                           120 T.C. No. 5



                       UNITED STATES TAX COURT



     WELLS FARGO & COMPANY (f.k.a. NORWEST CORPORATION) AND
                  SUBSIDIARIES, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.    7620-98, 12136-98,      Filed February 13, 2003.
                   19891-98, 7282-99,
                   12484-99.1



          For the years 1991-94, Ps made contributions to a
     voluntary employee benefit trust (the postretirement
     medical   trust)    for   the   purpose   of    providing
     postretirement medical benefits to their employees. For
     1991, Ps’ actuary computed the present value of future
     postretirement medical benefits for active employees to
     be $14,096,473 and for retired employees to be
     $27,759,057. The actuary divided the $14,096,473 for
     active employees by the average actuarial present value
     of future service to produce a 1991 funding amount of
     $2,930,660 for active employees. The actuary determined
     that the $27,759,057 for retired employees could be fully
     funded in 1991.     Ps contributed $30,689,717 to the


     1
          These cases have been consolidated for trial, briefing,
and opinion solely with respect to the issue involved herein.
                              - 2 -

     postretirement medical trust in 1991 and, on Ps’
     consolidated return for 1991, claimed a deduction for the
     contribution as an addition to a “qualified asset
     account” pursuant to sec. 419A(b), I.R.C.

          R determined that Ps’ method for computing the 1991
     contribution for postretirement benefits for retirees was
     improper and resulted in a contribution that exceeded the
     account limit for a reserve under sec. 419A(c)(2), I.R.C.
     R further determined deficiencies for years 1992-94 as a
     result of the determined overfunding in 1991.

          Held, with respect to an employee who is retired
     when the reserve is created, the present value of that
     employee’s projected benefit may be allocated to the year
     the reserve is created. Accordingly, Ps’ contributions
     to the postretirement medical trust for 1991 did not
     cause the qualified asset account to exceed the account
     limit under sec. 419A(b), I.R.C., with respect to the
     reserve for postretirement medical benefits provided in
     sec. 419A(c)(2), I.R.C.



     Walter A. Pickhardt, Mark A. Hager, and Andrew T. Gardner,

for petitioners.

     Alan M. Jacobson, Randall P. Andreozzi, Christa A. Gruber,

and James S. Stanis, for respondent.



                             Contents

FINDINGS OF FACT   . . . . . . . . . . . . . . . . . . . . . . . 4

A.   Background . . . . . . . . . . . . . . . . . . . . . . . . 5

B.   Norwest’s Welfare Benefit Plans    . . . . . . . . . . . . . 6

C.   Financial Accounting Standards Board Statement of
     Financial Accounting Standards No. 106 . . . . . . . . . . 8

D.   Norwest’s Contributions to the Postretirement Medical
     Trust . . . . . . . . . . . . . . . . . . . . . . . . .     11
     1.   Funding the Postretirement Medical Trust for 1991 .    11
                                  - 3 -

      2.    Funding the Postretirement Medical Trust for 1992-
            94 . . . . . . . . . . . . . . . . . . . . . . . .         12
      3.    Mercer’s Actuarial Assumptions for the 1991-94
            Contributions to the Postretirement Medical Trust .        13
     4.     Contributions to the Postretirement Medical Trust .        15

E.   Respondent’s Determinations . . . . . . . . . . . . . . .         15

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . .          15

A.   Statutory Framework:      Sections 419 and 419A    . . . . . .    15

B.   Method for Computing the Account Limit With Respect to a
     Reserve . . . . . . . . . . . . . . . . . . . . . . . .           17
     1.   Actuarial Cost Methods . . . . . . . . . . . . . .           18
          a.   Aggregate Cost Method . . . . . . . . . . . .           20
          b.   Entry Age Normal Cost Method . . . . . . . . .          20
          c.   Individual Level Premium Cost Method . . . . .          21
     2.   Computations by the Experts . . . . . . . . . . . .          22
          a.   Mr. Cohen . . . . . . . . . . . . . . . . . .           22
          b.   Mr. Scharmer . . . . . . . . . . . . . . . . .          23
          c.   Mr. Daskais . . . . . . . . . . . . . . . . .           25
     3.   Positions of the Parties . . . . . . . . . . . . .           33
     4.   Statutory Construction . . . . . . . . . . . . . .           34
     5.   The Statute . . . . . . . . . . . . . . . . . . . .          35
          a.   Reserve . . . . . . . . . . . . . . . . . . .           36
          b.   Reserve Funded Over the Working Lives of the
               Covered Employees and Actuarially Determined
               on a Level Basis . . . . . . . . . . . . . . .          39
               (i) Reserve Funded Over the Working Lives of
                    the Covered Employees . . . . . . . . . .          40
               (ii) Reserve Actuarially Determined on a Level
                    Basis . . . . . . . . . . . . . . . . . .          46

C.   Investment Rates . . . . . . . . . . . . . . . . . . . .          51



     JACOBS, Judge:     Respondent determined deficiencies in Federal

income     tax   and   accuracy-related   penalties    with   regard   to

petitioners’ consolidated returns for 1990-94 as follows:
                                      - 4 -

                                              Addition to Tax
            Year         Deficiency             Sec. 6662(a)

            1990         $52,073,344             $5,161,509
            1991         216,338,093             23,353,180
            1992         417,310,889              1,047,868
            1993          86,406,356              5,655,276
            1994          62,493,719              5,135,972

Numerous issues have been raised as a consequence of respondent’s

determinations; many of these issues heretofore have been resolved.

The issue to be decided herein concerns the amounts petitioners may

deduct for years 1991-94 for contributions made to a voluntary

employee benefit association (VEBA) trust to provide postretirement

medical     benefits     to   covered    employees     and    their     eligible

dependents.       To determine the allowable amounts, we first must

decide the proper method to be used in computing the reserve under

section 419A(c)(2).2      Then we must decide whether petitioners used

reasonable investment rates in their actuarial computations.

                              FINDINGS OF FACT

     Some    of    the   facts   have   been     stipulated     and   are   found

accordingly.       The stipulations of facts and the attached exhibits

are incorporated herein by this reference.




     2
          All section references are to the Internal Revenue Code
as in effect for the years in issue.
                                      - 5 -

A.   Background

     Norwest    Corp.3    (Norwest)    is     a   multibank     holding   company

organized in 1929.       It owns substantially all of the outstanding

capital stock of numerous commercial banks in Minnesota, Iowa,

South Dakota, Nebraska, Wisconsin, North Dakota, Montana, Wyoming,

Illinois, Indiana, and Arizona.             Norwest also owns subsidiaries

engaged in various businesses related to banking, principally

mortgage     banking,     equipment     leasing,      agricultural        finance,

commercial    finance,    consumer     finance,     securities     dealings    and

underwriting,     insurance      agency     services,     computer     and    data

processing services, corporate trust services, and venture capital

investments.     For each of the years at issue, Norwest and its

subsidiaries filed consolidated Federal income tax returns.

     On November 2, 1998, Wells Fargo & Co. was merged into a

wholly owned subsidiary of Norwest.                 Simultaneously with the

merger, Norwest changed its name to Wells Fargo & Co.              Hereinafter,

reference to Norwest is to Norwest and its subsidiaries before the

merger with Wells Fargo & Co.

     When Norwest filed the petitions in docket Nos. 7620-98 and

12136-98 (which was before the merger), its principal place of

business was in Minneapolis, Minnesota.             At the time Wells Fargo &

Co. filed the petitions in docket Nos. 19891-98, 7282-99, and



     3
          Norwest        Corp.   was      formerly      known     as   Northwest
Bancorporation.
                               - 6 -

12484-99 (which was after the merger), its principal place of

business was in San Francisco, California.

B.   Norwest’s Welfare Benefit Plans

     On January 1, 1930, Norwest established the Norwest Corp.

Medical Plan, also known as the Norwest Corp. Hospital-Medical Plan

(the medical plan).    The medical plan is a self-insured welfare

plan providing for the payment (or reimbursement) of all or a

portion of covered medical expenses incurred by Norwest’s eligible

employees (including eligible retired employees) and their eligible

dependents.   Since June 1, 1957, the medical plan has provided

postretirement medical benefits (i.e., medical benefits for its

retirees), pursuant to a rider issued by Prudential Insurance Co.

of America, relating to Norwest’s group health insurance policy.

