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failed to pay any employee for a fixed holiday when the employee
was entitled to holiday pay under petitioner’s employment
policies.
Petitioner believed that the use of a VEBA to fund its
holiday pay obligations would produce tax savings and allow
petitioner to provide employee benefits more efficiently. In
particular, petitioner anticipated that tax savings would result
from the income tax benefit to be gained from an up-front
deduction for the entire contribution to the VEBA, the reduction
of surplus tax,4 and the income tax saved because the VEBA’s
investment earnings would be tax exempt pursuant to section
501(c)(9).5 Assuming that petitioner was allowed a complete
4Surplus tax is a term used in the life insurance industry
to refer to the reduction that sec. 809(a)(1) imposes on a life
insurance company's policyholder dividends deduction under sec.
808(c). The parties have stipulated that petitioner's use of
VEBA II to fund holiday pay benefits saved petitioner surplus tax
under sec. 809 in the following amounts:
Year Amount
1985 $117,318
1986 -0-
1987 594,394
1988 64,260
1989 -0-
1990 60,112
1991 -0-
1992 -0-
1993 -0-
5Sec. 501(a) exempts from taxation VEBA's that provide for
the payment of life, sick, accident, or other benefits to
employees, or their dependents or designated beneficiaries,
(continued...)
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