Opinion
No. 1:01CV2091
October 2, 2002
MEMORANDUM OF OPINION
On August 31, 2001, The Sherwin-Williams Company Employee Health PlanTrust, Plaintiff, initiated the above-captioned action against the United States of America, Defendant, seeking a monetary judgment of $291,628 in overpaid federal income taxes. Specificaily, Plaintiff claims that it mistakenly applied trust tax rates to unrelated business taxable income reported in returns filed for the taxable years ending December 31, 1994, 1995 and 1996. Plaintiff contends that corporate tax rates apply, entitling the Trust to a refund of $291,628 pursuant to amended returns filed with the Internal Revenue Service (hereinafter IRS). See 26 U.S.C. § 511.
The United States denied that Plaintiff was entitled to refunds for the relevant taxable periods and, on July 22, 2002, filed a Motion for Summary Judgment (Docket No. 13). On August 5, 2002, Plaintiff filed a Brief in Opposition (Docket No. 14), and on August 26, 2002, Defendant replied. Plaintiff filed a Surreply on September 19, 2002 (Docket No. 19).
As this is a civil action against the United States of America for the recovery of internal revenue tax alleged to have been erroneously assessed, jurisdiction is properly predicated upon 28 U.S.C. § 1340, 1346. Plaintiff timely filed a refund claim with the Internal Revenue Service before pursuing the instant action giving this Court jurisdiction pursuant to 26 U.S.C. § 7422.
The parties have fully briefed the issues. For the following reasons, the Defendant's motion for summary judgment is GRANTED.
I. FACTS
The facts are undisputed. Plaintiff is the Sherwin-Williams Company Employee Health Plan Trust, Keybank, N.A., Trustee. The Trust reimburses health care claims and administrative expenditures of its current and retired employees and their dependants. Sherwin-Williams Company employees voluntarily participate in the Plan funded by employer and employee contributions and earnings on the Trust's corpus. The Internal Revenue Code (sometimes hereinafter, the Code) recognizes the Plaintiff as a Voluntary Employees' Beneficiary Association ("VEBA"), exempt from federal income tax pursuant to 26 U.S.C. § 501(a) and 501(c)(9).
All section references are to Title 26 of the United States Code unless stated otherwise.
As a VEBA tax exempt trust, Plaintiff is not taxed on its earnings. However, a tax exempt trust is still subject to taxation on its unrelated business taxable income (hereinafter UBTI) as dictated by Sections 511 and 512. Section 512 defines UBTI as, gross income derived from any unrelated trade or business activity regularly carried on by the entity in question. In the present case, the parties agree that the Trust's investment income is the source of its UBTI. The proper rate of tax applicable to Plaintiff's investment income is the sole issue before the Court.
The Trust originally filed its federal exempt organization business tax returns (Form 990T) with the IRS for the 1994, 1995 and 1996 tax years on August 14, 1995, May 6, 1996 and May 12, 1997, respectively (Complaint at ¶¶ 17, 26 and 35). The forms indicated respective tax liabilities for Plaintiff's unrelated business taxable income in the amounts of $864,057, $757,146 and $478,524. Plaintiff calculated the foregoing liabilities utilizing trust tax rates delineated in Section 1(e) of the Internal Revenue Code.
Plaintiff alleges that during an audit of an earlier tax period (1991 and 1992), an examining IRS agent suggested that the tax on the Trust's UBTI (the tax on its investment income) should be assessed at corporate rates provided for in Section 11, not trust rates associated with Section 1(e) (Plaintiffs Response and Memorandum in Opposition at p. 3). Plaintiffs tax counsel concurred with the agent's position. Accordingly, on May 13, 1998, the Trust filed amended tax returns with the IRS for the years ended December 31, 1994, 1995 and 1996 (Complaint at ¶¶ 21, 30, and 39). Applying a corporate tax schedule, Plaintiff calculated its UBTI tax liability as $743,615 for the tax year 1994, $651,840 for the tax year 1995 and $412,644 for the tax year 1996.
On March 2, 2002, the IRS denied Plaintiff's refund claims of $120,442, $105,306 and $65,880 (Complaint at ¶¶ 22, 31 and 40). These amounts represent the difference between the UBTI tax liability originally reported on Plaintiff's tax returns calculated according to Section 1(e) trust rates, and the amount of liability computed in the amended returns employing Section 11 corporate rates.
