Square D Company and Subsidiaries v. Commissioner , 109 T.C. No. 9 ( 1997 )


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    109 T.C. No. 9
    UNITED STATES TAX COURT
    SQUARE D COMPANY AND SUBSIDIARIES, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent
    Docket Nos. 15047-94, 4991-95.       Filed October 9, 1997.
    During December 1982, P established a voluntary
    employees' beneficiary association (VEBA) which
    qualified for exemption under sec. 501(c)(9), I.R.C.,
    and as a welfare benefit fund (WBF) under sec. 419(e),
    I.R.C. During the initial years of the VEBA, P
    contributed amounts to the VEBA to provide certain
    employee welfare benefits and for claims which were
    incurred but unpaid (CIBU's) at yearend. During 1985,
    P changed its VEBA yearend to Nov. 30, while P retained
    a calendar yearend. Also during 1985, P began
    prefunding for benefits the VEBA was expected to
    provide in later years.
    1. Held, P is not automatically entitled to the
    safe harbor percentages of sec. 419A(c)(5)(B)(i) and
    (ii), I.R.C., in computing additions to its account
    limit for CIBU's for the taxable years 1986 and 1987.
    General Signal Corp. & Subs. v. Commissioner, 
    103 T.C. 216
     (1994), followed.
    - 2 -
    2. Held, further, P's CIBU's for 1986 and 1987
    are based upon stipulated percentages of its qualified
    direct costs for each year. See sec. 419A(c)(1), (5),
    I.R.C.
    3. Held, further, the creation of a reserve under
    sec. 419A(c)(2), I.R.C., requires the accumulation of
    assets and does not result from the accrual of a
    liability. General Signal Corp. & Subs v.
    Commissioner, 
    supra,
     followed.
    4. Held, further, because P's contributions to
    its VEBA during 1986 did not result in the creation of
    a reserve for postretirement medical benefits for its
    employees, P is not entitled to an increase in its
    account limit for 1986 pursuant to sec. 419A(c)(2),
    I.R.C., with respect to that year.
    5. Held, further, the limit of sec. 1.419-1T,
    Q&A-5(b)(1), Temporary Income Tax Regs., 
    51 Fed. Reg. 4324
     (Feb. 4, 1986), is valid.
    Robert H. Aland, Gregg Douglas Lemein, Taylor S. Reid,
    Tamara L. Frantzen, Maura Ann McBreen, and Brian K. Wydajewski,
    for petitioner in docket No. 15047-94.
    Robert H. Aland, Gregg Douglas Lemein, Neal J. Block,
    Frederick Edward Henry III, Maura Ann McBreen, Tamara L.
    Frantzen, Taylor S. Reid, Brett L. Gold, and Brian K. Wydajewski,
    for petitioner in docket No. 4991-95.
    Lawrence C. Letkewicz and Randall P. Andreozzi, for
    respondent.
    OPINION
    WELLS, Chief Judge:   The instant cases were consolidated for
    purposes of trial, briefing, and opinion (hereinafter referred to
    as the instant case).   The instant case is before the Court on
    - 3 -
    the parties' cross-motions for partial summary judgment.   We must
    decide whether petitioner's contribution to its trust created as
    part of its voluntary employees' beneficiary association (VEBA)
    plan for the 1986 taxable year is deductible.   Specifically, we
    must decide:   (1) Whether petitioner is entitled to the safe
    harbor limits of section 419A(c)(5)(B)(i) and (ii)1 in computing
    the addition to the qualified asset account for medical, dental,
    and short-term disability (also referred to as accident and
    sickness) benefit claims and associated administrative costs
    pursuant to section 419A(c)(1); (2) whether petitioner's $27
    million contribution to its VEBA trust during 1986 constituted "a
    reserve funded over the working lives of the covered employees"
    for postretirement medical benefits (PRMB's) within the meaning
    of section 419A(c)(2); and (3) whether the limitation of section
    1.419-1T, Q&A-5(b)(1), Temporary Income Tax Regs., 
    51 Fed. Reg. 4324
     (Feb. 4, 1986), is valid.
    Background
    Some of the facts and certain exhibits have been stipulated
    by the parties for the purpose of the instant motion.   The
    stipulation of facts is incorporated in this Opinion by
    reference.   When its petition was filed, petitioner's principal
    office was located in Palatine, Illinois.   Petitioner is a
    1
    All Code and section references are to the Internal Revenue
    Code in effect for the year at issue. All Rule references are to
    the Tax Court Rules of Practice and Procedure.
    - 4 -
    worldwide manufacturer of electrical distribution and control
    equipment and electronic materials, components, products, and
    systems for industrial and construction markets.    Petitioner is
    an accrual basis taxpayer and uses a calendar yearend.    Prior to
    June 1991, petitioner's common stock was traded on the New York
    Stock Exchange.
    Establishment of the VEBA Trust
    On December 22, 1982, petitioner established the Square D
    Company and Subsidiaries Employee Welfare Benefit Trust (the VEBA
    Trust) to serve as the funding vehicle for a single welfare
    benefit plan, known as the Square D Company and Subsidiaries
    Employee Welfare Benefit Plan (the Plan).    The Plan provided for
    medical, dental, accident, sickness (short-term disability), and
    long-term disability benefits for eligible employees and retirees
    of petitioner and its subsidiaries.    The trustees of the VEBA
    Trust were Dexter S. Free, James M. Vetta, and Donald E. Wilson,
    all of whom are officers of petitioner.    The trust agreement
    authorized the establishment of a depository account for trust
    assets.   Funds of the VEBA Trust were deposited in an account
    with First Interstate Bank of Washington, N.A., pursuant to a
    custodial agreement dated December 31, 1982.    The VEBA Trust was
    a "welfare benefit fund" under section 419(e) at all relevant
    times.
    Prior to 1985, petitioner funded the VEBA Trust during each
    year for that year's employee benefit liabilities (and
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    administrative costs) as they were incurred (although it could
    also have made a contribution for the following year's expected
    liabilities).   Petitioner also funded the VEBA Trust at yearend
    for employee benefit claims that were incurred but unpaid
    (CIBU's) and associated administrative costs based on actuarial
    assumptions made by Prudential Insurance Co. (Prudential),
    petitioner's medical claims adjuster, with respect to medical,
    dental, accident, and sickness claims, and the Wyatt Co. (Wyatt),
    petitioner's actuarial firm, with respect to long-term disability
    claims.   Those assumptions were then reviewed by petitioner's
    risk management department.   Prior to 1985, the VEBA Trust was
    not funded for any other liabilities.     Petitioner contributed a
    total of $57,992,061 to the VEBA Trust between December 31, 1982,
    and December 31, 1984, as follows:
    Trust Yearend               Amount of Contribution
    Dec. 31, 1982                     $4,806,000
    Dec. 31, 1983                     25,761,346
    Dec. 31, 1984                     27,424,715
    Petitioner's 1985 VEBA Trust Contributions
    During November 1985, the VEBA Trust filed with respondent a
    Form 1128 to change its taxable year from a calendar year to a
    fiscal year ending November 30.   This change was approved by
    respondent and became effective as of November 30, 1985.        An
    internal memorandum dated October 3, 1985, from R.G. Halliday, a
    member of petitioner's tax department, to Dexter S. Free, an
    officer of petitioner and trustee of the VEBA Trust, stated that
    - 6 -
    The change in the Trust year would allow the
    contribution to be made in December of future years,
    thus providing a permanent deferral of the related tax
    liability. This change is necessary because the limit
    on the addition to a qualified asset account is tested
    at the Trust's year end. With the contribution in
    December, a full year's funding could be made, and
    therefore, the addition to asset account limits would
    be satisfied (at November 30), and the deduction would
    still fall within Square D's calendar year.
