Janet Laufer at
(202) 317-5500 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final Income Tax Regulations (26 CFR part 1)
under section 512(a) of the Code. Organizations that are otherwise
exempt from tax under section 501(a) are subject to tax on their
unrelated business taxable income (UBTI) under section 511(a). Section
512(a) of the Code generally defines UBTI of exempt organizations and
provides special rules for calculating UBTI for organizations described
in section 501(c)(7) (social and recreational clubs), voluntary
employees' beneficiary associations described in section 501(c)(9)
(VEBAs), and supplemental unemployment benefit trusts described in
section 501(c)(17) (SUBs).
Section 512(a)(1) provides a general rule that UBTI is the gross
income from any unrelated trade or business regularly carried on by the
organization, less certain deductions. Under section 512(a)(3)(A), in
the case of social and recreational clubs, VEBAs, and SUBs, UBTI is
defined as gross income, less directly connected expenses, but
excluding ``exempt function income.''
Exempt function income is defined in section 512(a)(3)(B) as gross
income from two sources. The first type of exempt function income is
amounts paid by members as consideration for providing the members or
their dependents or guests with goods, facilities, or services in
furtherance of the organization's exempt purposes. The second type of
exempt function income is all income (other than an amount equal to the
gross income derived from any unrelated trade or business regularly
carried on by the organization computed as if the organization were
subject to section 512(a)(1)) that is set aside: (1) For a charitable
purpose specified in section 170(c)(4); (2) in the case of a VEBA or
SUB, to provide for the payment of life, sick, accident, or other
benefits; or (3) for reasonable costs of administration directly
connected with a purpose described in (1) or (2).
As described in greater detail below, section 512(a)(3)(E)
generally limits the amount that a VEBA or SUB may set aside as exempt
function income to an amount that does not result in an amount of total
assets in the VEBA or SUB at the end of the taxable year that exceeds
the section 419A account limit for the taxable year. As specified in
section 512(a)(3)(E)(i), for this purpose, the account limit does not
take into account any reserve under section 419A(c)(2)(A) for post-
retirement medical benefits.
Section 512(a)(3)(E) was added to the Code under the Tax Reform Act
of 1984, Public Law 98-369 (98 Stat. 598 (1984)). Congress enacted
section 512(a)(3)(E) to limit the extent to which a VEBA's or SUB's
income is exempt from tax, noting that ``[p]resent law does not
specifically limit the amount of income that can be set aside'' by a
VEBA or SUB on a tax-free basis. H.R. Rep. No. 98-432, pt. 2, at 1275.
To implement section 512(a)(3)(E), Sec. 1.512(a)-5T was published
in the Federal Register as TD 8073 on February 4, 1986 (51 FR 4312),
with an immediate effective date. A cross-referencing Notice of
Proposed Rulemaking (the 1986 proposed regulation) was issued
contemporaneously with the temporary regulation. Written comments were
received on the 1986 proposed regulation, and a public hearing was held
on June 26, 1986. The 1986 proposed regulation was withdrawn and
replaced by a new proposed regulation (the 2014 proposed regulation)
that was published in the Federal Register on February 6, 2014 (79 FR
7110). The Treasury Department and the IRS received two comments on the
2014 proposed regulation. No public hearing was held.
The Treasury Department and the IRS have considered the comments
received in response to the 2014 proposed regulation. This final
regulation adopts the provisions of the 2014 proposed regulation with
no modifications other than the following changes: (1) A change in the
applicability date to taxable years beginning on or after the date of
publication of this final regulation; (2) the addition of a clause
modifying the definition of covered entity to include certain
corporations described in section 501(c)(2), as provided in section
512(a)(3)(C); (3) the addition of a clause which refers to the
provision in section 512(a)(3)(D) addressing nonrecognition of gain in
the case of sales of certain property; and (4) updates to the examples,
formatting changes, and other minor changes in wording, which are
nonsubstantive. The modifications to the definition of covered entity
and the addition of the clause addressing nonrecognition of gain are
described under the heading ``Summary of Comments and Explanation of
Provisions.'' The temporary regulation is removed.