26 U.S.C. § 1(e) provides the following rate schedule applicable to the taxable income of every estate and every trust:
If taxable income is not over $1,500, the tax is 15%. If taxable income is over $1,500 but not over $3,500, the tax is $225, plus 28% of the excess over $1,500. If taxable income is over $3,500 but not over $5,500, the tax is $785, plus 31% of the excess over $3,500. If taxable income is over $5,500 but not over $7,500, the tax is $1,045, plus 36% of the excess over $5,500. If taxable income is over $7,500, the tax is $2125, plus 39.6% of the excess over $7,500.
26 U.S.C. § 11 provides the following rate schedule applicable to the taxable income of every corporation. The amount of tax imposed shall be the sum of: 15% of so much of the taxable income as does not exceed $50,000, 25% of so much of the taxable income as exceeds $50,000 but does not exceed $75,000, 34% of so much of the taxable income as exceeds $75,000 but does not exceed $10,000,000, and 35% of so much of the taxable income as exceeds $10,000,000.
The schedules specified in the above Sections are identical to schedules in effect during the 1994, 1995 and 1996 taxable years.
Plaintiff alleges entitlement to tax refunds because it is not subject to Code sections imposing trust rates on its unrelated business income. Therefore, the Trust contends that it overpaid its tax obligations for the taxable years ended December 31, 1994, 1995 and 1996. Unable to resolve the issue with the Defendant, Plaintiff instituted the current action.
II. STANDARD OF REVIEW
Summary judgment Is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).
The party moving for summary judgment bears the initial burden of production under Rule 56. The movant can satisfy the burden of production by presenting affirmative evidence that negates an element of the non-movant's claim or by demonstrating "an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325(1986).
If the movant meets this burden, the non-movant must "set forth the specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248(1986). To avoid summary judgment, the non-movant must "make a showing sufficient to establish the existence of an element essential to the party's case, and on which that party will bear the burden of proof at trial." Celotex, 47 U.S. at 322.
"The evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor." Anderson, 477 U.S. at 256(citing Adickes v. Kress Co., 398 U.S. 144, 158-59(1970)). However, the non-movant must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586(1986). "[T]he mere existence of some alleged factual disputes between the parties will not defeat an otherwise properly supported motion [for summary judgment]." Anderson, 477 U.S. at 247-48
III. LAW ANALYSIS
A. UBTI Taxation and the Internal Revenue CodeSubchapter F, Section 501 of the Internal Revenue Code, establishes federal income tax exemption for particular entities. Subsection (a) affords exempt status to "An organization described in subsection (c). . ." Subsection 501(c) publishes a litany of exempt organizations and lists under 501(c)(9), "Voluntary employees' beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents or designated beneficiaries. . ." That Plaintiff maintains its exempt status as a result of Section 501(c)(9) is undisputed.
Although the Sherwin-Williams Trust enjoys 501(a) exemption, it is still subject to federal taxation of its UBTI. The rate schedule applicable to a tax exempt entity's UBTI is prescribed by Internal Revenue Code Section 511. This section is divided into two subsections, each providing separate tax rates. Subsection (a) proclaims that the UBTI of organizations described in 511(a)(2)(A) is subject to "a tax computed as provided in section 11 [the corporate tax schedule]." The Section reads as follows: "(2) Organizations subject to tax. — (A) Organizations described in sections 401(a) and 501(c). — The tax imposed by paragraph (1) [Section 11/corporate tax] shall apply in the case of any organization(other than a trust described in subsection (b). . .) which is exempt, except as provided in this part or part II(relating to private foundations), from taxation under this subtitle by reason of section 501(a)." Accordingly, tax exempt organizations described in 511(a)(2)(A), other than trusts described in 511(b), calculate UBTI tax liability pursuant to corporate rates.
The second part of Section 511, subsection (b), directs taxation of UBTI according to trust rates listed in Section 1(e). 511(b)(2) lists trusts subject to the rate and states, "The tax imposed by paragraph (1) [Section 1(e) trust rates] shall apply in the case of any trust which is exempt, except as provided in this part or part II(relating to private foundations), from taxation under this subtitle by reason of section 501(a) and which, if it were not for such an exemption, would be subject to subchapter J (sec. 641 and following, relating to estates, trusts, beneficiaries, and decedents)." Therefore, any trust described in 511(b)(2) must apply Section 1(e) trust rates to its UBTI.