    *     *     *     *      *    *     *
    Conclusion
    The delay in the enactment of the more stringent
    funding requirements passed by the Tax Reform Act of
    1984 has left open a window of opportunity that will be
    closed on January 1, 1986. By accruing or actually
    making a payment to the VEBA, Square D will be able to
    accelerate a deduction which would otherwise be taken
    in the following year. Continuing this funding pattern
    in future years will allow Square D in essence to
    receive a permanent deferral of tax on the amount.
    An internal memorandum dated December 17, 1985, from D.S. Free to
    D. E. Wilson and J. M. Vetta states:
    The Tax Department has proposed that the Trust adopt a
    fiscal taxable year ending November 30th in order to
    avoid the new limitation on pre-funding of the Trust.
    Because the limit on additions to the Trust's reserves
    is tested at the Trust's year end, the fiscal year
    would allow the Trust to meet the test as of November
    30th, which means Square D could pre-fund its entire
    liability for the following year in December of the
    current year.
    Pre-funding of the Trust will allow Square D to
    accelerate the recognition, for tax purposes only, of
    $36,500,000 of 1986 expenses into 1985. Assuming the
    Company's contributions to the Trust do not decline in
    future years, we will have deferred payment of
    $18,250,000 of taxes permanently. If tax reform
    legislation produces a corporate tax decrease, this
    plan will also produce a permanent tax benefit.
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    Petitioner did not change the nature or type of medical, dental,
    accident, sickness, and long-term disability benefits paid
    through the VEBA Trust.   Additionally, petitioner did not change
    the procedures for payment of such benefit claims by the VEBA
    Trust at the time the yearend was changed.
    The VEBA Trust's account balance at First Interstate on
    November 30, 1985, was $1,835,475.       On December 11 and 20, 1985,
    petitioner contributed $700,000 and $300,000, respectively, to
    the VEBA Trust.   On December 27, 1985, petitioner contributed
    $36,600,000 to the VEBA Trust.    Petitioner claimed a deduction on
    its 1985 Federal income tax return for these contributions
    ($37,600,000) and other contributions made earlier during 1985.
    Of the total deduction, $1,937,701 was disallowed by respondent
    as an amount in excess of petitioner's allowable deduction.      In
    accordance with the trust agreement, the VEBA Trust's assets,
    including the December 1985 contributions and the VEBA Trust's
    investment income, were used to pay medical, dental, accident,
    sickness, and long-term disability benefits (and administrative
    costs) under the plan to petitioner's employees and retirees as
    those benefits (and costs) came due during the 1986 plan year.2
    No contributions were made to the VEBA Trust from January 1986
    through November 30, 1986.   The VEBA's account balance at First
    Interstate on November 30, 1986, was $11,297,108.
    2
    References to VEBA Trust years after the yearend change
    include December of the previous year.
    - 8 -
    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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    the VEBA Trust during the 1986 calendar year.   The amount of the
    1986 contribution was based on an actuarial valuation by Wyatt.
    Wyatt ascertained that the maximum deductible contribution for
    1986 for PRMB's was $25,391,059.   Administrative expenses were
    considered to be 6.5 percent of the PRMB's, or $1,650,419, making
    the total deductible amount $27,041,478.   Regarding the
    calculation of the deductible amounts, a December 24, 1986,
    letter to petitioner from Wyatt stated the following:
    As mentioned on the phone, there are rulings several
    years old providing slim guidance to amounts which may
    be deducted for postretirement medical benefits. In
    general, deductible amounts are to be determined on an
    "actuarial basis", and are specified to be in one lump
    sum (or alternatively, over the remaining average
    lifetime) for persons who are already retired, and are
    specified as level amounts (or percentages) over the
    future working lifetimes for persons who are currently
    actively at work.
    These rules would apparently permit the full
    $20,446,059 to be deducted in 1986 for pensioners, and
    approximately $4,945,000 for currently active
    employees. Lesser amounts could, of course, be
    deducted for 1986.
    Petitioner was obligated by the Plan to pay all medical, dental,
    accident, sickness, and long-term disability benefits offered
    under the plan.   The VEBA Trust used its assets, including the
    1986 contribution and its investment earnings, to pay such
    benefits (and administrative costs) to petitioner's employees and
    retirees as those benefits (and costs) came due (or arose) during
    the next 11 months of the Plan year.   During the calendar year
    1987, the VEBA Trust paid medical and dental benefit claims under
    - 10 -
    the plan for retirees in the amount of $2,787,000.   During the
    Plan year, the VEBA Trust paid benefit claims, including related
    expenses, in the amount of $31,572,854.   The VEBA Trust's balance
    at First Interstate on November 30, 1987, was $7,992,215.   The
    balance on December 31, 1986, was $35,058,670.
    The parties have stipulated that the addition to the account
    limit for CIBU's for the trust year ended November 30, 1986, if
    based on the safe harbor limits of section 419A(c), is
    $10,020,825 (plus $617,245 of related administrative costs), and
    if not based on the safe harbor limits, is $7,619,925 (plus
    $395,683 of related administrative costs).   The parties also
    stipulated an increase, pursuant to section 419A(f)(7), in the
    amount of $432,010.
    Petitioner's 1987 VEBA Trust Contribution
    Pursuant to an amendment to the VEBA Trust agreement on
    December 29, 1987, employee welfare benefits for collectively
    bargained employees ceased to be funded through the VEBA Trust
    and were thereafter funded through a separate VEBA trust for
    collectively bargained employees.   On December 29, 1987,
    petitioner contributed $12,400,000 to the VEBA Trust and
    $37,700,000 to the VEBA trust for the collectively bargained
    employees.   The amounts contributed to the VEBA trust for the
    collectively bargained employees are not in issue in the instant
    case.
    - 11 -
    Petitioner calculated the amount of the 1987 contribution
    based on an actuarial valuation by Wyatt.    Wyatt ascertained, as
    of November 30, 1987, that the maximum deductible combined
    contribution for 1987 for postretirement medical benefits was
    $22,476,975.   Of that amount, $13,243,405 was attributable to
    employees and retirees not covered by collectively bargained
    agreements.    In its report dated December 9, 1987, Wyatt stated:
    The maximum tax deductible contribution for 1987 is
    equal to $22,476,975 plus the any [sic] contributions
    for postretirement medical paid but not previously
    deducted. This subtotal must further be reduced by any
    assets attributable to the postretirement medical plan
    remaining in the trust at the end of the plan year.
    Wyatt offered no explanation as to why the associated
    administration expenses were not included.
    The lump-sum present values, as of December 1, 1987, of
    future retiree medical benefits for current pensioners and for
    current active employees not covered by a collectively bargained
    agreement, were $10,732,153 and $23,766,492, respectively.
    Pursuant to the VEBA Trust agreement, the VEBA Trust's
    assets, including the December 29, 1987, contribution, additional
    contributions made during 1988, and the trust's investment
    earnings, were used to pay the cost of providing welfare benefits
    under the Plan to petitioner's employees and retirees as those
    benefits (and costs) arose during the VEBA Trust's 1988 year.
    The VEBA Trust's balance on November 30, 1988, was $1,525,484.
    During the 1988 calendar year, the VEBA Trust paid benefit claims
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    plus related expenses in the amount of $26,902,481, and   medical
    and dental benefit claims under the Plan for retirees in the
    amount of $4,092,000.