Summary of Comments and Explanation of Provisions
Covered Entity
Consistent with the 2014 proposed regulation, this final regulation
uses the uniform term ``Covered Entity'' to describe VEBAs and SUBs
subject to the UBTI computation rules of section 512(a)(3).\1\ For
taxable years beginning after June 30, 1992, group legal services
organizations (GLSOs) are no longer exempt as section 501(c)(20)
organizations.\2\ See section 120(e). Therefore, a GLSO is no longer a
Covered Entity.
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\1\ While section 501(c)(7) organizations are also subject to
the UBTI computation rules of section 512(a)(3), this regulation
addresses only computations for VEBAs and SUBs.
\2\ The preamble of the 2014 proposed regulation referred to
GLSOs. However, on December 19, 2014, the Tax Increase Prevention
Act of 2014, Public Law 113-295 (128 Stat. 4010) repealed sections
120 and 501(c)(20) regarding GLSOs as ``deadwood'' provisions.
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The 2014 proposed regulation did not reflect the provision of
section 512(a)(3)(C), which provides that section 512(a)(3)(A) applies
to a corporation described in section 501(c)(2), the income of which is
payable to an organization described in section 501(c)(7), (9), or
(17), as if the corporation were the organization to which the income
is payable. For this purpose, the corporation is treated as having
exempt function income for a taxable year only if it files a
consolidated return with the organization described in section
501(c)(7), (9), or (17). In this final regulation, a clause has been
added to clarify that the term ``Covered Entity'' includes a
corporation described in section 501(c)(2) to the extent provided in
section 512(a)(3)(C).
Nonrecognition of Gain
The 2014 proposed regulation did not reflect the provision of
section 512(a)(3)(D) regarding nonrecognition of gain with respect to
the sale of certain property. In this final regulation, a clause has
been added to refer to that provision. Section 512(a)(3)(D) provides
that, if property used directly in the performance of the exempt
function of a Covered Entity is sold by the Covered Entity, and other
property is purchased and used by the Covered Entity directly in the
performance of its exempt function within a four-year period beginning
one year before the date of the sale, and ending three years after the
date of sale, gain (if any) from the sale is recognized only to the
extent that the sales price of the old property exceeds the Covered
Entity's cost of purchasing the other property.
[[Page 67372]]
Limitation on Amounts Set Aside for Exempt Purposes
Section 512(a)(3)(E)(i) limits the amount of investment income a
Covered Entity may treat as nontaxable exempt function income in any
given year to the extent such income ``result[s] in'' a year-end
account balance ``in excess of'' the modified section 419A account
limit. An account overage can be considered the result of, or
essentially caused by, investment income only by considering all
investment income earned during the year. Thus, in order to give an
appropriate meaning to the term ``result in'', the total amount of
investment income earned during the year should be considered when
calculating whether an excess exists at the end of the year.
Certain taxpayers have taken a contrary position and asserted that
investment income may be set aside and used separately before the end
of a taxable year for current benefit payments and related
administrative costs (collectively, ``benefit expenditures'') and
thereby avoid the limit imposed by section 512(a)(3)(E)(i) on exempt
function income. In Sherwin-Williams Co. Employee Health Plan Trust v.
Comm'r, 330 F.3d 449 (6th Cir. 2003), rev'g, 115 T.C. 440 (2000), the
Sixth Circuit Court of Appeals held that investment income that the
VEBA earmarked and claimed was spent before year-end on reasonable
costs of administration was not subject to the section 512(a)(3)(E)(i)
limit on exempt function income. In contrast, in CNG Transmission Mgmt.
VEBA v. U.S., 588 F.3d 1376 (Fed. Cir. 2009), aff'g, 84 Fed. Cl. 327
(2008), the Federal Circuit Court of Appeals rejected this argument.