Section 641(a) states "Applicability of tax. — The tax imposed by section 1(e) shall apply to the taxable income of estates or of any kind of property held in trust. . ."
B. Plaintiff's Position
As a preliminary and general argument, the Sherwin-Williams Trust asserts that the Tax Code does not tax all entities formed as trusts according to the trust schedule prescribed in Section 1(e). Clayton v. United States, 33 Fed. Cl. 628, 640(1995) (Court states that not all trusts and estates are subject to the same tax regime). Plaintiff points out that Congress has mandated by statute that some trusts, such as real estate investment trusts (REITs), grantor trusts and Individual Retirement Accounts (IRAs), be taxed at rates other than trust rates (Plaintiffs Response and Memorandum in Opposition at p. 9).
Specifically, Plaintiff employs a step-by-step analysis of the Internal Revenue Code to conclude that Section 11 corporate rates apply to its unrelated investment income. First, the Trust establishes its exempt status under Section 501. Next, it proceeds to a pivotal Section 511 to discern the appropriate UBTI tax rate. Plaintiff construes Section 511(a) as providing a general rule that the tax on an exempt organization's UBTI is taxed at the corporate rate, unless the organization is a trust described in Section 511(b). Section 511(b)(2) imposes trust rates on a tax exempt trust that, were it not for that trust's exempt status, would otherwise be subject to subchapter J of the Code(sections 641 et. seq. relating to estates, trusts, beneficiaries, and decedents).
Correctly, Plaintiff then asks whether the Trust would ordinarily be subject to subchapter J, were not an exempt entity. Beginning with Section 641(a), Subchapter J states "That the tax imposed by section 1(e) shall apply to the taxable income of estates or of any kind of property held in trust. . ." Plaintiff relies on correlative Treasury Regulation § 1.641(a)-0, entitled, Scope of Subchapter J, for the proposition that as a VEBA Trust, it is not within the scope of subchapter J and thus, not subject to Section 1(e). "[T]he provisions of subchapter J do not apply to employee trusts subject to subchapters D and F, chapter 1 of the Code, and common trust funds subject to subchapter H chapter 1 of the Code." Treas. Reg. § 1.641(a)-0.
Based on the language of treasury Regulation § 1.641(a)-0, Plaintiff contends that, as an employee trust subject to subchapter D(Code sections dealing with deferred compensation) and subchapter F (Section 501 et. seq. providing for exemption), it is not subject to subchapter J absent its 501(a) exempt status. Consequently, Plaintiff is not a trust described in Section 511(b)(2). Because Plaintiff is not a trust described in Section 511(b)(2), it is not subject to that Section's applicable trust rate, and is included in Section 511(a), instituting corporate tax rates for "any organization (other than a trust described in subsection b. . .)."
Plaintiff offers Treasury Regulation § 1.511-2 as evidence that Congress intended to tax the unrelated income of VEBAs at corporate rates. The Trust points out that this Treasury Regulation, expounding upon Section 511, expressly includes VEBAs as organizations subject to a corporate taxation schedule. "In the case of an organization described in section 501(c)(4), (7), (8), (9), (10), (11), (12), (13), (14)(A), (15), (16), or (18), the tax imposed by section 511(a)(1)[the corporate rate] apply only for taxable years beginning after December 31, 1969." Treas. Reg. § 1.511-2(a)(1)(ii).
Plaintiff then cites Treasury Regulation § 511-2(b) as bolstering evidence that Congress means to impose corporate rates of taxation on a VEBA's UBTI. Treasury Regulation § 511-2(b)(1) describes the types of entities subject to Internal Revenue Code trust rates. Plaintiff establishes that, unlike Treasury Regulation § 51 1-2(a)(1)(ii), § 511-2(b)(1) does not expressly include 501(c)(9) VEBAs.
