- 11 -
II as an asset. Thereafter, petitioner reported the VEBA II
trust as an admitted asset on its annual statements. The change
in petitioner's annual statement reporting resulted from its
desire to change to an accounting practice similar to that
adopted in the Statement of Financial Accounting Standards No.
87.
VEBA III
Subsequent to the establishment of the holiday pay plan and
the VEBA II trust, petitioner established a third VEBA trust
(VEBA III) in order to fund its wellness program and health
services plans. Petitioner contributed $10 million to VEBA III
in 1986 but claimed no Federal income tax deduction in the year
of contribution.8 In 1991 and 1992, petitioner liquidated VEBA
III because of expense problems and capital and surplus
management considerations. Petitioner used the funds from VEBA
III to pay employee benefits other than those provided under the
wellness and health services plans.9 Over $1 million, for
instance, was used to fund vacation pay for petitioner's
employees. By using the assets of VEBA III to pay employee
benefit expenses, petitioner's expenses for the year were
reduced, and petitioner was able to maintain surplus growth.
8See infra p. 22.
9Petitioner did not terminate these plans; they remained
intact but were unfunded.
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