The Court stated that the ``language of section 512(a)(3)(E) is clear
and unambiguous,'' and upheld the Court of Federal Claims' conclusion
that a VEBA ``may not avoid the limitation on exempt function income in
[section] 512(a)(3)(E)(i) merely by allocating investment income toward
the payment of welfare benefits during the course of the tax year.''
CNG, 558 F.3d at 1379, 1377-78; accord Northrop Corp. Employee
Insurance Benefit Plans Master Trust v. U.S., 99 Fed. Cl. 1 (2011),
aff'd, 467 Fed. Appx. 886 (Fed. Cir. April 10, 2012), cert. denied,
(Dec. 3, 2012).
The Treasury Department and the IRS have concluded that the
decision in Sherwin-Williams is contrary to the statute, the
legislative history of section 512(a)(3)(E), Sec. 1.512(a)-5T, and the
1986 and 2014 proposed regulations, and have determined that it is
appropriate to issue this final regulation clarifying the proper
calculation method.\3\ Specifically, the Treasury Department and the
IRS disagree with the Sixth Circuit's conclusion that investment income
may be set aside and used separately before the end of a taxable year
to pay the reasonable costs of administering health care benefits and
thereby avoid the limit imposed by section 512(a)(3)(E)(i) on exempt
function income.\4\
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\3\ The IRS's interpretation is set forth in its non-
acquiescence to the Sherwin-Williams decision (AOD 2005-02, 2005-35
I.R.B. 422). In AOD 2005-02, the IRS recognized the precedential
effect of the decision to cases appealable to the Sixth Circuit and
indicated that it would follow the decision in Sherwin-Williams with
respect to cases within that circuit if the opinion could not be
meaningfully distinguished.
\4\ Notably, the Sixth Circuit opinion in Sherwin-Williams
concluded that section 512(a)(3)(E)(i) supported the interpretation
adopted by the court, not that the interpretation was based on the
unambiguous terms of the statute or even the best reading of the
statute. The Sixth Circuit also erroneously considered the 1986
temporary regulation as consistent with that interpretation.
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The fungible nature of money means that there is necessarily a
connection between investment income that a Covered Entity earns during
the year and the total amount of funds in the entity at year-end, even
if the Covered Entity purports to apply all of that income to benefit
expenditures. For example, a VEBA with a beginning balance of $1,000,
investment income of $100, benefit expenditures of $3,000, and employer
contributions of $3,000, will have a year-end balance of $1,100. This
will be true regardless of whether the VEBA allocates the investment
income to the benefit expenditures. Assume that the VEBA's year-end
account limit under section 512(a)(3)(E)(i) is $1,010, so that there is
an account overage of $90. Absent $90 of the investment income, the
VEBA would have had a year-end account balance of $1,010 and no account
overage. Thus, $90 of the investment income in the example ``result[s]
in'' a year-end account balance ``in excess of'' the VEBA's year-end
account limit and may not be set aside and excluded as exempt function
income.
The analysis that all investment income earned during a year should
be considered in determining whether there is an account overage is
consistent with the Joint Committee on Taxation's report with respect
to the legislation that enacted section 512(a)(3)(E). This report
indicated that investment income is subject to UBTI in ``an amount
equal to the lesser of the income of the fund or the amount by which
the assets in the fund exceed a specific limit on amounts set aside for
exempt purposes.'' See Staff of the Joint Comm. on Taxation, 98th
Cong., General Explanation of the Revenue Provisions of the Deficit
Reduction Act of 1984, at 790 (Comm. Print 1984) (JCS-41-84).
Accordingly, the Treasury Department and the IRS continue to interpret
section 512(a)(3)(E)(i) to mean that whether a VEBA or SUB allocated
its investment income (rather than other funds) to current year
expenditures is irrelevant to the application of the set aside
limitation.