According to the Trust, if Congress had intended 501(c)(9) VEBAs to be taxed as trusts, the IRS would have included 501(c)(9) in the description of entities taxable at trust rates under Regulation 1.511-2(b). Plaintiff deduces the foregoing from the common rule of statutory construction that, "where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion." Bates v. United States, 522 U.S. 23, 29-30(1997),(quoting; Russello v. United States, 464 U.S. 16, 23 (1983);Kondik v. United States, 81 F.3d 655, 657(6th Cir. 1986)).
Finally, the Trust cites to a current action in the Tax Court to establish that it is entitled to use corporate rates on its UBTI, regardless of Congressional intent. In CPL Employee Benefits Trust v. Commissioner, the government assessed corporate tax rates on the UBTI of a trust substantially similar to Plaintiff(Tax Court Petition, Docket No. 2273-01). Plaintiff claims that it is entitled to be treated the same as other similarly situated taxpayers, and therefore, may utilize the corporate schedule in assessing its UBTI tax obligations. Oshkosh Truck Corp. v. United States, 123 F.3d 1477(Fed. Cir. 1997) (Unless there is a rational reason for different treatment, similarly-situated taxpayers should be treated the same).
A synopsis of Plaintiff's position is as follows: Step One — Plaintiff is exempt from federal income tax under Section 501. Step Two — Plaintiff is subject to taxation on its UBTI according to Section 511. Step Three — Section 511(a) offers corporate rates to organizations other than the trusts described in Section 511(b). Step Four — Section 511(b) applies trust rates to trusts that, absent their exemption under 501, are subject to subchapter J, the Code sections applicable to trusts. Step Five — Treasury Regulation § 1.641(a)-0 excludes employee trusts from the scope of subchapter J. Step Six — Plaintiff is "not otherwise subject to subchapter J", and therefore, not subject to the trust rates in Section 511(b), but instead, is required to implement corporate rates in Section 511(a).
C. Government's Position
As a precipice to its position, Defendant relies on the logical notion that non-exempt income earned by trusts, is taxed according to trust rates. As authority, the government points to Section 641(a) providing that, "section 1(e) shall apply to the taxable income of estates or any kind of property held in trust. . ." Reverberating throughout Defendant's Motion for Summary Judgment, is the basic principle that entities organized as trusts, are taxable as trusts. Simply stated, it is Defendant's contention that if Plaintiff wished to utilize corporate rates, it should have organized as a corporation. The government undertakes to discredit Plaintiff's interpretation of specific Code sections and Treasury Regulations through reliance on the well-established principle of statutory interpretation that the law favors rational and sensible construction. American Tobacco Co. v. Patterson, 456 U.S. 63(1982).
The government does not disagree with Plaintiffs contention that Congress has the statutory power to tax entities organized as trusts at rates other than those prescribed in Section 1(e). However, with regards to the UBTI of tax exempt VEBAs, Congress has expressly mandated the imposition of trust rates on Plaintiffs unrelated investment income.
Defendant argues that the Sherwin-Williams Employee Trust is described in Section 511(b)(2) and thus, is subject to the trust tax schedule provided therein. Defendant's contention is that the Trust, but for its tax exempt status, is subject to Code Sections governing trust taxation(in particular, Section 641(a)). The government correctly defines Plaintiffs UBTI as non-exempt income. In other words, the Trust's UBTI from investment activity is ordinary income upon which, the federal government imposes a tax. Here, the ordinary income is earned by a trust and rationally then, taxed according to trust rates provided in the Code.
The government properly describes Section 511(b) as a test to determine whether the UBTI earned by a tax exempt trust is taxed at corporate or trust rates. At what rate would the Trust's income be taxed if it were not exempt from taxation under Section 501 is agreed to be the decisive inquiry. Stated differently, to determine the unrelated income tax on a trust VEBA, Section 511 looks to see how the entity would be taxed if it were not exempt, meaning if it were not subject to subchapter F of the Internal Revenue Code.