     Over the years, Norwest established other plans, in addition

to the medical plan, to provide benefits for Norwest’s eligible

employees (including under some plans retired employees) and their

eligible dependents.   The employee benefit plans include a long-
                              - 7 -

term disability plan,4 a dental plan,5 a severance plan,6 an HMO

premium plan,7 and a choice plus medical plan.8

     On November 11, 1978, Norwest established, effective January

1, 1979, a VEBA trust, under section 501(c)(9), to fund the

employee benefit plans then in existence (i.e., the medical plan

and the long-term disability plan).     This trust was originally

called the “Northwest Bancorporation Employee Benefit Trust” and is

hereinafter referred to as the master trust.   Over the years, the

master trust was amended to fund the dental plan and the HMO




     4
          On Aug. 1, 1969, Norwest established the Norwest Corp.
Long-Term Salary Continuation Plan (now known as the Norwest Corp.
Long-Term Disability Plan) (the long-term disability plan). The
long-term disability plan is a combination self-insured/insurance
welfare benefit plan providing monthly disability income benefits
for eligible disabled employees.
     5
          On Jan. 1, 1980, Norwest established the Norwest Corp.
Dental Plan (the dental plan). The dental plan is a combination
self-insured/insured welfare benefit plan providing for the payment
or reimbursement of all or a portion of covered dental expenses.
     6
          The Norwest Corp. Severance Pay Plan is a self-insured
welfare plan providing for the payment of severance benefits for
Norwest’s eligible employees.
     7
          Norwest established the Norwest Corp. HMO Premiums Plan,
an insured welfare benefit plan providing for the payment or
reimbursement of all or a portion of covered medical expenses.
     8
          Norwest established the Norwest Corp. Choice Plus Plan
(the choice plus medical plan), effective Jan. 1, 1993, which was
funded by the master trust. The choice plus medical plan is a
self-insured   welfare  plan   providing  for   the  payment   or
reimbursement of all or a portion of covered medical expenses.
                                       - 8 -

premium plan.        The master trust was amended and restated effective

January 1, 1991; the name of the master trust was changed to the

Norwest Corp. Employee Benefit Trust.

C.   Financial Accounting Standards Board Statement of Financial
     Accounting Standards No. 106

     From 1957 to 1991, Norwest paid medical benefits for retired

employees as claims were submitted; i.e., on a “pay-as-you-go”

basis.         For   financial    accounting     and   tax   purposes,    Norwest

recognized these costs when the benefits were paid.

     In    1990,     new   financial   accounting      rules   for   nonpension,

postretirement benefits were promulgated in Statement of Financial

Accounting Standards No. 106 (SFAS 106). Pursuant to SFAS 106, for

financial accounting purposes, employers must accrue (during the

employment of an employee) the cost of future health care benefits

to be paid to the employee after retirement.9                Thus, because SFAS

106 applies to a postretirement benefit plan regardless of the

means     or    timing     of   funding,   the    employer     cannot    postpone

recognition of the cost of the employee’s postretirement benefit by

contributing at the time of retirement a lump sum equal to the




     9
          “Attribution period” is the period of an employee’s
service to which the expected postretirement benefit obligation for
that employee is assigned.       Generally, the beginning of the
attribution period is the employee’s date of hire and the end of
the attribution period is the employee’s full eligibility date. An
equal amount of the expected postretirement benefit obligation is
attributed to each year.
                                - 9 -

present value of the employee’s benefit (terminal funding).       SFAS

106, par. 8.

     SFAS 106 permits an employer to immediately recognize, at the

date of initial application of SFAS 106, obligations that the

employer had not accrued for financial purposes in prior years

(transition    obligation10).   SFAS    106,   par.   260.   Immediate

recognition is not permitted after the initial application of SFAS

106.11

     Norwest adopted SFAS 106, effective January 1, 1992.        As a




     10
          The transition obligation recognized upon initial
application of SFAS 106 does not include “(a) any previously
unrecognized post-retirement benefit obligation assumed in a
business combination accounted for as a purchase, (b) a plan
initiation, and (c) any plan amendment that improved benefits, to
the extent that those events occur after the issuance of * * *
[SFAS 106].” SFAS 106, par. 261.
     11
          The Financial Accounting Standards Board concluded that
to permit immediate recognition at any subsequent time would result
in too much variability in financial reporting for a long period of
time.
                               - 10 -

consequence, Norwest elected to recognize as an immediate expense

its unrecognized transition obligation.12       The amount of this

obligation was $71.7 million (after tax).

     On December 20, 1991, Norwest established the Norwest Corp.

Employee   Benefit   Trust   for   Retiree   Medical   Benefits   (the

postretirement medical trust), effective December 16, 1991.13      The

postretirement medical trust funded postretirement medical benefits

to be provided to all employees, both active and retired (other

than “key employees”), under Norwest’s medical plan. Simultaneously

with the creation of the postretirement medical trust, Norwest

amended the master trust, effective December 16, 1991, to eliminate

the master trust’s responsibility to pay postretirement medical

benefits for all but key employees.




     12
          SFAS 106, par. 518, defines an “unrecognized transition
obligation” as the unrecognized amount, as of the date SFAS 106 is
initially applied, of “(a) the accumulated post-retirement benefit
obligation in excess of (b) the fair value of plan assets plus
accrued post-retirement benefit cost or less any recognized prepaid
post-retirement benefit cost.”       “Accumulated post-retirement
benefit obligation” is defined by SFAS 106, par. 518, as the
actuarial present value of benefits attributed to employee service
rendered to a particular date.     Since Norwest historically had
neither paid nor deducted the benefits until incurred, the
unrecognized transition obligation was equal to the accumulated
postretirement benefit obligation.
     13
          Effective Jan. 1, 1991, Norwest also established a
separate VEBA trust to fund the liabilities for the severance plan.
By an amendment to the master trust, effective Jan. 1, 1993,
Norwest merged the severance plan into the master trust.
                                          - 11 -

D.     Norwest’s Contributions to the Postretirement Medical Trust

       For the years 1991-94, Norwest made contributions to the

postretirement      medical       trust      for     the    purpose       of   providing

postretirement medical benefits.

       1.   Funding the Postretirement Medical Trust for 1991

       During   the       years     at     issue,     William    M.       Mercer,    Inc.

(hereinafter referred to as Mercer), a national actuarial firm,

prepared actuarial funding valuations for Norwest’s pension plans

and postretirement medical plans.                   Sometime in late 1990/early

1991, Norwest expressed to Mercer an interest in funding its

retiree medical benefits plan.               Norwest understood that employers

were    permitted     a    tax    deduction         for    funding    a    reserve    for

postretirement medical benefits.

       On April 14, 1992, Mercer prepared and presented to Norwest a

valuation report entitled “Norwest Corporation Actuarial Funding

Valuation of the Post-retirement Medical Plans as of January 1,

1991" (the 1991 valuation).               Mercer computed the present value of

future medical benefits to be $14,096,473 for active employees and

$27,759,057     for       retired        employees.         In   determining        these

computations, Mercer used a pretax investment rate assumption of 9

percent and an after-tax investment rate of 5.5 percent.                            Mercer

divided the $14,096,473 for active employees by the “average

actuarial present value of future service” for the active employees

(4.81) to produce a 1991 funding amount of $2,930,660 for active
                                 - 12 -

employees.    Mercer determined that, because the retired employees

had no remaining working life, the present value of future benefits

for retired employees ($27,759,057) could be funded in 1991.

Mercer believed that Norwest’s resulting reserve for active and

retired    employees   ($30,689,717)   would   be   within    the   section

419A(c)(2) account limit.

     On the basis of the 1991 valuation report, Norwest contributed

$30,689,717 to the postretirement medical trust in 1991.            On the

consolidated return for 1991, Norwest claimed a deduction for the

contribution as an addition to a “qualified asset account” pursuant

to section 419A(b).

     2.     Funding the Postretirement Medical Trust for 1992-94

     At the request of Norwest, Mercer prepared actuarial funding

valuation reports as of January 1 for each year 1992-94, relating

to the funding of the postretirement medical trust (the 1992-94

valuation reports).      In the 1992-94 valuation reports, Mercer

computed     the   end-of-year   contributions      to   be   $6,859,600,

$11,308,043, and $12,247,933, respectively.         Mercer calculated the

contribution amount to be equal to a fraction.           The numerator of

the fraction was the present value of future benefits for active

employees and retirees, reduced by the sum of the value of (a) the

postretirement medical trust assets and (b) the section 401(h)

account assets.     The denominator of the fraction was the average

present value of future working lifetimes of the employees.             The
                                    - 13 -

present    value   of   the   future   working    life    of    an     employee   is

comparable to the present value of an annuity (computed with the

actuarial interest rate used by the plan) that pays $1 each year

until the employee is expected to retire.

