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Petitioner's 1986 VEBA Trust Contribution
During 1986, petitioner became aware that the regulations
might remove the benefit of the VEBA Trust's yearend on November
30. An internal memorandum dated April 23, 1986, states:
the statute and the Committee Report could be
interpreted as allowing the qualified asset account to
be tested at the Trust's year end. Therefore, we
changed the Trust's year end to November 30th. At
November 30th, the Trust's reserves will always be low
enough to meet the qualified asset account limit. The
Trust can then be prefunded in December and a deduction
for the contribution taken on Square D's return for the
calendar year.
Pursuant to the regulations, the amount of an
employer's deduction for contributions to a �501(c)(9)
year is now limited to the qualified cost of the trust
for the taxable year of the trust which falls within
the taxable year of the employer. Thus, there is no
advantage to our trust having a November fiscal year
end as the qualified cost test will always be applied
as of Square D Company's calendar year end. In other
words, the new regulations will prevent Square D
Company from prefunding the trust for 1987 and
deducting the contribution in 1986.
Bob, it is obvious the IRS perceived the loophole
created by the statute's ambiguity about whose taxable
year, the trust's or the corporation's, should be used
to measure the qualified cost has opened for taxpayers.
It remains to be seen whether the IRS can correct this
defect in the statute through regulations. We are
going to contact our legal counsel to see if there is
any merit in challenging the regulations. In the
meantime, we are proceeding under the assumption that
Square D Company will not be allowed to deduct
contributions to the Trust in 1986.
On December 30, 1986, petitioner contributed $27 million to
the VEBA Trust and claimed a deduction for the full amount of
this contribution on its 1986 Federal income tax return. That
$27 million contribution was petitioner's only contribution to
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