Employing this test, Defendant attacks the Trust's interpretation of Treasury Regulation § 1.641(a)-0 as misleading and inconsistent with the language of the Code. The regulation states that trusts are excluded from section 641(assessing trust rates to any kind of property held in trust) if they are subject to subchapter D and F. Subchapter D covers deferred compensation and subchapter F provides for income tax exemption, including and beginning with Section 501. According to the government, the language in Treas. Reg. § 1.641(a)-0 is merely consistent with the fact that trusts subject to subchapters D and F are statutorily exempt from federal income tax. For purposes of determining UBTI however, a VEBA trust is presumed to lose its exemption status granted by Subchapter F, Section 501. Plaintiff cannot be subject to both subchapters D and F when, for the purposes of the tax rate test employed by Section 511(b), the Trust is not afforded the subchapter F exemption. Plaintiff is considered non-exempt and not subject to subchapter F for the limited purpose of determining its UBTI tax liability and thus, the government maintains that the Trust does not satisfy the provision in Treas. Reg. § 1.641(a)-0 excluding trusts from subchapter J and the relatedly imposed trust rate.
The government declares that Plaintiff's reliance on Treas. Reg. § 1.511-2(a)1(ii) to support its position is also misplaced. Treasury Regulation § 1.511 explains the assignment of different tax rates to tax exempt entities formed as "trusts" and those otherwise "organized." The government argues that Plaintiffs citation of Treas. Reg. § 1.511-2(a)(ii), expressly including 501(c)(9) organizations as among those subject to corporate tax rates, requires an interpretation exactly opposite to the one Plaintiff proposes. Defendant attempts to demonstrate the Trust's myopic misinterpretation by quoting the first sentence of the Regulation, stating that § 1.511-2(a), imposing corporate rates, applies to "Organizations other than trusts and title holding companies."
According to the Defendant, the plain reading of the entire Regulation clearly establishes that a VEBA's unrelated income is taxed according to its chosen organizational structure. In other words, the government argues that the inclusion of 501(c)(9) entities in § 1.511-2(a) refers to VEBAs formed as corporations ("organizations"). § 1.511-2(a) is entitled "Organizations other than trusts and title holding companies" and imposes corporate tax rates on UBTI accordingly. § 1.511-2(b) is entitled "Trusts" and provides for UBTI taxation at trust rates. The government claims that this language, coupled with the conscientious integration of other Code sections, disallows Plaintiffs interpretation, and mandates trust rate taxation on UBTI of tax exempt entities organized in trust form.
Defendant responds to Plaintiffs argument, that it is entitled to use corporate tax rates because of the corporate rate assessed in CP L Employee Benefit's Trust's Tax Court petition, by arguing that the relied on proceeding is an isolated circumstance. Defendant contends that plaintiff is similarly situated to all VEBAs in the country and therefore, should be taxed at trust rates according to Congressional intent as evidenced by the Internal Revenue Code. Even assuming arguendo, that corporate rates were applied in the liability of the taxpayer in the Tax Court litigation, that is no reason the error should be perpetuated. Wagner v. United States, 387 F.2d 966(Ct.Cl. 1967); Sirbo Holdings v. C.I.R., 509 F.2d 1220(2nd Cir. 1975) (The making of an error in one case, if error it was, does not give other taxpayers a right to its perpetuation.).
Furthermore, Defendant asserts that Plaintiff is barred from raising the argument of disparate treatment. According to the doctrine of variance, the government argues that the Court lacks jurisdiction over these new claims advanced by the Trust. A taxpayer may not raise at trial a basis for recovery different from that set forth in the claim for refund, since the taxpayer must set forth in detail in his administrative claim each of the grounds upon which he relies, and must set forth facts as to each of those grounds sufficient to apprize the Commissioner of the exact nature of the claim. Treas. Reg. § 301.6402-2(b); Angelus Milling Co. v. Commissioner, 325 U.S. 293(1945); United States v. Felt Tarrant Co., 283 U.S. 269(1931); Bird v. United States, 534 F.2d 1214(6th Cir. 1976). Defendant claims that disparate treatment arguments were not raised in Plaintiff's refund claims and are therefore, barred by the doctrine of variance.