    Post-1987 Facts and Circumstances
    Petitioner ceased prefunding the VEBA Trust after the
    December 1987 contribution when, sometime during October 1988,
    the VEBA Trust assets were depleted.   After that time, petitioner
    funded the VEBA Trust as the benefit claims were incurred.
    Because petitioner was no longer prefunding the VEBA Trust,
    during May 1990 it changed its VEBA Trust yearend from November
    30 back to a calendar yearend.
    Petitioner did not disclose in its financial reports that it
    funded a reserve for the provision of postretirement medical
    benefits.   The only reference to the VEBA Trust in petitioner's
    financial reports was to the fact that petitioner received a
    deferred tax benefit as a result of prefunding its group health
    insurance trust.3
    During 1988, for retirees and disabled employees, and during
    1990, for active employees, petitioner began disclosing to such
    employees the existence of the VEBA Trust.   No disclosure was
    ever made to retirees, employees, or collective bargaining units
    3
    For example, petitioner's 1986 annual report indicates that
    $12,420,000 of Federal income taxes (46 percent of petitioner's
    $27 million contribution) was deferred by prefunding the
    company's group health insurance trust, and the deferral of the
    tax effect of prefunding in 1985 in the amount of $13,648,000 was
    reversed.
    - 13 -
    representing its employees that petitioner prefunded a reserve
    within the VEBA Trust to accumulate assets for PRMB's for
    employees.
    Petitioner engaged the accounting firm of Touche Ross & Co.
    (Touche Ross) to audit4 the VEBA Trust's financial statements as
    of December 31, 1986, and November 30, 1987.   Petitioner informed
    Touche Ross of the liabilities of the VEBA Trust.   Although
    petitioner did disclose to Touche Ross that there existed
    liabilities for unrevealed claims for medical, dental, short- and
    long-term disabilities, and associated administrative costs,
    petitioner did not disclose any "liabilities" of the VEBA Trust
    for PRMB's and did not disclose that any portion of the
    contributions made was for the purpose of funding a reserve.
    Consequently, the VEBA Trust's financial statements disclose
    neither a reserve nor a liability for a reserve for PRMB's.
    Financial Accounting Standards Board (FASB) Statement No.
    81, entitled "Disclosure of Post Retirement Health Care and Life
    Insurance Benefits" (FASB 81), was in effect during petitioner's
    1986 year.   FASB section 81.06 provides that employers, at a
    minimum, must disclose (1) a description of the benefits provided
    and the employee groups covered; (2) a description of the
    accounting and funding policies followed for those benefits; and
    4
    Touche Ross's audit was limited, and it did not express an
    opinion as to certain elements of the financial statements.
    Those areas are not relevant to the instant case.
    - 14 -
    (3) the cost of those benefits recognized in the period.      FASB 81
    offers examples of appropriate disclosure statements.    When
    benefits are annually funded based on estimated accruals, a
    proper disclosure could state:    "The estimated cost of such
    benefits is accrued over the working lives of those employees
    expected to qualify for such benefits as a level percentage of
    their payroll costs".   Alternatively, when benefit costs are
    expensed as paid, a proper disclosure could state:    "The cost of
    retiree health care and life insurance benefits is recognized as
    an expense as claims are paid".    Petitioner's disclosure for
    retiree health and life insurance benefits for its 1986 year
    stated: "The cost of retiree health coverage is recognized as an
    expense when claims are paid.    The cost of life insurance
    benefits is recognized as an expense as premiums are paid."
    The parties have stipulated that the addition to the account
    limit for incurred but unpaid claims for the VEBA Trust's year
    ended November 30, 1987, if based on the safe harbor limits of
    section 419A(c)(5), is $11,193,974 (plus $731,907 of related
    administrative costs), and if not based on the safe harbor
    limits, is $5,290,729 (plus $261,232 of related administrative
    costs).
    Discussion
    Summary judgment may be granted if the pleadings and other
    materials demonstrate that no genuine issue exists as to any of
    the material facts and that a decision may be rendered as a
    - 15 -
    matter of law.    Rule 121(b); Sundstrand Corp. v. Commissioner, 
    98 T.C. 518
    , 520 (1992), affd. 
    17 F.3d 965
     (7th Cir. 1994);
    Colestock v. Commissioner, 
    102 T.C. 380
    , 381 (1994).      In the
    instant case, each party has moved for partial summary judgment.
    Neither party argues that there is any material issue of fact
    remaining if we decide the three issues in the manner in which we
    do.
    Legal Framework
    In sections 419 and 419A, enacted as part of the Deficit
    Reduction Act of 1984 (DEFRA), Pub. L. 98-369, 
    98 Stat. 494
    ,
    Congress limited the deductibility of contributions to welfare
    benefit funds (WBF's) in order to restrict an employer from
    taking a current deduction for welfare benefits to be provided in
    the future.   Section 419 provides, in relevant part, the
    following:
    SEC. 419. TREATMENT OF FUNDED WELFARE BENEFIT PLANS.
    (a) General Rule.--Contributions paid or accrued by an
    employer to a welfare benefit fund--
    (1)   shall not be deductible under this chapter,
    but
    (2) if they would otherwise be deductible, shall
    (subject to the limitation of subsection (b)) be
    deductible under this section for the taxable year in
    which paid.
    (b) Limitation.--The amount of the deduction allowable
    under subsection (a)(2) for any taxable year shall not
    exceed the welfare benefit fund's qualified cost for the
    taxable year.
    (c)    Qualified Cost.--For purposes of this section--
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    (1) In general.--Except as otherwise provided in
    this subsection, the term "qualified cost" means, with
    respect to any taxable year, the sum of--
    (A) the qualified direct cost for such
    taxable year, and
    (B) subject to the limitation of section
    419A(b), any addition to a qualified asset account
    for the taxable year.
    (2) Reduction for funds after-tax income.--In the
    case of any welfare benefit fund, the qualified cost
    for any taxable year shall be reduced by such fund's
    after-tax income for such taxable year.
    (3)    Qualified direct cost.--
    (A) In general.--The term "qualified direct
    cost" means, with respect to any taxable year, the
    aggregate amount (including administrative
    expenses) which would have been allowable as a
    deduction to the employer with respect to the
    benefits provided during the taxable year, if--
    (i) such benefits were provided
    directly by the employer, and
    (ii) the employer used the cash receipts
    and disbursements method of accounting.
    (B) Time when benefits provided.--For
    purposes of subparagraph (A), a benefit shall be
    treated as provided when such benefit would be
    includible in the gross income of the employee if
    provided directly by the employer (or would be so
    includible but for any provision of this chapter
    excluding such benefit from gross income).
    *      *    *     *      *    *     *
    (d)    Carryover of Excess Contributions.--If--
    (1) the amount of the contributions paid (or
    deemed paid under this subsection) by the employer
    during any taxable year to a welfare benefit fund,
    exceeds
    (2)   the limitation of subsection (b),
    - 17 -
    such excess shall be treated as an amount paid by the
    employer to such fund during the succeeding taxable
    year.
    Section 419 provides that an employer's deduction for
    contributions to a WBF, including a VEBA, during a taxable year
    may not exceed the fund's "qualified cost" for the taxable year.
    The qualified cost is the sum of qualified direct cost (QDC)
    and any additions to a qualified asset account (QAA), subject to
    the limitations of section 419A(b), less after-tax income for the
    year.   Sec. 419(c).   The QDC is the aggregate amount, including
    administrative expenses, which would have been allowable as a
    deduction to the employer with respect to the benefits provided
    during the tax year if the employer had provided those benefits
    directly rather than through the funds and used the cash receipts
    and disbursements method of accounting.   Sec. 419(c)(3)(A).   Such
    benefits are deemed provided at the time they would have been
    includable in the gross income of the employees if provided
    directly by the employer (disregarding any provision which would
    otherwise exclude such benefits from gross income).   Sec.