As discussed above, the statutory provisions are not dependent upon
a determination as to whether particular sources of income were used
for benefit expenditures in any particular year. Rather, the ``result
in'' language of section 512(a)(3)(E)(i) means that amounts set aside
for benefit expenditures are treated as exempt function income only to
the extent the total amount set aside for such purposes as of the end
of the year is equal to or less than ``the account limit determined
under section 419A . . . for the taxable year (not taking into account
any reserve described in section 419A(c)(2)(A) for post-retirement
medical benefits).'' Accordingly, the final regulations reflect this
rule, and, for taxable years to which these regulations apply, the IRS
will apply this final regulation to cases arising in the Sixth Circuit.
This final regulation retains the formula, description, and
examples set forth in the 2014 proposed regulation. The 2014 proposed
regulation retained the formula set forth in the 1986 proposed
regulation and Sec. 1.512(a)-5T, but modified and clarified the
description and added examples. Thus, consistent with the 2014 proposed
regulation, this final regulation specifically states that any
investment income a Covered Entity earns during the taxable year is
subject to unrelated business income tax (UBIT) to the extent the
Covered Entity's year-end assets exceed the account limit, and
clarifies that this rule applies regardless of how that income is used.
The IRS received two comments on the 2014 proposed regulation. One
of the commenters asked that the proposed regulation be withdrawn on
the basis that it is inconsistent with the statute, while the other
commenter indicated his view that the position taken in the proposed
regulation is a fair interpretation of the statute. With respect to the
request that the 2014 proposed regulation be withdrawn, the Treasury
Department and the IRS have concluded that the position in the 2014
proposed regulation, and adopted in this final regulation, is not only
consistent with the statute, but is correct
[[Page 67373]]
for the reasons set forth in this preamble.
Both of the commenters expressed concern over the proposed
applicability date in the 2014 proposed regulation because of its
potential impact on VEBAs within the Sixth Circuit's jurisdiction. The
2014 proposed regulation proposes that it will apply to taxable years
ending on or after the date of publication of the final regulation. One
commenter argued that the proposed applicability date would be unfair
to VEBAs that are within the Sixth Circuit's jurisdiction because these
VEBAs and their sponsors have been operating in good faith under a tax
regime that a federal court of appeals held is the law. The commenter
suggested that if the 2014 proposed regulation were finalized as
proposed, the regulation should apply only with respect to taxable
years beginning six months after the date the final regulation is
published in the Federal Register, at least for VEBAs within the Sixth
Circuit's jurisdiction.
The other commenter stated that VEBAs that account for investment
income in the manner approved by the Sixth Circuit have been operating
in good faith and in accordance with a reasonable interpretation of the
relevant Code provisions. The commenter expressed concern that if the
regulation were finalized in the manner in which it was proposed, the
investment income of those VEBAs would be retroactively taxed. The
commenter therefore requested that the proposed applicability date be
changed in the final regulation to the first taxable year beginning on
or after the date of publication of the final regulation.
Taking into account these comments, the Treasury Department and the
IRS have decided to modify the applicability date, so that this final
regulation applies to taxable years beginning on or after the date of
publication of the final regulation (and so for VEBAs within the Sixth
Circuit's jurisdiction, the position reflected in AOD 2005-02 would
apply through the end of the VEBA's taxable year in which the final
regulation is issued).
Effective/Applicability Date
This regulation is effective on December 10, 2019. The regulation
applies to taxable years beginning on or after December 10, 2019. For
rules that apply to earlier periods, see Sec. 1.512(a)-5T as contained
in 26 CFR part 1, revised April 1, 2019.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations. Because this
regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply). Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding this regulation was submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal authors of this regulation are Jennifer Solomon and
Janet Laufer, Office of Associate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment Taxes). However, other personnel
from the Treasury Department and the IRS participated in the
development of this regulation.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805, unless otherwise noted.
* * * * *
0
Par. 2. Section 1.512(a)-55 is added to read as follows:
Sec. 1.512(a)-5 Questions and answers relating to the unrelated
business taxable income of organizations described in paragraphs (9) or
(17) of section 501(c).