IV. DISCUSSION
A. Tax Refund Actions
Plaintiffs action prays for the refund of federal income taxes previously paid. Accordingly, the Trust bears the burden that its position is correct and that the government's position is incorrect. Welch v. Helvering, 290 U.S. 111(1933). To prevail in an action for overpaid taxes, a plaintiff must "prove by substantial evidence the wrongfulness of the Commissioner's [IRS's] determination." Kraft v. United States, 30 Fed.Cl. 739,757(1994). The Commissioner's tax liability determination is presumed correct. Welch, 290 U.S. at 115(citing Wickwire v. Reinecke, 275 U.S. 101(1927)). "[T]he presumption is that taxes paid are rightly collected upon assessments correctly made by the Commissioner, and in a suit to recover them the burden rests upon the taxpayer to prove all the facts necessary to establish the illegality of the collection." Niles Bement Pond Co. v. United States, 281 U.S. 357, 361(1930) (citing United States v. Anderson, 269 U.S. 422(1926)); Greer v. United States, 408 F.2d 631(6th Cir. 1969).
B. Analysis
At issue is whether a § 501(c)(9) VEBA, organized as a trust, should be taxed at trust or corporate rates on unrelated business taxable income under Internal Revenue Code Section 511. An informed reading of the Code, guided by dominating principles of statutory construction, establishes Congress' intent to impose Section 1(e) trust rates to the UBTI of a VEBA trust. Plaintiffs interpretation of the Code and correlative Treasury Regulations is misleading and inconsistent with meaningful statutory construction. Therefore, the Court finds that the Trust is taxable according to Internal Revenue Code Section 1(e) on its unrelated business taxable income earned during the taxable years ended December 31, 1994, 1995 and 1996. As a result, Plaintiff is not entitled to any refunds and Defendant's Motion for Summary Judgment is GRANTED.
Plaintiff has failed to carry the requisite burden of proof entitling it to income tax refunds. The Trust's myopic reading of the Code fails to overcome the strong presumption of correctness afforded to the Commissioner's tax liability determination. Niles Bement Pond Co., 281 U.S. 361. Plaintiff has simply not proven by substantial evidence the wrongfulness of the government's position, nor has it established the correctness of its own. Welch, 290 U.S. 111; Kraft, 30 Fed.Cl. 757.
Interpretation of Section 511 predominates the issue before the Court. Absent from the instant action are any material factual disputes. Where, as here, the parties are in agreement about the operative facts giving rise to their dispute, a motion for summary judgment is appropriate because the parties raise questions of law, the resolution of which does not involve disputed material facts. Edwards v. Aguillard, 482 U.S. 578 (1987).
When interpreting a statute, a District Court must first determine whether the language of the statute has a plain and unambiguous meaning applicable to the case. Robinson v. Shell Oil Co., 519 U.S. 337, 340(1997). "In construing the tax law, as for any statute, the starting point is the words of the statute, taking the words in their ordinary meaning in the field of interest." Xerox Corp. v. United States, 41 F.3d 647, 658(Fed. Cir. 1994) (citing Bread Political Action Committee v. Federal Election Commission, 455 U.S. 577, 580 (1982), and Perrin v. United States, 444 U.S. 37, 339 (1979)).
The Sherwin-Williams Employee Health Plan Trust is a trust described in Section 511(b) and therefore, is subject to trust rate UBTI taxation. For the limited purpose of determining taxation of the UBTI of exempt entities, Section 511(b) logically iguores the entity's exemption. In other words, nonexempt income is taxed as if it were earned by a non-exempt entity. UBTI is non-exempt income and it is taxed as such. Plaintiff is organized as a trust and the ordinary income in question is subject to federal income tax. Rationally then, this income should be taxed as income earned by a trust, according to a trust rate schedule. The law favors rational and sensible construction. American Tobacco Co., 456 U.S. 71 ("Statutes should be interpreted to avoid untenable distinctions and unreasonable results whenever possible.")
Plaintiff argues that Congress has statutorily mandated taxation of certain trusts (real estate investment trusts (REITs), grantor trusts and Individual Retirement Accounts (IRAs)) at rates other than those imposed by Section 1(e). That Congress has the power to tax entities organized as trusts at non-trust rates is not subject to debate. With regards to the UBTI of a tax exempt VEBA trust however, Congress has not chosen to do so. In fact, an inclusive examination of the relevant tax Code provisions, requires the Court to conclude that Congress intends to tax VEBA trusts according to the schedule delineated in Section 1(e).