      3.      Mercer’s   Actuarial   Assumptions  for   the   1991-94
              Contributions to the Postretirement Medical Trust

      In order to compute the present value of future benefits in

the   1991-94    valuation    reports,   Mercer    made    certain       actuarial

assumptions, including investment rates, the number of employees

who   would     “retire,   die,   terminate    their      services      or   become

disabled, their ages at termination, and their expected benefits.”

Mercer requested Norwest to provide an estimate of Norwest’s

effective tax rates for years 1991-94. Norwest advised Mercer that

those tax rates would be approximately 39 percent in 1991-92 and 40

percent in 1993-94.

      The pretax and after-tax investment rates Mercer used in the

1991-94 valuation reports were as follows:

                                       1991       1992         1993      1994

      Pretax investment rate           9.00%      8.00%        6.00%     6.00%
      After-tax investment rate        5.50       4.90         3.60      3.60

      The following chart illustrates the various factors disclosed

in the 1991-94 valuation reports (minor computational discrepancies

are unexplained):
                                                   - 14 -


                                                                 Valuation Date
                                       1/1/91               1/1/92            1/1/93           1/1/94
1. Actuarial present value of
   projected benefits
     Active employees                $13,361,586        $38,521,857        $62,860,146       $83,594,015
     Retired employees                26,311,902         36,694,928         47,731,960        48,947,859
      Total                           39,673,488         75,216,785        110,592,106       132,541,874
2. Actuarial value of assets
     VEBA                                -0-             30,736,554         30,176,217        39,940,676
     401(h)                              -0-              1,125,467          1,172,269         7,598,653
     Total                               -0-             31,862,021         31,348,486        47,539,329
3. Actuarial present value of
   future normal costs [1-2]1         13,361,588         43,354,764         79,243,620        85,002,545
4. Actuarial present value of
   future service                       4.81                 6.63              7.26             7.19
5. Normal cost at beginning of
   year [3/4]                          2,777,877            6,539,180       10,915,099        11,822,329
6. Maximum contribution2
   a. Paid at beginning of year       29,089,779            6,539,180       10,915,099        11,822,329
   b. Interest to yearend              1,599,938              320,420          392,944           425,604
   c. Paid at yearend [a + b]         30,689,717            6,859,600       11,308,043        12,247,933


1
     In 1991, this is the present value of active benefits only, excluding the 1991 net benefit costs.
2
      In 1991, this includes the normal cost for active participants, plus the entire present value for
those retired as of Jan. 1, 1991, excluding the retirees’ 1991 net benefit costs.
                                    - 15 -


      4.   Contributions to the Postretirement Medical Trust

      In 1991-94, Norwest made contributions to the postretirement

medical    trust    of   $30,689,717,      $2,170,000,      $13,791,600,   and

$12,247,933,      respectively.      During   1992-94,   Norwest’s    retired

employees made contributions to the postretirement medical trust of

$473,832.62, $736,176.25, and $784,906.22, respectively.              In 1993,

$175,216    was     transferred     from     the   master     trust   to   the

postretirement medical trust.

E.   Respondent’s Determinations

      Respondent determined that Norwest’s method for computing the

1991 contribution for postretirement benefits for retirees was

improper and resulted in a contribution that exceeded the account

limit for a reserve under section 419A(c)(2).            As a result of the

1991 overfunding, respondent determined that the reserve was also

overfunded in 1992-94.

                                    OPINION

A.    Statutory Framework:        Sections 419 and 419A

      Sections 419 and 419A limit deductions for contributions made

by a taxpayer to an employee welfare benefit fund.14              In general,

section 419(a)(1) denies a deduction for contributions paid or

accrued by an employer to a welfare benefit fund.             However, if the

contributions would otherwise be deductible, then section 419(a)(2)


      14
          For purposes of secs. 419 and 419A, a welfare benefit
fund includes a VEBA that is exempt from taxation under sec.
501(c)(9).
                                  - 16 -

permits a deduction for the taxable year in which the contribution

is paid, subject to the limitation contained in section 419(b).

      Section 419(b) limits the deduction for any taxable year to

the welfare benefit fund’s “qualified cost”.15 The fund’s qualified

cost is equal to the sum of the fund’s “qualified direct cost” for

the year, and, subject to the limitation of section 419A(b), any

addition to a “qualified asset account” for the year.16                  Sec.

419(c)(1).

      Section 419A(a) defines a qualified asset account as any

account consisting of assets set aside to provide for the payment

of    (1)   disability   benefits,   (2)   medical     benefits,   (3)     SUB

(supplemental compensation benefit) or severance pay benefits, or

(4) life insurance benefits.         Additions to a qualified asset

account are included in the fund’s qualified cost only to the

extent they do not exceed the fund’s “account limit” for the

taxable year.     Sec. 419A(b).

       For purposes of the present case, the account limit includes:

(1) The amount reasonably and actuarially necessary to fund claims

that are incurred but unpaid as of the close of the taxable year

and   related   administrative    costs    and   (2)   the   amount   of   an



      15
          A contribution to a welfare benefit fund in excess of
that year’s qualified cost is treated as a contribution by the
employer to the fund during the succeeding taxable year.   Sec.
419(d).
       16
          The fund’s qualified cost for the taxable year is reduced
by the fund’s after-tax income for that year. Sec. 419(c)(2).
                                    - 17 -

additional 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

postretirement     medical    and   life     insurance   benefits.        Sec.

419A(c)(1) and (2).

     At issue in this case is the computation of the account limit

for the reserve necessary for postretirement medical benefits

provided under section 419A(c)(2).            Petitioners and respondent

disagree as to the proper method for computing the account limit

for “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

post-retirement    medical    benefits”.        Additionally,   respondent

asserts that the investment rates petitioners used in computing the

reserve were too low.

B.   Method for Computing the Account Limit With Respect to a
     Reserve

     For   1991,   Mercer    computed   Norwest’s    contribution    to    the

postretirement medical trust by including (1) the present value of

postretirement medical benefits for the active employees amortized

over the employees’ remaining working lives, and (2) the entire

present value of the postretirement medical benefits for the

retirees funded in 1 year (the Mercer method).           Respondent asserts

that Mercer’s methodology in computing Norwest’s 1991 contribution

for medical benefits to retirees was improper and resulted in a
                                 - 18 -

contribution that exceeded the account limit for a reserve under

section 419A(c)(2).17    For the reasons set forth below, we disagree

with respondent’s assertion.      To the contrary, we approve of the

Mercer method used in computing Norwest’s 1991 contribution to the

postretirement trust.

     The parties rely on expert reports and testimony to explain

actuarial    methods    appropriate   for   computing   a   reserve   for

postretirement medical benefits described in section 419A(c)(2) and

to compute the account limit using those methods.            Petitioners

presented the reports and testimony of two expert witnesses:

Messrs. Ira Cohen and Gary Scharmer.         Respondent presented the

expert report and testimony of Mr. Richard Daskais.          The experts

generally agree that actuarial cost methods approved for computing

the funding of defined benefit pension plans may be used for

computing the funding of postretirement medical benefits.

     1.     Actuarial Cost Methods

     In calculating reserves, actuaries first calculate the stream

of benefits to be paid from the trust (the year-by-year          benefit

payments to be made to covered employees in future years) and then

calculate the present value of that stream by discounting the

payment each year at a determined interest or investment rate.        The

stream of benefit payments is based on actuarial assumptions.         For

postretirement medical benefits, these assumptions include those as


     17
          Respondent does not dispute the method petitioners used
for computing the contribution for the years 1992-94.
                                  - 19 -

to when employees will retire, how long they will live after

retirement, how many will have spouses entitled to benefits, the

annual cost of the benefits for each retired employee or spouse,

and an interest rate for discounting the stream of benefits to

present value.

        An actuary uses an actuarial cost method to assign the present

value of promised benefits to individual plan years as an annual

cost.     The portion of the total cost of the plan that is assigned

by the actuarial cost method to the current year or to a future

year is called the normal cost.

     In general, six actuarial cost methods (or variations thereof)

are used for purposes of computing pension costs. They include (1)

the unit credit method (also known as the accrued benefit cost

method); (2) the entry age normal cost method; (3) the individual

level premium cost method; (4) the aggregate cost method; (5) the

attained age     normal   cost   method;   and   (6)   the   frozen   initial

liability cost method.       The methods discussed by the parties’

experts are the aggregate cost method (respondent’s preferred

method), the entry age normal cost method (petitioners’ preferred

method), and the individual level premium cost method (the method

Mercer used in 1991 and the one which we find satisfies the

requirements of section 419A(c)(2)).
                                    - 20 -

            a.     Aggregate Cost Method

     The aggregate cost method calculates costs for all employees

on an aggregate basis.        The aggregate cost method computes normal

costs in relation to the assets of the fund; this method does not

calculate an accrued liability independent of those assets.

