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512(a)(3)(E)(i) is “plainly restricted to only set-asides for the
payment of benefits described in I.R.C. �512(a)(3)(B)(ii), and
thus, its application does not extend to Exempt Function Income
arising from member contributions, set-asides for charitable
purposes, or administrative costs.”
Respondent counters that reasonable costs of administration
directly connected with a purpose described in section
512(a)(3)(B)(i) or (ii) do not constitute an independent source
or component of exempt function income under section
512(a)(3)(B). In support of that position, respondent argues:
It is clear the statute [section 512(a)(3)(B)] is
written so that the reasonable cost of administration
phrase did not have to be written twice, that is once
after clause (i) and again after clause (ii). This is
a common drafting technique used throughout the Inter-
nal Revenue Code. * * *
Another way of describing exempt function income
is income set-aside [sic] for a purpose specified in
section 170(c)(4) including administrative costs di-
rectly connected with this purpose or, in the case of
an organization described in paragraph (9), (17), or
(20) of section 501(c), to provide for the payment of
life, sick, accident, or other benefits, including
reasonable costs of administration directly connected
with this purpose. This is the clear meaning of this
section [512(a)(3)(B)]. Accordingly, administrative
costs are a part of the benefit costs which may be set-
aside [sic] under clauses (i) and (ii) of I.R.C. �
512(a)(3)(B), not a separate component thereof.
We first address the premises of the Trustee’s position
under section 512(a)(3)(E)(i), namely, its contentions that the
plain language of section 512(a)(3)(B) identifies four sources or
components of exempt function income and that one of those
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