(a)(1) Q-1. What does section 512(a)(3) provide with respect to
organizations described in paragraphs (9) or (17) of section 501(c)?
(2) A-1. (i) In general, section 512(a)(3) provides rules for
determining the unrelated business income tax of voluntary employees'
beneficiary associations (VEBAs) and supplemental unemployment benefit
trusts (SUBs). Under section 512(a)(3)(A), a Covered Entity's
``unrelated business taxable income'' (UBTI) means all income except
exempt function income. Under section 512(a)(3)(B), exempt function
income includes income that is set aside for exempt purposes, as
described in paragraph (b) of this section, subject to certain limits,
as described in paragraph (c) of this section.
(ii) For purposes of this section, a ``Covered Entity'' means a
VEBA or a SUB, and, to the extent provided in section 512(a)(3)(C), a
corporation described in section 501(c)(2).
(b)(1) Q-2. What is exempt function income?
(2) A-2. (i) Under section 512(a)(3)(B), the exempt function income
of a Covered Entity for a taxable year means the sum of--
(A) Amounts referred to in the first sentence of section
512(a)(3)(B) that are paid by members of the Covered Entity and
employer contributions to the Covered Entity (collectively ``member
contributions'');
(B) Other income of the Covered Entity (including earnings on
member contributions) that is set aside for a purpose specified in
section 170(c)(4) and reasonable costs of administration directly
connected with such purpose; and
(C) Other income of the Covered Entity (including earnings on
member contributions) that, subject to the limitation of section
512(a)(3)(E) (as described in paragraph (c) of this section), is set
aside for the payment of life, sick, accident, or other benefits and
reasonable costs of administration directly connected with such
purpose.
(ii) The other income described in paragraphs (b)(2)(i)(B) and (C)
of this section does not include the gross income derived from any
unrelated trade or business (as defined in section 513) regularly
carried on by the Covered Entity, computed as if the organization were
subject to section 512(a)(1).
(c)(1) Q-3. What are the limits on the amount that may be set
aside?
(2) A-3. (i) Pursuant to section 512(a)(3)(E)(i), and except as
provided in paragraph (c)(2)(ii) of this section, the amount of
investment income (as defined in paragraph (c)(2)(iii) of this section)
set aside by a Covered Entity as of the close of a taxable year of such
Covered Entity to provide for the payment of life, sick, accident, or
other benefits (and administrative costs associated with the provision
of such benefits) is not taken into account for purposes of determining
the amount of that income that constitutes ``exempt function income''
to the extent that the total amount of the assets of the Covered Entity
at the end of the taxable year set aside to provide for the payment of
life, sick, accident, or other benefits (and related administrative
costs) exceeds the applicable account limit for such taxable year of
the Covered Entity (as described in paragraph (c)(2)(iv) of this
[[Page 67374]]
section). Accordingly, any investment income a Covered Entity earns
during the taxable year is subject to unrelated business income tax to
the extent the Covered Entity's year-end assets exceed the applicable
account limit. The rule in this paragraph (c)(2) applies regardless of
whether the Covered Entity spends or retains (or is deemed to spend or
deemed to retain) that investment income during the course of the year.
Thus, in addition to the unrelated business taxable income derived by a
Covered Entity from any unrelated trade or business (as defined in
section 513) regularly carried on by it, computed as if the
organization were subject to section 512(a)(1), the unrelated business
taxable income of a Covered Entity for a taxable year of such an
organization includes the lesser of--
(A) The investment income of the Covered Entity for the taxable
year; and
(B) The excess (if any) of--
(1) The total amount of the assets of the Covered Entity (excluding
amounts set aside for a purpose described in section 170(c)(4)) as of
the close of the taxable year; over
(2) The applicable account limit for the taxable year.
(ii) In accordance with section 512(a)(3)(E)(iii), a Covered Entity
is not subject to the limits described in this paragraph (c) if
substantially all of the contributions to the Covered Entity are made
by employers who were tax exempt throughout the five year taxable
period ending with the taxable year in which the contributions are
made.