     In computing the normal cost under the aggregate cost method,

the value of the plan assets is subtracted from the present value

of future benefits for all participants.             The remaining present

value of future benefits is then divided by the sum of the present

value of the future working lives of the active employees.                     The

present    value   of   the   future   working   life     of   an   employee    is

comparable to the present value of an annuity (computed with the

actuarial interest rate used by the plan) that pays $1 each year

until the employee is expected to retire.

            b.     Entry Age Normal Cost Method

     The   entry    age    normal   cost   method   can   be   applied   on     an

individual or aggregate basis; in this case, it is applied on an

individual basis.         Under the entry age normal cost method, the

actuarial present value of each employee’s projected benefit is

spread over the entire length of the employee’s service, beginning

at the date the employee began service with the employer and ending

with the anticipated normal retirement date.

     The normal cost computed under the entry age normal cost

method is a dollar amount which, if paid annually and allowed to
                                      - 21 -

accumulate from the date the employee began service until the

projected retirement date of that employee, will have accumulated

at retirement the amount necessary to fully fund the benefit to the

covered employee.       The actuarial accrued liability is the portion

of the actuarial present value that is not provided for by future

normal costs.

          c.         Individual Level Premium Cost Method

     The individual level premium cost method is an individual

method, similar to the entry age normal cost method.                     Under the

individual level premium cost method, the normal cost is separately

determined for each covered employee as a level dollar amount

which, if accumulated from the later of the date the plan is

established     or    the   date    that   the   employee    was   hired,    would

accumulate at retirement the amount necessary to fully fund the

benefit to the covered employee.

     The primary difference between the individual level premium

cost method and the entry age normal cost method is the date when

normal cost is assumed to commence.              If the plan is established

after the employee is hired, under the entry age normal cost

method, normal cost is assumed to have retroactively commenced at

the date of hire.       Under the individual level premium cost method,

normal   cost    begins     no     earlier   than   the     date   the    plan   is

established.
                                 - 22 -

     2.    Computations by the Experts

     The   parties’   experts   described   the   ways   that   actuaries

interpret the account limit for a reserve provided in section

419A(c)(2) and made computations using variations of the aggregate

and entry age normal cost methods.

           a.   Mr. Cohen

     Mr. Cohen, one of petitioners’ experts, is an expert in

actuarial science and a principal at PricewaterhouseCoopers LLP,

advising clients on various matters involving actuarial, tax,

pension, and postretirement medical issues.       He is a fellow of the

Society of Actuaries, an enrolled actuary under ERISA, and a member

of the American Academy of Actuaries.       From 1970-86, Mr. Cohen was

employed by the Internal Revenue Service, serving in a variety of

positions, including director of the Employee Plans, Technical and

Actuarial Division.

     Mr. Cohen uses the terms “reserve” and “accrued liability”

interchangeably and posits that the reserve for retirees is the

present value of future benefits.         In Mr. Cohen’s opinion, the

aggregate cost method is not appropriate for computing the account

limit for a reserve for postretirement benefits because that method

does not directly compute an accrued liability and fails to fully

fund the reserve for an employee upon retirement.        In his opinion,

the entry age normal cost method is the appropriate method because

that method allocates the cost over the entire working life of an
                                - 23 -

employee, directly computes an accrued liability, and provides for

full funding upon retirement.

     Mr. Cohen opined that (1) the account limit for the reserve is

equal to the reserve (accrued liability) computed under the entry

age normal cost method, (2) for retirees, the reserve (accrued

liability) is the present value of future benefits, and (3) for

active employees, the reserve is the present value of future

benefits minus the present value of future normal costs.

          b.   Mr. Scharmer

     Mr. Scharmer is an expert in actuarial science and is a

principal at Mercer.   He is a fellow of the Society of Actuaries,

an enrolled actuary under ERISA, a member of the American Academy

of Actuaries, and a member of the Conference of Actuaries.

     Mr. Scharmer opined that the account limit for a reserve under

section 419A(c)(2) was equal to the accrued liability using the

entry age normal cost method. For 1991-94, Mr. Scharmer calculated

the account limit for the reserve by applying the entry age normal

cost method and by using the same facts and assumptions that Mercer

relied upon when it prepared the 1991-94 valuation reports.    Mr.

Scharmer computed the accrued liability (dollars in millions) on

the valuation date for each year as follows:
                                   - 24 -

                                             1991     1992    1993    1994

A. Investment return                          5.5%    4.9%    3.6%    3.6%
B. Present value accrued benefits
   (beginning of year)
   a. Active                                $14.7    $38.5   $62.9   $83.6
   b. Retired                                28.2     36.7    47.7    48.9
   c. Total                                  42.9     75.2   110.6   132.5
C. Accrued liability (beginning of year)
   a. Active                                $12.6    $28.7   44.7    $59.4
   b. Retired                                28.2     36.7   47.7     48.9
   c. Total                                  40.8     65.4   92.4    108.3
D. Normal cost (beginning of year)            0.3      1.2    2.5      3.3
E. Accrued liability (yearend)
   a. Active                                $12.3    $31.2   $48.7   $64.7
   b. Retired                                27.8     34.5    45.2    45.8
   c. Total                                  40.1     65.7    93.9   110.5
F. Account limit                             40.1     65.7    93.9   110.5
G. Plan assets (VEBA + 401(h))                -0-     29.3    28.0    44.1
H. Deductible limit                          40.1     36.4    65.9    66.4

     Mr. Scharmer also calculated the account limit for the reserve

by varying the application of the aforementioned methodology to

reflect the investment rates        Mr. Daskais proposed.       Under these

computations, he determined that the accrued liability (dollars in

millions) for 1991-94 was as follows:

                                            1991     1992     1993    1994

A. Investment return                                 6.0%     5.7%    4.9%
B. Accrued liability (beginning of year)
   a. Active                                $10.3    $26.1   $35.0   $51.6
   b. Retired                                26.0     32.3    40.0    42.4
   c. Total                                  36.3     58.4    75.0    94.0
C. Account limit                             36.3     58.4    75.0    94.0
D. Plan assets (VEBA + 401(h))                -0-     29.6    28.6    44.7
E. Deductible limit                          36.3     28.8    46.4    49.3
                                    - 25 -

            c.    Mr. Daskais

     Mr. Daskais, respondent’s expert, is an expert in actuarial

science.    He is a fellow of the Society of Actuaries and was an

enrolled actuary under ERISA from 1976 to 1995.

     Mr. Daskais opined that “actuarially determined on a level

basis” means that the systematic year-to-year increments to the

reserve    are   the   same   (or   “level”   in   some   sense)   each   year.

Examples of level increments that are appropriate for computing a

reserve for postretirement medical benefits include (1) a uniform

(or level) dollar amount each year or (2) a uniform (or level)

dollar amount per active employee each year, so that the total

dollar amount increases or decreases as the number of active

employees increases or decreases.18

     Mr. Daskais opined that in actuarial parlance a “reserve

funded over the working lives of covered employees” is a “one-

sentence description of the aggregate cost method.”                It means a

reserve, determined on the basis of an actuarial cost method and

actuarial assumptions, that will increase from year to year and

will be exactly sufficient to provide the trust fund’s benefits at

the end of the working lives of the covered employees.             Mr. Daskais



     18
          A third example is a uniform (or level) percent of the
total payroll of active employees each year, so that the total
dollar amount increases or decreases as the total payroll of active
employees increases or decreases.        The experts agree that
allocating by percentages is inappropriate for postretirement
medical benefits because postretirement benefits usually are not
pay related.
                              - 26 -

acknowledged that the reserve funded using the aggregate cost

method will not be fully funded with respect to an individual

employee upon retirement.   In Mr. Daskais’s opinion, full funding

upon retirement of an individual employee is not required; in his

opinion the end of the working lives of covered employees occurs

when the employment of all covered employees has terminated.