Plaintiffs reliance on Treasury Regulation § 1.641(a)-0 is out of context and the Trust's statutory progression is flawed. Treasury Regulation § 1.641(a)-0 describes the scope of subchapter J and does expressly exclude VEBA trusts. However, the reason such trusts are excluded from subchapter J trust taxation is, in part, because of the exemption VEBAs enjoy as a result of Section 501. Plaintiff iguores the fact that Section 511(b) assesses tax liability on non-exempt UBTI as though the Trust were not an exempt entity. The Trust attempts to exploit wording in the Regulation that is inapplicable to the determination of UBTI tax rates. Plaintiff cannot be subject to subchapter J (exemption) when for the purpose of determining UBTI, the Trust is considered non-exempt. Accordingly, Plaintiffs reliance on the one sentence in Treas. Reg. § 1.641(a)-0 is out of context and misleading.
The relevant sentence reads, "the provisions of subchapter J do not apply to employee trusts subject to subchapters D [deferred compensation] and F [exemption, including 501]. . ."
Section 511 dictates UBTI tax rates and must be given operative effect. United States v. Menasche, 348 U.S. 528, 539(1955) (It is a Court's duty to give effect, if possible, to every word of a statute.);United States v. Nordic Village. Inc., 503, U.S. 30(1992). To interpret the Code as Plaintiff has, is to deprive Section 511(b) of any operative effect. The provision in Section 511(b) disregarding a trust's 501 exempt status for the purpose of UBTI rate assessment, prevents Plaintiff from satisfying the subchapter J exclusion in Treas. Reg. § 1.641(a)-0.
An encompassing reading of the Code, considering each provision in its plain and ordinary meaning, evinces Congress' intent to tax UBTI of entities like the Trust at issue, under Section 1(e) trust rates. Section 511 and Treasury Regulation § 1.511-2 demonstrate this intent. Regulation 1.511-2 distinguishes between "organizations" subject to corporate rates and "trusts" subject to trust rates. Regulation § 1.511-2(a) is entitled "Organizations other than trusts and title holding companies" and provides for corporate rates. Included in subsection (ii) of this heading is an "organization" described in 501(c)(9). This Regulation unambiguously imposes Section 11 corporate rates on the UBTI of a 501(c)(9) "organization", other than a trust. Plaintiff is not a 501(c)(9) organization, rather it is a 501(c)(9) trust, and does not qualify for 1.511-2(a) corporate rate taxation.
As a 501(c)(9) trust, Plaintiff is expressly described in Treasury Regulation § 1.511-2(b) "Trusts", which imposes Section 1(e) rates on UBTI. Regulation 1.511-(b) reiterates the test employed in Internal Revenue Code Section 511(b). This test assesses the UBTI of a tax exempt trust as if the entity were not exempt, i.e. not subject to Section 501. The resulting rate is then imposed on the UBTI of an otherwise exempt entity. If the Sherwin-Williams Trust were non-exempt and not subject to 501, it would be taxed as any other trust generating taxable income. This test delineated in Section 501(b) takes into consideration that the UBTI of a tax exempt entity is equivalent to ordinary income earned by an identical, non-exempt entity. Thus, the income in question should be taxed according to rates applicable to non-exempt trusts.
Congress chose to use the terms "organization" and "trust" at different times and in different sections. The Court recognizes this differentiation to convey meaning and insight into Congress' intent in drafting relevant sections. Section 511 and the complimentary Treasury Regulations that aid in its interpretation, do not use "organization" and "trust" interchangeably. In fact, these terms are included in subsection headings, exclusive of one another, that provide for different tax rates. Congress' choice to use these terms definitively, in headings directing taxpayers to apply different tax rates, cannot be disregarded by Plaintiff's nearsighted interpretation of the last sentence in Treas. Reg. § 1.641(a)-0. "[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion" Russello, 464 U.S. 23;United States v. Wong Kim Bo, 472 F.2d 720, 722 (5th Cir. 1972); Walton v. Hammons, 192 F.3d 590 (6th Cir. 1999).
Section 511(a) is entitled "Charitable, etc., organizations taxable at corporation rates." Section 511(b) is entitled "Tax on charitable, etc., trusts." Treasury Regulation § 1.511-2(a) is captioned "Organizations other than trusts and title holding companies" and provides for corporate tax rates. Finally, Treasury Regulation § 1.511-2(b), imposing trust rates, is entitled simply, "Trusts."