(iii) For purposes of this section, a Covered Entity's ``investment
income''--
(A) Means all income except--
(1) Member contributions described in paragraph (b)(2)(i)(A) of
this section;
(2) Income set aside as described in paragraph (b)(2)(i)(B) of this
section; or
(3) Income from any unrelated trade or business described in
paragraph (b)(2)(ii) of this section; and
(B) Includes gain realized by the Covered Entity on the sale or
disposition of any asset during such year (other than gain on the sale
or disposition of assets of an unrelated trade or business described in
paragraph (b)(2)(ii) of this section), except to the extent provided in
section 512(a)(3)(D).
(C) For purposes of paragraph (c)(2)(iii)(B) of this section, the
gain realized by a Covered Entity on the sale or disposition of an
asset is equal to the amount realized by the organization over the
basis of such asset in the hands of the organization reduced by any
qualified direct costs attributable to such asset (under paragraphs
(b), (c), and (d) of Q&A-6 of Sec. 1.419A-1T).
(iv) In calculating the total amount of the assets of a Covered
Entity as of the close of the taxable year, certain assets with useful
lives extending substantially beyond the end of the taxable year (for
example, buildings and licenses) are not to be taken into account to
the extent they are used in the provision of life, sick, accident, or
other benefits. By contrast, cash and securities (and other similar
investments) held by a Covered Entity are taken into account in
calculating the total amount of the assets of a Covered Entity as of
the close of the taxable year because they may be used to pay welfare
benefits, rather than merely used in the provision of such benefits.
(v) The determination of the applicable account limit for purposes
of this paragraph (c) is made under the rules of sections 419A(c) and
419A(f)(7), except that a reserve for post-retirement medical benefits
under section 419A(c)(2)(A) is not to be taken into account. See Sec.
1.419A-2T for special rules relating to collectively bargained welfare
benefit funds.
(vi) The limits of this paragraph (c) apply to a Covered Entity
that is part of a 10 or more employer plan, as defined in section
419A(f)(6). For purposes of this paragraph (c), the account limit is
determined as if the plan is not subject to the exception under section
419A(f)(6).
(vii) The following examples illustrate the calculation of a VEBA's
UBTI.
(A) Example 1. (1) Employer X establishes a VEBA as of January
1, 2015, through which it provides health benefits to active
employees. The plan year is the calendar year. The VEBA has no
employee contributions or member dues, receives no income from an
unrelated trade or business regularly carried on by the VEBA, and
has no income set aside for a purpose specified in section
170(c)(4). The VEBA's investment income in 2020 is $1,000. As of
December 31, 2020, the applicable account limit under section
512(a)(3)(E)(i) is $5,000 and the total amount of assets of the VEBA
is $7,000.
(2) The VEBA's UBTI for 2020 is $1,000. This is because the UBTI
is the lesser of the investment income for the year ($1,000) and the
excess of the VEBA assets over the account limit at the end of the
year ($7,000 over $5,000, or $2,000).
(B) Example 2. (1) The facts are the same as in the example in
paragraph (c)(2)(vii)(A) of this section (Example 1), except that
the VEBA's applicable account limit under section 512(a)(3)(E)(i) as
of December 31, 2020, is $6,500.
(2) The VEBA's UBTI for 2020 is $500. This is because the UBTI
for 2020 is the lesser of the investment income for the year
($1,000) and the excess of the VEBA assets over the account limit at
the end of the year ($7,000 over $6,500, or $500).
(C) Example 3. (1) Employer Y contributes to a VEBA through
which Y provides health benefits to active and retired employees.