     Mr. Daskais computed the maximum contribution for 1991-94 to

the postretirement medical trust deductible under section 419 by

applying the aggregate cost method using the same actuarial values

(including the investment rate) Mercer used, as follows:
                                             - 27 -

                                                 1991           1992          1993          1994

A. Investment return                              5.5%          4.9%          3.6%          3.6%
B. Present value accrued benefits
   a. Active                                  $13,361,586    $38,521,857   $62,860,146   $83,594,015
   b. Retired                                  26,311,902     36,694,928    47,731,960    48,947,859
   c. Total                                    39,673,488     75,216,785   110,592,106   132,541,874
C. Value of assets (beginning of year)
   a. VEBA                                       ---         30,736,554    30,176,217    39,940,676
   b. 401(h)                                     ---          1,125,467     1,172,269     7,598,653
   c. Total                                      ---         31,862,021    31,348,486    47,539,329
D. Nondeductible contribution from prior
    years (O from prior year)                     ---        22,034,781    14,394,743    14,426,384
E. Net value of assets1                           ---         9,827,240    16,953,743    33,112,945
F. Present value future normal costs2          39,673,488    65,389,545    93,638,363    99,428,929
G. Average present value of future service        4.81          6.63          7.26          7.19
H. Normal cost (beginning of year)3             8,248,126     9,862,676    12,897,846    13,828,780
I. Benefits paid during year                      N/A         4,078,160     4,859,441     5,301,930
J. Employee contributions during year             N/A           473,833       736,176       784,906
K. Interest to yearend4                           453,647       821,352       958,237     1,335,044
L. Account limit (yearend)5                     8,701,773    15,781,474    25,514,292    36,161,092
M. Actual contribution                         30,689,717     2,170,000    13,966,816    12,247,933
N. Value of assets (yearend)                   30,736,554    30,176,217    39,940,676    47,668,557
O. Nondeductible contribution
    carryforward6                              22,034,781    14,394,743    14,426,384    11,507,465
P. Deductible limit7                            8,654,936     9,810,038    13,935,175    15,166,852

    1
        C.c - D
    2
        B.c - E
    3
        F/G
    4
        A x (C.a - D + H + ½ of (J - I))
    5
        C.a - D + H - I + J + K
    6
        Smaller of (N - L) and (D + M), but not below zero
    7
        D + M - O
                              - 28 -

     In Mr. Daskais’s opinion, the investment rates Mercer used

were unreasonably low.   Mr. Daskais recalculated the contribution

limit by applying the aggregate cost method using the Mercer

assumptions but substituting investment rates that, in his opinion,

were reasonable.   Under these computations, he determined that the

maximum contributions for 1991-94 were as follows:
                                             - 29 -

                                                 1991           1992          1993          1994

A. Investment return                             6.6%           6.0%          5.7%          4.9%
B. Present value accrued benefits
   a. Active                                  $11,154,103    $30,515,975   $38,396,684   $61,044,923
   b. Retired                                  23,798,600     33,006,450    38,374,995    42,599,819
   c. Total                                    34,952,703     63,522,425    76,771,679   103,644,742
C. Value of assets (beginning of year)
   a. VEBA                                       ---         30,736,554    30,176,217    39,940,676
   b. 401(h)                                     ---          1,125,467     1,172,269     7,598,653
   c. Total                                      ---         31,862,021    31,348,486    47,539,329
D. Nondeductible contribution from prior
    years (O from prior year)                     ---        22,679,988    16,144,825    19,283,596
E. Net value of assets1                           ---         9,182,033    15,203,661    28,255,733
F. Present value future normal costs2          34,952,703    54,340,392    61,568,018    75,389,009
G. Average present value of future service       4.62          6.26          6.46          6.68
H. Normal cost (beginning of year)3             7,557,754     8,682,914     9,523,819    11,286,962
I. Benefits paid during year                      N/A         4,078,160     4,859,441     5,301,930
J. Employee contributions during year             N/A           473,833       736,176       784,906
K. Interest to yearend4                           498,812       896,239     1,225,134     1,454,591
L. Account limit (yearend)5                     8,056,566    14,031,392    20,657,080    28,881,609
M. Actual contribution                         30,689,717     2,170,000    13,966,816    12,247,933
N. Value of assets (yearend)                   30,736,554    30,176,217    39,940,676    47,668,557
O. Nondeductible contribution
    carryforward6                              22,679,988    16,144,825    19,283,596    18,786,948
P. Deductible limit7                            8,009,729     8,705,163    10,828,045    12,744,581

    1
        C.c - D
    2
        B.c - E
    3
        F/G
    4
        A x (C.a - D + H + ½ of (J - I))
    5
        C.a - D + H - I + J + K
    6
        Smaller of (N - L) and (D + M), but not below zero
    7
        D + M - O
                                  - 30 -

     Mr.   Daskais   opined    that,   if   the     funding          method    used   to

calculate the reserve computes an accrued liability, that liability

must be amortized.     In Mr. Daskais’s opinion, since there are no

specific     amortization     rules    applicable        to     the     funding       of

postretirement medical benefits in section 419A or in the income

tax regulations, the amortization rules applicable to pensions

should be applied.

     Mr. Daskais calculated the contribution limit by applying the

entry age normal cost method and by using the same facts and

assumptions Mercer used.       He amortized the accrued liability over

the present value of the remaining working lives of the active

employees.     Under these computations, he determined that the

maximum    contributions      (dollars      in     millions;           discrepancies

attributable to rounding) for 1991-94 were as follows:

                                                  1991        1992      1993     1994

A. Investment return                              5.5%        4.9%      3.6%     3.6%
B. Present value accrued benefits
   a. Active                                     $13.4    $38.5        $62.9    $83.6
   b. Retired                                     26.3     36.7         47.7     48.9
   c. Total                                       39.7     75.2        110.6    132.5
C. Accrued liability
   a. Active                                     11.3         28.7      44.7     59.4
   b. Retired                                    26.3         36.7      47.7     48.9
   c. Total                                      37.6         65.4      92.4    108.3
D. Normal cost                                    0.3          1.2       2.5      3.3
E. Average present value of future service       4.81         6.63      7.26     7.19
F. Amortized accrued liability from prior
   years1                                         ---          8.6      15.5     25.5
G. Remaining unamortized accrued liability2      37.6         56.8      76.9     82.8
H. Amortization of accrued liability3             7.8          8.6      10.6     11.5
I. Account limit (beginning of year)4             8.1         18.3      28.6     40.3
J. Interest to yearend                            0.4          0.9       1.0      1.5
K. Account limit (yearend)5                       8.6         19.2      29.7     41.7
                                   - 31 -

L. Benefits paid less employee
   contributions                                 ---     3.6     4.1   ---
M. Interest for one-half year                    ---     0.1     0.1   ---
N. Amortized accrued liability (yearend)6        8.6    15.5    25.5   --–
O. Nondeductible contribution from prior
   years7                                        ---    22.1    15.3   16.2
P. Actuarial value of assets
   a. VEBA                                       ---    30.7    30.2   39.9
   b. 401(h)                                     ---     1.1     1.2    7.6
   c. Total (beginning of year)                  ---    31.9    31.3   47.5
   d. Net after nondeductible
      contributions8                              ---    9.7    16.1   31.3
   e. Interest to yearend                         ---    0.5     0.6    1.1
   f. Total (yearend)9                            ---   10.2    16.7   32.4
Q. Actual contribution                           30.7    2.2    14.0   12.2
R. Deductible contribution10                      8.6    9.0    13.0    9.3
S. Nondeductible contribution
    carryforward11                               22.1   15.3    16.2   19.2

    1
          N of prior year
     2
          C.c - F
     3
          G/E
     4
          D + F + H
     5
          I + J
     6
          K - L - M
     7
          S of prior year
     8
          P.c - O
     9
          P.d + P.e
     10
          Smaller of (K - P) and (O + Q)
     11
          O + Q - R

     Mr. Daskais also calculated the contribution limit by applying

his variation of the entry age normal cost method (amortizing the

accrued liability over the remaining lives of the active employees)

as above but substituting investment rates that, in his opinion,

were reasonable.     Under these computations, he determined that the

maximum     contributions     (dollars      in    millions;    discrepancies

attributable to rounding) for 1991-94 were as follows:
                                   - 32 -