    419(c)(3)(B).   If a contribution exceeds the year's qualified
    cost, the excess is treated as a contribution by the employer to
    the fund during the succeeding taxable year.   Sec. 419(d).
    Pursuant to the foregoing framework, a deduction is available
    only for contributions made during the taxable year for benefits
    actually provided during the taxable year (with the exception of
    additions made to QAA's for CIBU's and PRMB's).   Accordingly,
    - 18 -
    employers are prohibited from prefunding benefits expected to be
    provided in later years (other than additions made to QAA's).
    Stated another way, after the enactment of DEFRA, employers are
    no longer allowed to accelerate deductions into one taxable year
    for employee welfare benefits to be provided in later taxable
    years, except as provided in sections 419(c)(1)(B) and 419A.
    Section 419A provides, in relevant part:
    SEC. 419A.    QUALIFIED ASSET ACCOUNT; LIMITATION ON ADDITIONS
    TO ACCOUNT.
    (a) General Rule.--For purposes of this subpart and
    section 512, the term "qualified asset account" means any
    account consisting of assets set aside to provide for the
    payment of--
    (1)   disability benefits,
    (2)   medical benefits,
    (3)   SUB or severance pay benefits, or
    (4)   life insurance benefits.
    (b) Limitation on Additions to Account.--No addition
    to any qualified asset account may be taken into account
    under section 419(c)(1)(B) to the extent such addition
    results in the amount in such account exceeding the account
    limit.
    (c)     Account Limit.--For purposes of this section--
    (1) In general.--Except as otherwise provided in
    this subsection, the account limit for any qualified
    asset account for any taxable year is the amount
    reasonably and actuarially necessary to fund--
    (A) claims incurred but unpaid (as of the
    close of such taxable year) for benefits referred
    to in subsection (a), and
    (B) administrative costs with respect to
    such claims.
    - 19 -
    (2) Additional reserve for post-retirement
    medical and life insurance benefits.--The account limit
    for any taxable year may include a reserve funded over
    the working lives of the covered employees and
    actuarially determined on a level basis (using
    assumptions that are reasonable in the aggregate) as
    necessary for--
    (A) post-retirement medical benefits to be
    provided to covered employees (determined on the
    basis of current medical costs), or
    (B) post-retirement life insurance benefits
    to be provided to covered employees.
    *     *     *     *      *    *     *
    (5) Special limitation where no actuarial
    certification.--
    (A) In general.--Unless there is an
    actuarial certification of the account limit
    determined under this subsection for any taxable
    year, the account limit for such taxable year
    shall not exceed the sum of the safe harbor limits
    for such taxable year.
    (B)   Safe harbor limits.--
    (i) Short-term disability benefits.--In
    the case of short-term disability benefits,
    the safe harbor limit for any taxable year is
    17.5 percent of the qualified direct costs
    (other than insurance premiums) for the
    immediately preceding taxable year with
    respect to such benefits.
    (ii) Medical benefits.--In the case of
    medical benefits, the safe harbor limit for
    any taxable year is 35 percent of the
    qualified direct costs (other than insurance
    premiums) for the immediately preceding
    taxable year with respect to medical
    benefits.
    *     *     *     *      *    *     *
    (i) Regulations.--The Secretary shall
    prescribe such regulations as may be
    - 20 -
    appropriate to carry out the purposes of this
    subpart. Such regulations may provide that
    the plan administrator of any welfare benefit
    fund which is part of a plan to which more
    than 1 employer contributes shall submit such
    information to the employers contributing to
    the fund as may be necessary to enable the
    employers to comply with the provisions of
    this section.
    A fund's QAA consists of any assets set aside to provide for
    the payment of (1) disability    benefits, (2) medical benefits,
    (3) supplemental unemployment compensation benefits (SUB) or
    severance pay benefits, or (4) life insurance benefits.     Sec.
    419A(a).   No addition to a QAA which causes the account balance
    to exceed the account limit may be considered as a portion of the
    qualified cost under section 419(c)(1)(B).    Sec. 419A(b).   The
    account limit for any taxable year consists of two separate
    elements, each of which is in issue in the instant case.
    The first element of the account limit is the amount
    reasonably and actuarially necessary to fund CIBU's as of the
    close of the taxable year, as well as administrative costs
    related to such claims.   Sec. 419A(c)(1).   In the event that the
    CIBU's are not actuarially determined, the deduction can be no
    greater than certain safe harbor percentages.    Sec. 419A(c)(5).
    The second element of the account limit is a reserve funded over
    the working lives of covered employees and actuarially determined
    on a level basis (using assumptions that are reasonable in the
    aggregate) as necessary for PRMB's to be provided to covered
    employees (determined on the basis of current medical costs) or
    - 21 -
    postretirement life insurance benefits to be provided to covered
    employees.   Sec. 419A(c)(2).
    In the event that a taxpayer did not fund a reserve for
    CIBU's or postretirement medical or life insurance benefits, the
    account limit for that taxable year would be zero.      Any amount
    left in the VEBA Trust at yearend in such a case would cause a
    reduction in the deduction equal to that remaining balance
    because that amount would not qualify as QDC, for although the
    requirement that the contribution be made during the taxable is
    satisfied, such remaining funds were not used to provide welfare
    benefits during the taxable year.    Sec. 419(c).
    Issues
    The parties disagree as to whether petitioner is
    automatically (i.e., without having to show reasonableness)
    entitled to use the safe harbor limits of section
    419A(c)(5)(B)(i) and (ii) (discussed infra) in computing the
    addition to the QAA for medical, dental, and short-term
    disability benefit CIBU's, and associated administrative costs.
    The parties also disagree as to whether petitioner's $27 million
    contribution, or a part of that contribution, to its VEBA Trust
    during 1986 funded a reserve over the working lives of the
    covered employees for the provision of PRMB's.      Finally,
    petitioner challenges the validity of section 1.419-1T, Q&A-
    5(b)(1), Temporary Income Tax Regs., 
    51 Fed. Reg. 4324
     (Feb. 4,
    - 22 -
    1986), on the ground that it contradicts the plain language of
    section 419.
    A.     Claims Incurred But Unpaid
    Section 419A(c)(5)(A) provides that, without an actuarial
    certification with respect to an account limit determined under
    section 419A(c), the account limit may not exceed certain "safe
    harbor" limits for the taxable year.     In the case of short-term
    disability benefits, the safe harbor limit for any taxable year
    is 17.5 percent of the QDC (other than insurance premiums) for
    the immediately preceding taxable year with respect to such
    benefits.    Sec. 419A(c)(5)(B)(i).   In the case of medical
    benefits, the safe harbor limit for any taxable year is 35
    percent of the QDC (other than insurance premiums) incurred for
    such benefits in the prior taxable year.     Sec. 419A(c)(5)(B)(ii).
    The safe harbor limits are not automatic safe harbors because a
    taxpayer will not be entitled to use such limits unless they are
    reasonable, as required by section 419A(c)(1).     General Signal
    Corp. & Subs. v. Commissioner, 
    103 T.C. 216
    , 232 (1994).       If a
    taxpayer obtains an actuarial certification, however, it is not
    limited to the safe harbors.