The plan year is the calendar year. At the end of 2020, there was no
carryover of excess contributions within the meaning of section
419(d), the balance in the VEBA was $25,000, the Incurred but Unpaid
(IBU) claims reserve was $6,000, the reserve for post-retirement
medical benefits (PRMB) (computed in accordance with section
419A(c)(2)) was $19,000, and there were no existing reserves within
the meaning of section 512(a)(3)(E)(ii). During 2021, the VEBA
receives $70,000 in employer contributions and $5,000 in investment
income, pays $72,000 in benefit payments and $7,000 in
administrative expenses, and receives no income from an unrelated
trade or business regularly carried on by the VEBA. All the 2021
benefit payments are with respect to active employees and the IBU
claims reserve (that is, the account limit under section 419A(c)(1))
at the end of 2021 was $7,200. The reserve for PRMB at the end of
2021 is $20,000. All amounts designated as ``administrative
expenses'' are expenses incurred in connection with the
administration of the employee health benefits. ``Investment
income'' is net of administrative costs incurred in the production
of the investment income (for example, investment management and/or
brokerage fees). Only employers contributed to the VEBA (that is,
there were no employee contributions or member dues/fees). The VEBA
does not set aside any income for the purpose specified in section
170(c)(4).
(2) The total amount of assets of the VEBA at the end of 2021 is
$21,000 (that is, $25,000 beginning of year balance + $70,000
contributions + $5,000 investment income-($72,000 in benefit
payments + $7,000 in administrative expenses)).
(3) The applicable account limit under section 512(a)(3)(E)(i)
(that is, the account limit under section 419A(c), excluding the
reserve for post-retirement medical benefits) is the IBU claims
reserve ($7,200).
(4) The total amount of assets of the VEBA as of the close of
the year ($21,000) exceeds the applicable account limit ($7,200) by
$13,800.
(5) The unrelated business taxable income of the VEBA is $5,000
(that is, the lesser of investment income ($5,000) and the excess of
the amount of assets of the VEBA as of the close of the taxable year
over the applicable account limit ($13,800)).
(D) Example 4. (1) The facts are the same as in the example in
paragraph (c)(2)(vii)(C) of this section (Example 3) except that the
2020 year-end balance was $15,000.
(2) The total amount of assets in the VEBA at the end of 2021 is
$11,000 (that is, $15,000 beginning of year balance + $70,000
contributions + $5,000 investment income-($72,000 in benefit
payments + $7,000 in administrative expenses)).
(3) The applicable account limit under section 512(a)(3)(E)(i)
remains $7,200.
(4) The total amount of assets of the VEBA as of the close of
the year ($11,000) exceeds the applicable account limit ($7,200) by
$3,800.
(5) The VEBA's unrelated business taxable income is $3,800 (that
is, the lesser of investment income ($5,000) and the excess of
[[Page 67375]]
the total amount of assets of the VEBA at the close of the taxable
year over the applicable account limit ($3,800)).
(d)(1) Q-4. What is the effective date of the amendments to section
512(a)(3) and what transition rules apply to ``existing reserves for
post-retirement medical or life insurance benefits''?
(2) A-4. (i) The amendments to section 512(a)(3), made by the Tax
Reform Act of 1984, apply to income earned by a Covered Entity after
December 31, 1985, in the taxable years of such an organization ending
after such date.
(ii) Section 512(a)(3)(E)(ii)(I) provides that income that is
attributable to ``existing reserves for post-retirement medical or life
insurance benefits'' will not be treated as unrelated business taxable
income. This includes income that is either directly or indirectly
attributable to existing reserves. An ``existing reserve for post-
retirement medical or life insurance benefits'' (as defined in section
512(a)(3)(E)(ii)(II)) is the total amount of assets actually set aside
by a Covered Entity on July 18, 1984 (calculated in the manner set
forth in paragraph (c) of this section, and adjusted under paragraph
(c) of Q&A-11 of Sec. 1.419-1T), reduced by employer contributions to
the fund on or before such date to the extent such contributions are
not deductible for the taxable year of the employer including July 18,
1984, and for any prior taxable year of the employer, for purposes of
providing such post-retirement benefits. For purposes of the preceding
sentence only, an amount that was not actually set aside on July 18,
1984, will be treated as having been actually set aside on such date if
the amount was--
(A) Incurred by the employer (without regard to section 461(h)) as
of the close of the last taxable year of the Covered Entity ending
before July 18, 1984; and
(B) Actually contributed to the Covered Entity within 8 \1/2\
months following the close of such taxable year.