                                              1991     1992    1993    1994

A. Investment return                           6.6%    6.0%    5.7%    4.9%
B. Present value accrued benefits
   a. Active                                  $11.2   $30.5   $38.4   $61.0
   b. Retired                                  23.8    33.0    38.4    42.6
   c. Total                                    35.0    63.5    76.8   103.6
C. Accrued liability
   a. Active                                   9.4    22.7    27.3    43.4
   b. Retired                                 23.8    33.0    38.4    42.6
   c. Total                                   33.1    55.2    64.1    84.7
D. Normal cost                                 0.2     1.0     1.5     2.4
E. Average present value of future service    4.62    6.26    6.46    6.68
F. Amortized accrued liability from prior
   years1                                      ---     7.9    13.7    20.1
G. Remaining unamortized accrued liability2   33.1    47.3    50.4    64.6
H. Amortization of accrued liability3          7.2     7.6     7.8     9.7
I. Account limit (beginning of year)4          7.4    16.4    23.0    32.2
J. Interest to yearend                         0.5     1.0     1.3     1.6
K. Account limit (yearend)5                    7.9    17.4    24.3    33.8
L. Benefits paid less employee
   contributions                               ---     3.6     4.1     ---
M. Interest for one-half year                  ---     0.1     0.1     ---
N. Amortized accrued liability (yearend)6      7.9    13.7    20.1     ---
O. Nondeductible contribution from prior
   years7                                      ---    22.8    17.2    21.8
P. Actuarial value of assets
   a. VEBA                                     ---    30.7    30.2    39.9
   b. 401(h)                                   ---     1.1     1.2     7.6
   c. Total (beginning of year)                ---    31.9    31.3    47.5
   d. Net after nondeductible
      contributions8                           ---     9.1    14.2    25.8
   e. Interest to yearend                     ---      0.5     0.8     1.3
   f. Total (yearend)9                        ---      9.6    15.0    27.0
Q. Actual contribution                        30.7     2.2    14.0    12.2
R. Deductible contribution10                   7.9     7.8     9.4     6.7
S. Nondeductible contribution
    carryforward11                            22.8    17.2    21.8    27.3

     1
         N of prior year
     2
         C.c - F
     3
         G/E
     4
         D + F + H
     5
         I + J
     6
         K - L - M
     7
         S of prior year
     8
         P.c - O
     9
         P.d + P.e
                                         - 33 -
       10
              Smaller of (K - P) and (O + Q)
       11
              O + Q - R

        3.     Positions of the Parties

        Petitioners assert that the reserve under section 419A(c)(2)

refers       to   the   employer’s    accrued     liability       to    provide    the

postretirement benefits.             Petitioners maintain that, since the

entry age normal cost method is the only method that directly

computes an accrued liability and allocates the present value of an

employee’s future benefit over the employee’s entire working life,

the account limit for the reserve is equal to the accrued liability

computed under the entry age normal cost method.                           Petitioners

further maintain that (1) for a retiree the accrued liability is

the present value of the employee’s future benefits, and (2) for an

active employee the accrued liability is the present value of the

employee’s future benefits minus the present value of future normal

costs        determined    under   the    entry       age   normal     cost   method.

Petitioners contend that their contribution to the reserve for each

year at issue did not cause the reserve to exceed the account limit

and, therefore, the contributions were deductible under section

419.

        Respondent argues that petitioners’ position is inconsistent

with (1) the language of section 419A(c)(2), (2) the established

judicial       precedent    interpreting       that    section,      (3)    Congress’s

purpose in enacting that section, (4) the accepted interpretation

given “nearly identical language” in the provisions governing
                                        - 34 -

pension plans, (5) the law in effect before the enactment of

section 419, and (6) principles of actuarial practice.                   Respondent

contends that the cost of the postretirement benefit must be spread

over    the   remaining      working     lives    of   the   covered     employees.

Respondent further contends that, since retirees have no remaining

working lives, the cost must spread over the remaining working

lives of the active employees.             Respondent concludes, therefore,

that the aggregate cost method is the proper method for computing

the    account   limit      for   the   reserve    under     section    419A(c)(2).

Respondent asserts in the alternative that, if the entry age normal

cost method is a proper method, then the accrued liability must be

amortized over the remaining lives of the active employees.

       4.     Statutory Construction

       “Our first step in interpreting a statute is to determine

whether the language at issue has a plain and unambiguous meaning

with regard to the particular dispute in the case.”                     Robinson v.

Shell   Oil    Co.,   519    U.S.   337,   340    (1997).       We     look   to   the

legislative history primarily to learn the purpose of the statute

and to resolve any ambiguity in the words contained in the text.

Landgraf v. USI Film Prods., 511 U.S. 244 (1994); Commissioner v.

Soliman, 506 U.S. 168, 174 (1993); Consumer Prod. Safety Commn. v.

GTE Sylvania, Inc., 447 U.S. 102, 108 (1980); United States v. Am.

Trucking Associations, Inc., 310 U.S. 534, 543-544 (1940); Allen v.

Commissioner, 118 T.C. 1, 7 (2002); Venture Funding, Ltd. v.
                                      - 35 -

Commissioner, 110 T.C. 236, 241-242 (1998), affd. without published

opinion 198 F.3d 248 (6th Cir. 1999); Trans City Life Ins. Co. v.

Commissioner,    106   T.C.    274,    299   (1996).      Where     Congress   has

expressed its will in reasonably plain terms, those terms must

ordinarily be regarded as conclusive.               Negonsott v. Samuels, 507

U.S. 99, 104 (1993).

     The plainness or ambiguity of statutory language is determined

by reference to the language itself, the specific context in which

that language is used, and the broader context of the statute as a

whole.     Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469

(1992);     McCarthy v. Bronson, 500 U.S. 136, 139 (1991).                     In

analyzing the plain meaning of section 419A(c)(2), we examine the

section as a whole, with all of its subsections in mind.                       See

Hellmich    v.   Hellman,     276   U.S.     233,   237   (1928);    Huffman    v.

Commissioner, 978 F.2d 1139, 1145 (9th Cir. 1992), affg. in part,

revg. and remanding in part T.C. Memo. 1991-144.

     5.     The Statute

     We begin with the specific language of section 419A(c)(2),

which provides:

     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
                                       - 36 -

                  (B) post-retirement life insurance benefits to
             be provided to covered employees.

     We first addressed the requirements of section 419A(c)(2) in

Gen. Signal Corp. v. Commissioner, 103 T.C. 216, 239 (1994), affd.

142 F.3d 546 (2d Cir. 1998).            In that case, we held that section

419A(c)(2)    requires     an    accumulation     of   assets   equal    to     the

deduction taken, and that those assets must be used to pay welfare

benefit expenses of retired employees.             See also Square D Co. v.

Commissioner,     109    T.C.    200    (1997);   Parker-Hannifin       Corp.    v.

Commissioner, T.C. Memo. 1996-337, affd. in part, revd. in part and

remanded 139 F.3d 1090 (6th Cir. 1998).                In Gen. Signal Corp.,

Square D Co., and Parker-Hannifin Corp., we found that no reserves

had been created, obviating the need to consider whether the

contributions were excessive from an actuarial standpoint.                In the

case at hand, respondent agrees that a reserve was created; i.e.,

assets in the amount of the deduction taken were accumulated to be

used to pay medical expenses of retired employees.

             a.   Reserve

     Petitioners        assert   that    the    term   “reserve”   in    section

419A(c)(2) refers to the employer’s accrued liability to provide

the postretirement benefits. Petitioners conclude, therefore, that

the method used in computing the reserve must compute the accrued

liability.

     Respondent asserts that section 419A(c)(2) does not define the

account limit but rather describes contributions to a reserve
                                       - 37 -

(equal to the normal cost computed under the aggregate cost method)

which may be included as a component of the account limit, together

with    the   amounts   set    aside     for    incurred   but    unpaid    claims.

Respondent concludes, therefore, that section 419A(c)(2) does not

require the computation of the accrued liability.

       A comparison of the language in section 419A(c)(1) with that

in   section    419A(c)(2)      belies    respondent’s     position.        Section

419A(c)(1) provides that the account limit “for any taxable year is

the amount reasonably and actuarially necessary to fund” (emphasis

supplied) incurred but unpaid claims and administrative costs with

respect to such claims.         By contrast, section 419A(c)(2) provides

that    the   account   limit    “for    any    taxable    year   may   include    a

reserve”.

        Congress   could      have   used      identical    language       in   both

provisions; the fact that Congress chose not to do so must be given

heed.    Cf. Keene Corp. v. United States, 508 U.S. 200, 208 (1993)

(“Where Congress includes particular language in one section of a

statute but omits it in another * * *, it is generally presumed

that Congress acts intentionally and purposely in the disparate

inclusion or exclusion.” (Internal quotation marks and citation

omitted.)); United States v. $359,500 in U.S. Currency, 828 F.2d

930, 933 (2d Cir. 1987) (“‘contrasting language in similar statutes

may show that the legislature intended different standards of

compliance’” (quoting 2A Singer, Sutherland Statutory Construction,
                                   - 38 -

sec. 57.06, at 654 (Sands 4th ed. 1984))).                 Thus, it is the

reserve, not merely a contribution equal to the normal cost for the

year, that must be computed in determining the account limit.