    Petitioner contends that there is no reasonableness
    requirement in section 419A(c)(5), and therefore it is entitled
    to use the safe harbor limits.    Based on those limits, the
    additions to the account limit attributable to medical, dental
    and short-term disability CIBU's are $10,020,825 (plus $617,245
    - 23 -
    of related administrative costs) for the VEBA Trust year ended
    November 30, 1986, and $11,193,974 (plus $731,907 of related
    administrative costs) for the VEBA Trust year ended November 30,
    1987.   The parties have stipulated that the additions to the
    account limit for CIBU's, if not based on the safe harbor limits,
    are $7,619,925 (plus $395,683 of related administrative costs)
    and $5,290,729 (plus $261,232 of related administrative costs)
    for the VEBA Trust years ended November 30, 1986 and 1987,
    respectively.
    Petitioner contends that the phrase in section 419A(c)(1)
    "Except as otherwise provided in this subsection" means that
    any other provision, i.e., section 419A(c)(5), is outside of, and
    not subject to, the general requirement of section 419A(c)(1).
    Accordingly, petitioner contends that, because section 419A(c)(5)
    does not require that the account limit be reasonable, no such
    requirement exists.   Petitioner also argues that the safe harbor
    limits allow taxpayers to avoid the burden of demonstrating that
    additions to the account limit are reasonable, because the only
    way to show reasonableness would be to obtain an actuarial
    certification.
    We disagree with petitioner.   Although Congress sought to
    reduce the cost of compliance by allowing certain additions to
    the account limit to be made without having to incur the cost of
    obtaining actuarial certification, a taxpayer must still show
    that the additions to the account limit for CIBU's during the tax
    - 24 -
    year are reasonable.   In General Signal Corp. & Subs. v.
    Commissioner, supra, we found that the taxpayer's calculations
    were not reasonable where the estimates were not made as of the
    fund's yearend, the computations did not apportion administrative
    costs between insurance premiums and other qualified direct
    costs, and the calculations were made using direct costs from the
    wrong years.   If there were no reasonableness standard, taxpayers
    would automatically be entitled to the safe harbor limits.      The
    legislative history, however, states that "Even if the safe
    harbors are satisfied, the taxpayer is to show that the reserves,
    as allowed under the general standards provided by the bill
    (e.g., claims incurred by unpaid) are reasonable."    General
    Signal Corp. & Subs. v. Commissioner, supra at 232 (quoting H.
    Conf. Rept. 98-861, at 1158 (1984), 1984-3 C.B. (Vol. 2) 1, 412).
    In General Signal, we addressed and rejected much of the
    argument petitioner makes in the instant case.   Petitioner
    neither cites nor addresses the analysis provided in General
    Signal.   Our reasoning in General Signal is supported by the
    legislative history, and, because petitioner has neither argued
    that the additions to the account limit based on the safe harbors
    are reasonable nor offered a compelling argument to abandon the
    General Signal reasoning in the instant case, we will not do so.
    Consequently, we grant respondent's motion for partial summary
    judgment with regard to the CIBU's, and deny petitioner's motion
    for partial summary judgment with regard thereto.    In so doing,
    - 25 -
    we conclude that petitioner is entitled to an increase in the
    account limit attributable to medical, dental and short-term
    disability CIBU's in the amounts of $7,619,925 (plus $395,683 of
    related administrative costs) and $5,290,729 (plus $261,232 of
    related administrative costs) for the VEBA Trust years ended 1986
    and 1987, respectively.
    B.   Reserve for Postretirement Medical Benefits
    Petitioner argues that the phrase "reserve funded over the
    working lives of the covered employees" in section 419A(c)(2)
    describes a method of measuring a liability to provide PRMB's and
    does not require a separate accumulation of assets.     The issue of
    whether an actual reserve must be created has been addressed by
    this Court in General Signal Corp. & Subs. v. Commissioner,
    supra, and Parker-Hannifin Corp. v. Commissioner, 
    T.C. Memo. 1996-337
    .   In those cases, we held that the phrase "reserve
    funded over the working lives of covered employees" requires an
    accumulation of assets equal to the deduction taken, and that
    those assets must be used to pay retiree welfare benefit
    expenses.   In General Signal, we stated that
    the plain language of section 419A(c)(2) suggests that
    Congress intended to allow the accumulation of funds
    over the working lives of employees for the purpose of
    providing postretirement benefits. This interpretation
    is supported by repeated references in the legislative
    history to the accumulation of reserves for purposes of
    funding postretirement benefits and by the reference to
    revenue rulings which dealt with reserves used to
    accumulate funds for postretirement benefits.
    Additionally, the legislative history also establishes
    that Congress intended "to prevent employers from
    - 26 -
    taking premature deductions, for expenses which have
    not yet been incurred". * * * [General Signal Corp. &
    Subs. v. Commissioner, supra at 243-244; emphasis
    added.]
    In both General Signal and Parker-Hannifin Corp., we found that
    no reserve had been created, obviating the need to consider
    whether the contributions were excessive from an actuarial
    standpoint.
    In General Signal, we stated that the phrase "reserve
    funded", on its face, "suggests that Congress intended this
    provision to allow the accumulation of funds by a welfare benefit
    fund for the purpose of providing postretirement benefits."
    General Signal Corp. & Subs. v. Commissioner, 
    103 T.C. at 239
    .
    Where a statute is ambiguous we may look to its legislative
    history and to the reason for its enactment.     United States v.
    American Trucking Associations, 
    310 U.S. 534
    , 543-544 (1940);
    U.S. Padding Corp. v. Commissioner, 
    88 T.C. 177
    , 184 (1987),
    affd. 
    865 F.2d 750
     (6th Cir. 1989).     In General Signal, in light
    of the taxpayer's assertions that the phrase "reserve funded"
    does not have a commonly understood meaning, we assumed arguendo
    that the phrase was ambiguous and considered the legislative
    history.    General Signal Corp. & Subs. v. Commissioner, supra at
    240.
    The relevant portion of the committee report states:
    Prefunding of life insurance, death benefits, or
    medical benefits for retirees.--The qualified asset account
    limits allow amounts reasonably necessary to accumulate
    reserves under a welfare benefit plan so that the medical
    - 27 -
    benefit or life insurance (including death benefit) payable
    to a retired employee during retirement is fully funded upon
    retirement. * * * The conferees intend that the Treasury
    Department prescribe rules requiring that the funding of
    retiree benefits be based on reasonable and consistently
    applied actuarial cost methods * * * [H. Conf. Rept. 98-861,
    at 1157 (1984), 1984-3 C.B. (Vol. 2) 1, 411; emphasis
    added.]
    In General Signal, we concluded that Congress' intent was to
    allow for the accumulation of assets to fund certain
    postretirement benefits.    In the instant case, petitioner has
    offered no arguments, beyond those made and rejected in General
    Signal Corp. & Subs. v. Commissioner, supra, and Parker-Hannifin
    Corp. v. Commissioner, supra, as to whether the language of
    section 419A requires an accumulation of funds in order to create
    a reserve.   Consequently, we hold that such an accumulation of
    funds is necessary.   Accordingly, we next consider whether such
    an accumulation was made.
    We consider all of the facts and circumstances in deciding
    whether a reserve funded over the working lives of covered
    employees for postretirement welfare benefits was created.
    General Signal Corp. & Subs. v. Commissioner, supra; Parker-
    Hannifin Corp. v. Commissioner, supra.
    In General Signal, the taxpayer established its VEBA Trust
    to prefund benefit payments it expected to incur in the calendar
    year following the year during which the contribution was made.