(iii) In addition, section 512(a)(3)(E)(ii)(I) applies to existing
reserves for such post-retirement benefits only to the extent that such
``existing reserves'' do not exceed the amount that could be
accumulated under the principles set forth in Revenue Rulings 69-382,
1969-2 CB 28; 69-478, 1969-2 CB 29; and 73-599, 1973-2 CB 40. Thus,
amounts attributable to any such excess ``existing reserves'' are not
within the transition rule of section 512(a)(3)(E)(ii)(I) even though
they were actually set aside on July 18, 1984. See Sec.
601.601(d)(2)(ii)(b) of this chapter.
(iv) All post-retirement medical or life insurance benefits (or
other benefits to the extent paid with amounts set aside to provide
post-retirement medical or life insurance benefits) provided after July
18, 1984 (whether or not the employer has maintained a reserve or fund
for such benefits) are to be charged, first, against the ``existing
reserves'' within the transition rule of section 512(a)(3)(E)(ii)(I)
(including amounts attributable to ``existing reserves'' within the
transition rule of section 512(a)(3)(E)(ii)(I) for post-retirement
medical benefits or for post-retirement life insurance benefits (as the
case may be)) and, second, against all other amounts. For purposes of
this paragraph (d)(2)(iv), the qualified direct cost of an asset with a
useful life extending substantially beyond the end of the taxable year
(as determined under Q&A-6 of Sec. 1.419-1T) will be treated as a
benefit provided and thus charged against the ``existing reserve''
based on the extent to which such asset is used in the provision of
post-retirement medical benefits or post-retirement life insurance
benefits (as the case may be). All plans of an employer providing post-
retirement medical benefits are to be treated as one plan for purposes
of section 512(a)(3)(E)(ii)(III), and all plans of an employer
providing post-retirement life insurance benefits are to be treated as
one plan for purposes of section 512(a)(3)(E)(ii)(III).
(v) In calculating the unrelated business taxable income of a
Covered Entity for a taxable year of such organization, the total
income of the Covered Entity for the taxable year is reduced by the
income attributable to ``existing reserves'' within the transition rule
of section 512(a)(3)(E)(ii)(I) before such income is compared to the
excess of the total amount of the assets of the Covered Entity as of
the close of the taxable year over the applicable account limit for the
taxable year.
(vi) The following example illustrates the calculation of UBTI for
a VEBA that has existing reserves.
(A) Example. Assume that the total income of a VEBA for a
taxable year is $1,000, and that the excess of the total amount of
the assets of the VEBA as of the close of the taxable year over the
applicable account limit is $600. Assume also that of the $1,000 of
total income, $540 is attributable to ``existing reserves'' within
the transition rule of section 512(a)(3)(E)(ii)(I). The unrelated
business taxable income of this VEBA for the taxable year is $460,
determined as the lesser of the following two amounts:
(1) The total income of the VEBA for the taxable year, reduced
by the extent to which such income is attributable to ``existing
reserves'' within the meaning of the transition rule of section
512(a)(3)(E)(ii)(I) ($1,000-$540 = $460); and
(2) The excess of the total amount of the assets of the VEBA as
of the close of the taxable year over the applicable account limit
($600).
(B) [Reserved]
(e)(1) Q-5. What is the applicability date of this section?
(2) A-5. Except as otherwise provided in this paragraph (e)(2),
this section is applicable to taxable years beginning on or after
December 10, 2019. For rules that apply to earlier periods, see Sec.
1.512(a)-5T, as contained in 26 CFR part 1, revised April 1, 2019.
Sec. 1.512(a)-5T [Removed]
0
Par. 3. Section 1.512(a)-5T is removed.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: November 19, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-26274 Filed 12-9-19; 8:45 am]
BILLING CODE 4830-01-P