Proposed Regulation Incorporates IRS Litigation Position on UBTI for VEBAs and SUB Trusts

On February 6, 2014, the Internal Revenue Service (IRS) proposed new regulations for calculating the unrelated business taxable income (UBTI) of IRC section 501(c)(9) voluntary employees’ beneficiary associations (VEBA) and 501(c)(17) supplemental unemployment benefit (SUB) trusts.  Regulations on this subject were initially published in temporary and proposed form in 1986; the reproposal withdraws the 1986 proposal and, if adopted, would replace the temporary regulation (Treas. Reg. §1.512(a)-5T). 

The principal objective of the reproposal is to state expressly in regulations the IRS position that investment income earned during a taxable year is subject to UBTI if the organization’s year-end assets exceed the account limit under IRC section 419A for that year (without taking into account any post-retirement medical reserve).  The two courts of appeals that have considered this issue reached different conclusions:

  • The Sixth Circuit in Sherwin-Williams1decided that such investment income dedicated to paying administrative expenses over the course of the year is not taken into account in computing UBTI.
  • Six years later, the Federal Circuit in CNG2 disagreed and adopted the IRS view.

The reproposal would clarify the regulation with respect to the method the IRS views as correct for calculating UBTI, to take account of such investment income, and add examples clearly illustrating this approach.

The reproposed regulation would also, inter alia:

  • Reflect the statutory rules that UBTI for these organizations also includes income from any unrelated trade or business regularly conducted by the organization, but does not take account of the section 419A limitation if substantially all the contributions to the organization were made by employers that had been tax-exempt for at least five years;
  • Subject “ten or more employer plans” to this calculation, in accordance with a technical correction to the statute adopted in 1986;
  • Leave to another pending regulation project issues related to collectively bargained plans raised by commentators; and
  • Retain the treatment of existing reserves proposed in 1986.

Comments on the proposed regulation are due May 7, 2014.

 1 Sherwin-Williams Co. Employee Health Plan Trust v. Commissioner, 330 F.2d 449 (6th Cir. 2003), non-acq. AOD 2005-02, 2005-35 IRB 422.
 2 CNG Transmission Management VEBA v. U.S., 588 F.3d 1376 (Fed. Cir. 2009).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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