     Respondent asserts that courts have held in prior cases, such

as Gen. Signal Corp. v. Commissioner, supra, Square D Co. v.

Commissioner, supra, and Parker-Hannifin Corp. v. Commissioner,

supra, that “reserve” as used in section 419A(c)(2) does not mean

a measure of liability.         At issue in those cases, however, was

whether    section    419A(c)(2)   required   the     actual    funding   of   a

reserve.    The taxpayers in those cases argued that term “reserve”

was an actuarial term of art meaning “a quantity of liability” that

did not require actual funding.        We held that a mere quantity of

liability does not constitute a “reserve funded over the working

lives of     the   covered    employees”;   i.e.,   we   held   that   section

419A(c)(2) requires the actual funding of the reserve.

     When Congress uses a term of art that has an established

meaning, a strong presumption arises that Congress intends to

incorporate that meaning.        Morissette v. United States, 342 U.S.

246, 263 (1952).      Congress’s choice of the word “reserve” (rather

than “account” or “fund”, for example) connotes a measure of

liability.    W. Natl. Mut. Ins. Co. v. Commissioner, 102 T.C. 338,

373 (1994) (“reserves * * * are estimates of liabilities: ‘“best

estimates”    of     future   settlement    costs’”      (quoting   Salzmann,

Estimated Liabilities For Losses & Loss Adjustment Expenses 155
                                           - 39 -

(1984))), affd. 65 F.3d 90 (8th Cir. 1995); see also Ins. Co. of N.

Am. v. McCoach, 224 F. 657, 659 (3d Cir. 1915) (defining “reserve

funds” as “funds as must be reserved to meet liabilities”); Black’s

Law Dictionary 1309 (7th ed. 1999) (defining “reserve” to mean

“Something retained or stored for future use; esp., a fund of money

set aside by a bank or an insurance company to cover future

liabilities.”).

       Section 419A(c)(2) includes in the account limit a reserve

funded    for       the    payment    of    postretirement     medical       (or   life

insurance) benefits.           The payment of those benefits is a liability

of the employer, and “reserve” as used in section 419A(c)(2)

connotes a measure of that liability; it refers to the accumulation

of    assets    in    an     amount   necessary      to   satisfy    the   employer’s

liability to pay the covered employees’ postretirement medical (or

life insurance) benefits when those benefits become due.

               b.     Reserve Funded Over the Working Lives of the
                      Covered Employees and Actuarially Determined on a
                      Level Basis

       Section 419A(c)(2) limits the reserve that may be included in

the account limit to “a reserve funded over the lives of the

covered employees and actuarially determined on a level basis”.

       Respondent asserts that Norwest’s contribution in 1991 was

excessive because it created a reserve that was not “funded over

the    working       lives    of   the     covered   employees      and    actuarially

determined on a level basis”.                  Respondent maintains that the
                                      - 40 -

language    of    section    419A(c)(2)        is,    in   essence,     a   one-clause

definition of the aggregate cost method.                   Respondent posits that

section    419A    requires    that      (1)    a    reserve    for    postretirement

benefits must be “funded”; i.e., contributions must be made for the

purpose of providing postretirement medical benefits, and (2) the

funding must be done on a “level” basis over the working lives of

the employees.      Respondent contends that the funding cannot begin

before the reserve is created and, therefore, the funding must be

determined on a level basis over the remaining working lives of the

covered    employees.        Respondent        concludes       that,   since   retired

employees have no remaining working lives, the funding must be

determined on a level basis over the remaining working lives of the

active employees.        Disagreeing with respondent, petitioners assert

that the term “funded” means “calculated”, not “contributed”, and

that the reserve (accrued liability) is calculated over the working

lives of the covered employees.                Thus, petitioners conclude that

the reserve       included    in   the    account      limit     is    an   actuarially

determined accrued liability (i.e., a “reserve”) that is calculated

(i.e., “funded”) over the working lives of the covered employees.

                   (i)    Reserve Funded Over the Working Lives of the
                          Covered Employees

     We do not agree with petitioners that funded means calculated.

We have previously held that the “funded” reserve in section

419A(c)(2) refers to an accumulation of assets and the funding of

benefits. Natl. Presto Indus., Inc. v. Commissioner, 104 T.C. 559,
                               - 41 -

574 (1995).     A “reserve funded over the working lives of the

covered employees” “clearly evokes the gradual accumulation of

funds measured with an eye toward complete funding at the time of

retirement”.    Gen. Signal Corp. v. Commissioner, 142 F.3d at 549

(citing Parker-Hannifin Corp. v. Commissioner, 139 F.3d 1090, 1094

(6th Cir. 1998)).   We agree with respondent that the funding of the

reserve cannot begin until the reserve is created.    However, we do

not agree with respondent that the reserve must be funded over the

aggregate remaining working lives of the active employees.

     Respondent asserts that once the reserve is created it may be

funded over the aggregate working lives of the covered employees

and that the end of the working lives of the covered employees

occurs when the last covered employee is no longer employed by the

employer, because the employment of all covered employees has

terminated.    Respondent acknowledges that, under that reading, the

reserve will not be fully funded upon retirement with respect to

any individual employee (except the last employee).    The position

taken by respondent in this case is contrary to the position

successfully urged by the Commissioner in Gen. Signal Corp.      In

Gen. Signal Corp. v. Commissioner, 142 F.3d at 549, the Court of

Appeals for the Second Circuit agreed with the Commissioner’s

interpretation that the phrase “funded over the working lives”

means that “the amount that is supposed to be added to the reserve

each year would, assuming the reserve remained intact, result in
                                      - 42 -

full funding for retirement benefits at the end of each employee’s

term of service.” (Emphasis supplied.)

       Respondent acknowledges that sections 419 and 419A do not

impose an obligation on an employer to create a reserve to pay for

postretirement medical benefits; i.e., employers may pay and deduct

the medical claims as they become due on a pay-as-you-go basis.

Respondent further acknowledges that if an employer establishes a

reserve under section 419A(c)(2), sections 419 and 419A do not

impose a minimum annual contribution requirement or require an

employer      to   make    contributions       that     are   precisely   level.

Respondent contends, however, that “funded” in section 419A(c)(2)

is synonymous with “amortized” and that if an employer does not

make a contribution in a given year, then the “contribution that

was not made would be funded over the remaining working lives of

employees in subsequent years”.                Respondent asserts that the

language “funded over the working lives of the covered employees”

is     essentially        identical    to      the    language     of     section

404(a)(1)(A)(ii), and, therefore, any accrued liability must be

amortized over the remaining lives of the active employees.                   We

disagree.

       The language of section 404(a)(1)(A)(ii) is clearly different

from    the   language     of   419A(c)(2).      When    applicable,19    section


       19
          The deduction for a contribution to a pension trust is
limited to the amount provided in sec. 404(a)(1)(A)(ii) when it
exceeds the minimum funding amount provided in sec. 412(a) and the
                                                    (continued...)
                                    - 43 -

404(a)(1)(A)(ii) limits the deduction for a contribution to a

pension plan to “the amount necessary to provide with respect to

all of the employees under the trust the remaining unfunded cost of

their past and current service credits distributed as a level

amount * * * over the remaining future service of each such

employee”.       The phrases “over the remaining future service of each

such employee” (the section 404(a)(1)(A)(ii) language) and “over

the working lives of the covered employees” (the section 419A(c)(2)

language) are not identical.             We give heed to the fact that

Congress could have used identical language in both the pension and

VEBA provisions but chose not to do so.

        Moreover, Congress in section 419A(e)(1) specifically made the

pension nondiscrimination rules of section 505(b) applicable to the

section 419A(c)(2) reserve.         This is an indication that Congress

did not intend to automatically apply pension provisions to section

419A.        Additionally, in section 419(c)(3), Congress provided for

the amortization of the adjusted basis of a child care facility

over 60 months.        This is a further indication that Congress did not

intend to require amortization of the postretirement benefit of a

retired employee.

     When Congress has intended to require costs to be spread over

the remaining working lives of active employees, it has done so

clearly.         For   example,   the   funding   period   for   purposes   of


        19
      (...continued)
amount provided in sec. 404(a)(1)(A)(iii).
                              - 44 -

contributions to a black lung benefit trust20 is the greater of “(i)

the average remaining working life of miners who are present

employees of the taxpayer, or (ii) 10 taxable years.”            Sec.