    For contributions to a VEBA made after December 31, 1985, the
    employer's deduction was limited to the employer's qualified
    - 28 -
    direct cost for the year, plus any contributions to a QAA
    reasonably necessary to fund CIBU's and/or to provide a reserve
    for postretirement medical or life insurance benefits.   Secs. 419
    and 419A.   The taxpayer in General Signal increased its VEBA
    contributions during 1986 by making additions to a QAA, although
    it did not intend the VEBA trust to establish a reserve for
    postretirement benefits or accumulate assets for purposes of
    funding a reserve.   The taxpayer's additional QAA contributions
    during 1986 and 1987 totaled $63,300,000.   The VEBA trust's
    balance increased by only $8,782,003 between November 30, 1986,
    and November 30, 1988, while its financial statements showed
    expenses for retiree liabilities of only $8,813,000.
    Accordingly, of the $63,300,000 contributed to fund a reserve, at
    least $45,700,000 ($63,300,000 less $8,782,003 and $8,813,000)
    was used to pay active employee welfare benefits during 1987 and
    1988.   Additionally, the taxpayer made no disclosures on its
    financial reports of the establishment or maintenance of reserves
    for postretirement medical or life insurance benefits, nor did it
    make any disclosure to its employees or their unions of the
    establishment or maintenance of such reserves.   Finally, the
    taxpayer's Form 1024, containing projected yearend balances for
    1986 through 1988, did not show reserves established for any
    purpose.    On the basis of all of the facts and circumstances, we
    concluded that the VEBA trust did not accumulate assets for the
    - 29 -
    purpose of funding a reserve for postretirement medical and life
    insurance benefits.
    In Parker-Hannifin Corp. v. Commissioner, supra, the
    taxpayer argued that during its 1987 tax year it contributed
    $26,913,158 for postretirement employee welfare benefits.      The
    taxpayer neither disclosed any assets set aside for
    postretirement welfare benefits in its 1987 financial statements,
    nor informed its employees of the existence or maintenance of
    such assets.   An internal document indicated that the 1987
    contribution was expected to be depleted by benefit payments over
    the 12 to 18 months following the creation of the VEBA Trust,
    and, in fact, the contribution was depleted by the second month
    of the taxpayer's 1989 year.   During its 1988 year, petitioner
    made no contributions to the VEBA trust, and in the following
    years, only monthly contributions which approximated the monthly
    welfare benefits paid were made to the trust.   The ending balance
    in the VEBA trust for each of the years 1989 and 1990 was zero.
    The taxpayer's Form 1024, Application for Recognition of
    Exemption, did not disclose the existence of a reserve.    Although
    such a disclosure was not required by the Code or the
    regulations, the taxpayer's lack of disclosure, together with
    other evidence, indicated that reserves did not exist.    We
    concluded that the taxpayer did not accumulate assets in the VEBA
    trust for the purposes of establishing a reserve for the payment
    of retiree welfare benefits.
    - 30 -
    In the instant case, respondent's position, simply stated,
    is that, considering all of the evidence, petitioner did not
    create a reserve.
    The VEBA Trust was created by petitioner during 1982.    One
    of its purposes was to accelerate the company's deduction for
    CIBU's.   During 1985, petitioner recognized that statutory
    amendments made by DEFRA, which did not become effective until
    January 1, 1986, would tighten the limitations governing the
    deduction of contributions to VEBA trusts.   An internal
    memorandum dated December 17, 1985, indicates that petitioner
    believed that prefunding the VEBA Trust would allow an
    acceleration of $36,500,000 of 1986 expenses into 1985,
    producing, assuming continued contributions to the trust, a
    permanent deferral of taxes.   The memorandum also notes that if
    tax reform legislation produced a corporate tax decrease,
    prefunding would produce additional tax benefits.   Petitioner
    funded the VEBA Trust with contributions totaling $37,600,000
    during December 1985.   That contribution was the only
    contribution made to the VEBA Trust during its year ending
    November 30, 1986.   The VEBA Trust's beginning balance on
    December 1, 1985, of $1,835,475, its investment income of
    $360,578, and the December contributions were used to pay
    medical, dental, accident, sickness, and long-term disability
    benefits under the plan as they were incurred during the year,
    leaving a yearend balance of $11,297,108 on November 30, 1986.
    - 31 -
    As discussed infra, section 1.419-1T, Q&A-5(b)(1), Temporary
    Income Tax Regs., 
    51 Fed. Reg. 4324
     (Feb. 4, 1986), effectively
    denies the prefunding of claims by using differing taxable year
    ends.   In an internal memorandum dated April 23, 1986, petitioner
    recognized that that regulation could close the "loophole created
    by the statute's ambiguity."   During 1986, petitioner increased
    its section 419A account limit by allegedly creating a reserve
    for PRMB's under section 419A(c)(2).    Wyatt, petitioner's
    actuary, calculated that the present value of petitioner's
    PRMB's, as of December 1, 1986, for retirees was $20,446,059, and
    for current active employees was $46,699,569, the deductible
    portion of which was $4,945,000.    Accordingly, in Wyatt's view
    the total deductible cost of PRMB's for petitioner's tax year
    ending December 31, 1986, was $25,391,059.    The associated
    administrative expenses were $1,650,419, which is 6.5 percent of
    the deductible PRMB's, and when they are added to the cost of the
    PRMB's, the total is $27,041,478.
    On December 30, 1986, petitioner contributed $27 million to
    the VEBA Trust.   That contribution was the only one made to the
    VEBA Trust during the 1986 calendar year.    The balance of the
    VEBA Trust on December 31, 1986, was $35,058,670.    During the
    1987 Plan year, the VEBA Trust paid benefit claims, including
    related expenses, of $31,572,854.    During the 1987 Plan year,
    only $2,787,000 was paid by the VEBA Trust for benefit claims of
    - 32 -
    retirees.   The VEBA Trust's balance on November 30, 1987, was
    $7,992,215.
    Wyatt calculated that the present value of petitioner's
    PRMB's, as of December 1, 1987, for retirees was $10,732,153, and
    for current active employees was $23,766,492, the deductible
    portion of which was $2,511,252, for a total deductible reserve
    contribution of $13,243,405.
    On December 29, 1987, petitioner made a $12,400,000
    contribution to the VEBA Trust.   During the 1988 Plan year, the
    December 29, 1987, contribution, additional contributions made
    during 1988, and the VEBA Trust investment income were used to
    pay the cost of providing medical, dental, accident, sickness,
    and long-term disability benefits (and administrative costs)
    under the Plan to petitioner's employees and retirees as those
    benefits and costs came due during the VEBA Trust's 1988 year.
    During the 1988 calendar year, only $4,092,000 was actually paid
    by the VEBA Trust under the Plan for PRMB's.    The VEBA Trust's
    balance on November 30, 1988, was $1,525,484.
    If there had been an accumulation of assets, the balance
    would have reflected the reserve contributions for 1986 and 1987,
    less any amounts actually paid for PRMB's during 1986 and 1987.
    The 1986 deductible contribution amount (the amount actuarially
    determined as necessary to create a reserve for PRMB's) was
    $27,041,478.   During the 1987 plan year, $2,787,000 was paid by
    the VEBA Trust for PRMB's.   Accordingly, the beginning balance
    - 33 -
    for the 1988 plan year should have been, if properly funded,
    $24,254,478 ($27,041,478 less $2,787,000).   The yearend balance
    on November 30, 1987, was in fact only $7,992,215.   The
    deductible contribution amount for the 1988 plan year was
    $13,243,405.5   During the 1988 year, $4,092,000 was paid for
    PRMB's.   Accordingly, the increase in the required reserve at the
    1988 plan yearend is $9,151,405 ($13,243,405 less $4,092,000).