It is a well established axiom that similarly-situated taxpayers should be treated similarly. Oshkosh Truck Corp., 123 F.3d 1477; United States v. Kaiser, 363 U.S. 299, 308 (1960) "The Commissioner cannot tax one and not tax another without some rational basis for the difference." Keasler v. United States, 766 F.2d 1277, 1234(8th Cir. 1984). Plaintiff points to a Tax Court petition where the government assessed corporate tax rates on the UBTI of a trust substantially similar to the Sherwin-Williams Employee Health Plan Trust (CPL, Tax Court Petition, Docket No. 2273-01). The government in this case applied corporate tax rates to the UBTI of the Carolina Power and Light Employee Benefits Trust in calculating a deficiency.
The Court considers Plaintiff's argument despite Defendant's suggestion that it lacks jurisdiction pursuant to the doctrine of variance. Application of this doctrine to the argument of disparate treatment is unwarranted. The Trust interprets Section 511 to allow for corporate taxation. The argument proffered by the Plaintiff regarding disparate treatment does not represent grounds or facts other than those set forth in the claim for refund. Angelus Milling Co., 283 U.S. 269. The Commissioner was made well aware of Plaintiff's supporting arguments upon receipt of refund applications and various letters. Citing Tax Court litigation and mentioning the general principle that similar taxpayers are to be treated similarly, does not introduce new and different grounds for recovery, over which, this Court lacks jurisdiction.
This isolated Tax Court case does not however, conclusively establish that the UBTI of all VEBA trusts is taxed at corporate rates, nor does it require a finding that the Commissioner's determination in the present circumstance is clearly wrong. Providing one example in favor of Plaintiff's position in a deficiency proceeding (as opposed to a refund suit), does not amount to substantial evidence to overcome the presumption of correctness afforded the Commissioner's conclusions in the instant action. See Welch, 290 U.S. at 115; Niles Bement Pond Co., 281 U.S. at 361; Greer, 408 F.2d at 631.
The standard for interpreting statutes which impose a tax directs liberal construction in favor of the taxpayer. Porter v. Commissioner, 288 U.S. 436(1933); Weingarden v. Commissioner, 825 F.2d 1027, 1029(6th Cir. 1987); Holmes Limestone Co. v. United States, 946 F. Supp. 1310, 1329(N.D. Ohio 1996). "[I]f doubt exists as to the construction of a taxing statute, doubt should be resolved in favor of the taxpayer."Xerox, 41 F.3d at 658. Although these principles inform Tax Code interpretation, they do not authorize fragmentary exploitation of any one section in the interest of tax liability reduction. The Court is without doubt in this case. The difficult task of deciphering the Internal Revenue Code requires expansive and cohesive construction. An inclusive reading of the relevant Internal Revenue Code sections permits only one conclusion; Section 511 imposes trust rates on the UBTI of a Voluntary Employees' Beneficiary Association organized in the form of a trust.
Plaintiff fails to meet its burden in the instant action. The arguments Plaintiff advances in favor of corporate taxation give way to the presumption of correctness bestowed upon the IRS's determination in this refund action. The Trust does not provide substantial evidence to establish that its position is correct and that the government's position is incorrect. Furthermore, the Trust's interpretation of the Code is simply incorrect, and Plaintiff properly employed Section 1(e) trust rates in its original UBTI tax liability calculations. Accordingly, Plaintiff is not entitled to any income tax refund.
Plaintiff also argues that Congress intends to tax VEBAs at the same rates as its sponsoring entity (Plaintiffs Response and Memorandum in Opposition at pp. 14-15). This argument is unsupported by any statutory language and Plaintiff advances no specific evidence of such Congressional intent. The Court's interpretation of the relevant Code sections renders this generalized statement unpersuasive.
V. CONCLUSION
For the foregoing reasons, the Motion for Summary Judgment of Defendant United States of America (Docket No. 13) is GRANTED. Plaintiffs claim is dismissed with prejudice each party to bear its own costs.
IT IS SO ORDERED.
ORDER
Pursuant to the Memorandum of Opinion issued in the above-captioned case this date, Defendant's Motion for Summary Judgment (Docket No. 13) is GRANTED. Plaintiffs claim is dismissed with prejudice each party to bear its own costs.
IT IS SO ORDERED.