    Consequently, the total reserve balance should be $33,405,883 at
    the 1988 yearend ($24,254,478 plus $9,151,405).   The November 30,
    1988, yearend balance of the VEBA Trust, however, was $1,525,484,
    which supports a conclusion that, in fact, no reserve was funded.
    Petitioner claims that it continued to fund the reserve for
    PRMB's during 1988.   Petitioner, however, ceased funding the VEBA
    Trust for PRMB's after the December 1987 contribution, and
    sometime during October 1988, the VEBA Trust's assets were
    depleted.   If petitioner had funded a reserve for the provision
    of PRMB's, it would not have depleted the VEBA Trust by October
    1988.   What apparently caused that depletion was that all of the
    assets of the VEBA Trust were used to pay welfare benefit claims
    incurred, which is inconsistent with funding a reserve.
    Although petitioner did make reference to an insurance trust
    on its financial statements, it gave no notice to shareholders,
    5
    This figure represents only the deductible contribution
    amount for employees not covered by collectively bargained
    agreements.
    - 34 -
    employees, retirees or disabled employees of the existence of a
    reserve within the VEBA Trust for the accumulation of assets,
    i.e., the creation of a reserve, for the provision of
    postretirement medical benefits.    This circumstance also supports
    the conclusion that petitioner did not fund or create a reserve.
    Petitioner engaged the services of Touche Ross to audit its
    VEBA Trust financial statements, but it did not disclose to
    Touche Ross the existence of a reserve or liabilities for the
    provision of PRMB's.    Petitioner, however, did disclose its
    reserve for CIBU's, and it was reported on the VEBA Trust's
    financial statements.
    Although FASB 81 requires disclosure of the funding policies
    followed for providing benefits and sets out an example of how a
    company could disclose the fact that it funded benefits on the
    basis of an accrual over the working lives of the covered
    employees, the funding method for the cost of retiree health
    coverage that petitioner actually disclosed was that claims would
    be expensed as they were incurred.      This circumstance is
    additional support for the conclusion that petitioner did not
    fund a reserve for the provision of PRMB's.
    In an attempt to distinguish General Signal Corp. & Subs. v.
    Commissioner, 
    103 T.C. 216
     (1994), and Parker-Hannifin Corp. v.
    Commissioner, 
    T.C. Memo. 1996-337
    , from the instant case,
    petitioner points out that it established the VEBA Trust in 1982
    and used it at all times thereafter to pay employee welfare
    - 35 -
    benefits, whereas petitioner asserts that in General Signal and
    Parker-Hannifin Corp. the VEBA's were short-lived tools utilized
    primarily as a mechanism for accelerating expenses prior to the
    corporate tax rate reduction.    Although it may be true that
    petitioner's VEBA Trust has been used to provide employee welfare
    benefits since 1982, our inquiry is not whether the VEBA Trust
    was used improperly for tax avoidance purposes.    Rather, the
    question is whether petitioner created a reserve for PRMB's
    funded over the working lives of its covered employees.    Such
    reserves were not provided for by the Code for tax years ending
    prior to December 31, 1985.    Petitioner increased its account
    limit for a reserve contribution in 1986 and 1987 but then ceased
    such funding.    Because we must decide whether a reserve was in
    fact created, it is irrelevant how long petitioner utilized a
    VEBA Trust, or that it still has its VEBA Trust.
    For the foregoing reasons, we hold that no reserve was
    created.
    C.    Section 1.419-1T, Q&A-5(b)(1), Temporary Income Tax
    Regs.
    The parties, on brief, agree that under section 419 a
    contribution to a VEBA Trust is not deductible unless it
    satisfies the following two conditions (among others).    First,
    the contribution is deductible only to the extent it is paid to
    the fund during the taxable year.    Sec. 419(a)(2).   The parties
    agree that $28,937,701 was paid or deemed paid to the fund during
    - 36 -
    1986.6    Second, the amount of the deduction shall not exceed the
    fund's qualified cost for the fund's taxable year.    Sec. 419(b);
    sec. 1.419-1T, Q&A-4, Temporary Income Tax Regs., 
    51 Fed. Reg. 4324
     (Feb. 4, 1986).    As discussed supra, the qualified cost is
    the qualified direct cost, $29,651,067, plus any additions to a
    QAA, $8,447,418,7 less the fund's after-tax income for the year,
    $1,512,700, which in the instant case yields $36,585,785.    Sec.
    419(c).    The third limitation, contained in section 1.419-1T,
    Q&A-5(b)(1), Temporary Income Tax Regs., 
    51 Fed. Reg. 4324
     (Feb.
    4, 1986), causes contributions made after the close of a fund's
    taxable year, but during the taxpayer's taxable year, to be
    included in the fund's yearend balance.    The dispute of the
    parties is whether the regulation is valid.
    1.    Mechanics of the Regulation
    Section 1.419-1T, Q&A-5(b)(1), Temporary Income Tax Regs.,
    supra, provides:
    (b)(1) Pursuant to section 419A(i), notwithstanding
    section 419 and § 1.419-1T, contributions to a welfare
    benefit fund during any taxable year of the employer
    beginning after December 31, 1985, shall not be
    deductible for such taxable year to the extent that
    such contributions result in the total amount in the
    6
    This amount comprises the Dec. 30, 1986, contribution of $27
    million and the $1,937,701 disallowed in 1985 and deemed to have
    been contributed on Jan. 1, 1986.
    7
    The $8,447,418 addition to the QAA comprises CIBU's of
    $7,619,725, associated administrative costs of $395,683, and an
    increase pursuant to sec. 419A(f)(7) of $432,010.
    - 37 -
    fund as of the end of the last taxable year of the fund
    ending with or within such taxable year of the employer
    exceeding the account limit applicable to such taxable
    year of the fund (as adjusted under section
    419A(f)(7)). Solely for purposes of this subparagraph,
    (i) contributions paid to a welfare benefit fund during
    the taxable year of the employer but after the end of
    the last taxable year of the fund that relates to such
    taxable year of the employer, and (ii) contributions
    accrued with respect to a welfare benefit fund during
    the taxable year of the employer or during any prior
    taxable year of the employer (but not actually paid to
    such fund on or before the end of a taxable year of the
    employer) and deducted by the employer for such or any
    prior taxable year of the employer, shall be treated as
    an amount in the fund as of the end of the last taxable
    year of the fund that relates to the taxable year of
    the employer. Contributions that are not deductible
    under this subparagraph are in excess of the qualified
    cost of the welfare benefit fund for the taxable year
    of the fund that relates to the taxable year of the
    employer and thus are treated as contributed to the
    fund on the first day of the employer's next taxable
    year.
    The first sentence of the foregoing regulation reiterates
    the rule established by sections 419 and 419A, and General Signal
    Corp. & Subs. v. Commissioner, supra, providing that
    contributions to a WBF which cause the amount in the VEBA Trust
    to be greater than the account limit during a tax year will cause
    a reduction in the deductible amount of any contribution made
    during the year.   The second sentence eliminates the tax benefit
    to be obtained by having the taxable year of a WBF end prior to
    the taxable yearend of a taxpayer.     That sentence causes any
    contribution or portion thereof made to a WBF after the fund's
    yearend, but prior to the taxpayer's yearend (intrayearend
    - 38 -
    contributions), to be "treated as an amount in" the WBF as of the
    end of the WBF's taxable year.8
    In the instant case, the second sentence of the regulation
    would prevent petitioner's deduction on the basis of the
    following calculation.    The fund balance on November 30, 1986,
    was $11,297,108.    Petitioner contributed $27 million to the VEBA
    Trust during December 1986, which under the regulation is deemed
    part of the November 30, 1986, yearend balance, equal to
    $38,297,108.    As was mentioned supra, any balance remaining in
    the VEBA Trust which is greater than the QAA account limit is not
    allowed as a deduction.    Sec. 419A(b).   The deemed yearend
    balance on November 30, 1986 ($38,297,108), less the QAA account
    limit ($8,447,418) equals the amount of the actual contribution
    which is not allowable ($29,849,690) as a current deduction.
    Because the disallowed amount ($29,849,690) is greater than the
    actual contribution for the year ($27 million), there is no
    amount of the 1986 contribution which is allowable as a current
    deduction.     Consequently, the deductible amount for 1986,
    pursuant to section 1.419-1T, Q&A-5(b)(1), Temporary Income Tax
    Regs., supra, is zero.
    Petitioner contends that the limitation in the regulation is
    not supported by sections 419 and 419A and, therefore, is an
    8
    See also sec. 1.419-1T, Q&A-4, Temporary Income Tax Regs.,
    
    51 Fed. Reg. 4324
     (Feb. 4, 1986), which similarly defines the
    taxable year where the employer and the fund have a different
    yearend.
    - 39 -
    impermissible broadening of the statute.     Petitioner changed the
    tax year of the VEBA Trust from a calendar yearend to a fiscal
    year ending November 30 during November of 1985.       Changing the
    yearend of the VEBA Trust was an attempt to avoid the limit on
    additions to a qualified asset account as imposed by section
    419A.     By making a full contribution during December for the next
    year's claims, petitioner sought to take a deduction for the year
    of the contribution while treating the contribution as being made
    in the following year of the VEBA Trust and avoiding the account
    limit imposed by sections 419 and 419A.     Petitioner argues that,
    but for the regulation, its intrayearend contribution, made
    during December 1986, would be deductible in 1986, because that
    contribution would not be required to be included as part of the
    VEBA as of its taxable year ending November 30, 1986.
    Accordingly, petitioner argues, the regulation contradicts the
    plain language of section 419 and is invalid.     Petitioner
    contends that it is therefore entitled to a deduction for the
    1986 contribution without application of the limitation.
    2.     Review of the Regulation
    In General Signal Corp. & Subs. v. Commissioner, supra,
    where the facts were virtually identical to the facts in this
    case, the taxpayer did not argue that section 1.419-1T, Q&A-
    5(b)(1), Temporary Income Tax Regs., supra, was invalid, so we
    left that question for another day.      Id. at 238.   Accordingly, we
    - 40 -
    are now called upon to answer the question of the validity of the
    regulation.
    Generally, temporary regulations are accorded the same
    weight as final regulations.   Redlark v. Commissioner, 
    106 T.C. 31
    , 38 (1996); Peterson Marital Trust v. Commissioner, 
    102 T.C. 790
    , 797 (1994), affd. 
    78 F.3d 795
     (2d Cir. 1996).   Section
    419A(i) provides that the regulations shall be promulgated by the
    Secretary as may be necessary to carry out the purposes of
    sections 419 and 419A.9
    If the intent of Congress on a matter is clear, then the
    Secretary must give effect to the unambiguously expressed intent
    of Congress.   Chevron U.S.A. Inc. v. Natural Resources Defense
    Council, Inc., 
    467 U.S. 837
    , 842 (1983).   If, however, the
    statute is silent or ambiguous with respect to the specific
    issue, a court must let stand any permissible construction of the
    statute by the agency, unless the construction is arbitrary,
    capricious, or manifestly contrary to the statute.   Id. at 843.
    If the administrator's regulation fills a gap or defines a term
    in a way that is reasonable in light of congressional intent, the
    regulation should be given controlling weight.   NationsBank v.
    Variable Annuity Life Ins. Co., 
    513 U.S. 251
    , 257 (1995); Chevron
    U.S.A. Inc. v. Natural Resources Defense Council, Inc., supra at
    9
    Based on our analysis infra, we find it unnecessary to
    decide whether the regulations are interpretive or legislative.
    - 41 -
    843; Bell Fed. Sav. & Loan Association v. Commissioner, 
    40 F.3d 224
     (7th Cir. 1994), revg. 
    T.C. Memo. 1991-368
    .
    3.   Legislative Intent
    Sections 419 and 419(A) were enacted as part of DEFRA, which
    made these sections effective for contributions paid or accrued
    after December 31, 1985, in taxable years ending after December
    31, 1985.   Speaking to the special grant of regulatory authority
    in section 419(e)(3)(C), with respect to the definition of
    "fund", the conference committee report states:
    In prescribing regulations relating to the definition
    of the term "fund," the conferees wish to emphasize
    that the principal purpose of this provision of the
    bill is to prevent employers from taking premature
    deductions, for expenses which have not yet been
    incurred, by interposing an intermediary organization
    which holds assets which are used to provide benefits
    to the employees of the employer. * * * [H. Conf.
    Rept. 98-861, at 1155 (1984), 1984-3 C.B. (Vol. 2) 1,
    409; emphasis added.]
    Although the foregoing portion of the legislative history
    specifically deals with section 419(e), it demonstrates that
    Congress was primarily concerned with preventing employers from
    accelerating deductions prior to their being incurred.    General
    Signal Corp. & Subs. v. Commissioner, 
    103 T.C. at 243
    .    As stated
    above, prior to the enactment of DEFRA, an employer generally
    could deduct a contribution to a WBF in the year it was made or
    accrued even though the corresponding benefits were not
    includable in the income of the recipient until a later year.   H.
    Conf. Rept. 98-861, supra at 1154, 1984-3 C.B. (Vol. 2) at 408;
    - 42 -
    see also Moser v. Commissioner, 
    T.C. Memo. 1989-142
     (allowing a
    deduction for a single contribution to a VEBA which funded all of
    the welfare benefits the VEBA was expected to pay), affd. on
    other grounds 
    914 F.2d 1040
     (8th Cir. 1990).
    Both sections 419 and 419A, in their attempt to end the
    acceleration of deductions for contributions to VEBA's, refer to
    the taxable year, or taxable yearend.    These sections, by their
    terms, do not deal specifically with a situation where the trust
    and the employer use different taxable years, creating a gap in
    the statutes.   The regulation fills the gap by treating
    contributions to a VEBA after the VEBA yearend but prior to the
    taxpayer's yearend as being in the fund at the time of the VEBA
    yearend.10
    Because the regulation is consistent with the intent of
    DEFRA, and because it permissibly fills a gap created by sections
    419 and 419A, we conclude that section 1.419-1T, Q&A-5(b)(1),
    Temporary Income Tax Regs., 
    51 Fed. Reg. 4324
     (Feb. 4, 1986), is
    not impermissibly broader than sections 419 and 419A   and,
    accordingly, we hold that it is valid.    Chevron U.S.A., Inc. v.
    Natural Resources Defense Council, Inc., supra.    We have
    10
    Respondent also argues that the deduction limited by the
    regulation would not otherwise be allowable, as required by sec.
    419(a)(2), i.e., under secs. 162, 446, 461, and 7852, and that
    therefore the regulation is valid. Because we hold that the
    regulation is valid on other grounds, we do not address this
    argument.
    - 43 -
    considered the remaining arguments of the parties and find them
    either without merit or unnecessary to reach.
    To reflect the foregoing,
    An appropriate order
    will be issued.