192(c)(1)(B).   We conclude, therefore, that the amortization rules

applicable to pensions do not apply to the computation of the

section 419A(c)(2) reserve.

     In Gen. Signal Corp. v. Commissioner, 103 T.C. at 240, 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.   We shall do likewise in this case.

     In consulting the legislative history of section 419A, we are

mindful that 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


     20
          Sec. 192(b) limits contributions to a black lung benefit
trust as follows:

          SEC. 192(b). Limitation.--The maximum amount of the
     deduction allowed by subsection (a) for any taxpayer for
     any taxable year shall not exceed the greater of--

                (1) the amount necessary to fund (with level
           funding) the remaining unfunded liability of the
           taxpayer for black lung claims filed (or expected
           to be filed) by (or with respect to) past or
           present employees of the taxpayer, or

                (2) the aggregate amount necessary to increase
           each trust described in section 501(c)(21) to the
           amount required to pay all amounts payable out of
           such trust for the taxable year.
                              - 45 -

     the medical benefit or life insurance (including death
     benefit) payable to a retired employee during retirement
     is fully funded upon retirement. These amounts may be
     accumulated no more rapidly than on a level basis over
     the working life of the employee, with the employer of
     each employee. * * *     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, which take
     into account experience gains and losses, changes in
     assumptions, and other similar items, and be no more
     rapid than on a level basis over the remaining working
     lifetimes of the current participants. * * * [H. Conf.
     Rept. 98-861, at 1157 (1984), 1984-3 C.B. (Vol. 2) 1,
     411.]

     The legislative history makes clear that the funding of the

reserve can be completed no more rapidly than over the working life

of the employee.   Therefore, we conclude that fully funding the

reserve at or after retirement is permissible because, in that

case, the assets are accumulated less rapidly than over the working

life of the employee.

     To conclude this aspect of our deliberation, we hold that for

purposes of section 419A(c)(2), the phrase “reserve funded over the

working lives of the covered employees” means that assets necessary

to satisfy the employer’s liability may be accumulated no more

rapidly than over the working lives of the covered employees, such

that the reserve with respect to an employee can be fully funded no

earlier than upon retirement of the employee.
                                - 46 -

                 (ii) Reserve   Actuarially   Determined   on   a   Level
                      Basis

       We now turn our attention to the requirement that the reserve

under section 419A(c)(2) be “actuarially determined on a level

basis” and the calculation of the reserve.      We have held that the

term “reserve” in section 419A(c)(2) refers to assets in an amount

necessary to satisfy the employer’s liability to pay the covered

employees’ postretirement medical benefits when the benefits become

due.

       Petitioners assert that “level”, as an actuarial concept,

refers to normal cost and that, to an actuary, “level” means that

the normal costs are level.      Normal cost is that portion of the

present value of the benefit that is assigned to the current or a

future year.   In other words, the value of the benefit assigned to

the current year is the same as the amount assigned to each

subsequent year until the employee’s retirement date.      Petitioners

further assert that the actuarial concept of level is unrelated to

the employer’s actual contributions to a plan and that actuarial

methods determine amounts that can be contributed but do not

mandate funding.

       Petitioners acknowledge that both the aggregate and entry age

normal cost methods produce level normal costs.            Petitioners

assert, however, that the aggregate cost method is not appropriate

because it does not directly calculate the accrued liability

independently of the assets.
                                    - 47 -

     Respondent asserts that a direct calculation of the accrued

liability independent of the assets is not necessary.                 Respondent

contends that the actuary must compute on a level basis a reserve

funded over the working lives of the covered employees.                Further,

respondent posits that since the funding does not begin before the

reserve is created, the reserve must be computed by allocating the

cost in a level amount over the remaining lives of the employees.

Respondent contends that (1) the actuarial methodology used must

determine   contributions     at    a   “rate”   that   would    be    level   if

actuarial assumptions were exactly realized, (2) the funds may only

accumulate gradually, and (3) in order to accomplish the gradual

funding,    the   actuarial   method     must    provide   for   the    ratable

accumulation of funds over the remaining working lives of the

covered employees.     Respondent asserts that the following excerpt

from the legislative history supports his position: “The conferees

intend * * * that the funding of retiree benefits * * * be no more

rapid than on a level basis over the remaining working lifetimes of

the current participants”.         H. Conf. Rept. 98-861, supra at 1157,

1984-3 C.B. (Vol. 2) at 411.            Respondent contends that once an

employer elects to fund a reserve for postretirement benefits under

section 419A(c)(2), it must then select an actuarial cost method

that satisfies this statutory requirement.              Respondent concludes

that the aggregate cost method properly allocates the costs in a

level amount over the remaining lives of the covered employees.                In
                                  - 48 -

the   alternative,   respondent   argues   that,   if   the   method   used

calculates an accrued liability independently of the fund assets,

the unfunded accrued liability must be amortized over the remaining

lives of the active employees.

      We believe that use of the aggregate cost method to compute

the reserve is not appropriate because that method will not permit

full funding of the reserve with respect to a retired employee at

retirement of that employee.       Further, we agree with petitioners

that the accrued liability should be computed independently of the

plan assets.    Indeed, there are circumstances under which the

reserve could become overfunded and yet additional amounts could be

added to the reserve using the aggregate cost method.21        We have no

doubt that, in such an event, the Commissioner would require the

use of another method that directly calculates an accrued liability

independently of the plan assets.     Additionally, we have held that

section 419A(c)(2) does not require the amortization of the accrued

liability.

      Section 419A(c)(2) requires that the reserve funded over the

lives of the covered employees be “actuarially determined on a

level basis”.   Thus, assets necessary to satisfy the employer’s


      21
           We note that use of the aggregate cost method is not
permitted in computing the full-funding limit for pensions under
sec. 412. Sec. 412(c)(7) defines the term “full-funding limitation”
for purposes of sec. 412(c)(6) as the excess of the accrued
liability (including normal cost) under the plan, over the value of
the plan’s assets. The accrued liability is determined under the
entry age normal cost method if the accrued liability cannot be
directly calculated under the funding method used for the plan.
                                 - 49 -

liability may be accumulated no more rapidly than on a level basis

over the working lives of the covered employees, such that the

reserve with respect to an employee can be fully funded no earlier

than upon retirement of the employee. We conclude that the maximum

amount of the liability that may be satisfied by the reserve is the

amount at the time with respect to which the reserve is computed

that, together with future normal costs and interest, will be

sufficient upon retirement of each employee to pay future medical

claims of the employee when they become due.           See, e.g., United

States v. Atlas Life Ins. Co., 381 U.S. 233, 236 n.3 (1965);

Travelers Ins. Co. v. United States, 303 F.3d 1373, 1380-1381 (Fed.

Cir. 2002); Natl. States Ins. Co. v. Commissioner, 758 F.2d 1277,

1278 (8th Cir. 1985) (a reserve is computed by calculating the

excess of the present value of future benefits payable over the

present value of future net premiums receivable), affg. 81 T.C. 325

(1983).   That amount must be actuarially determined on a level

basis.

     The actuarial present value of the projected benefit of each

covered employee should be allocated on a level basis to each year

commencing   with   the   year   in   which   the   allocation   is   first

recognized and ending with the year the employee is expected to

retire. The funding of “a reserve funded over the working lives of

the covered employees” cannot begin until the reserve is created.

Thus, the allocation is first recognized on the later of the date
                               - 50 -

when the reserve is created and the date the employee becomes a

covered employee.     Essentially, this is the individual level

premium cost method with the date of the creation of the reserve

substituted for the date the plan is instituted.   When the year in

which the allocation is first recognized is after the employee has

retired, there are no future years to which the benefits may be

allocated.    Since there are no future years to which the benefits

may be allocated, there are no future normal costs, and the entire

present value of the projected benefit is properly allocated to the

first year.     This is the method that Mercer used in computing

Norwest’s contribution for 1991, the year the reserve was created.

     The individual level premium cost method comports with our

holding that the amount of the liability that may be satisfied by

the reserve is the amount at the time with respect to which the

reserve is computed that, together with future normal costs and

interest, will be sufficient upon retirement of an employee to pay

future medical claims of the employee when they become due.   See,

e.g., United States v. Atlas Life Ins. Co., supra; Travelers Ins.

Co. v. United States, supra; Best Life Assur. Co. v. Commissioner,

281 F.3d 828, 830 (9th Cir. 2002), affg. T.C. Memo. 2000-134; Natl.

States Ins. Co. v. Commissioner, supra; Sears, Roebuck & Co. v.

Commissioner, 96 T.C. 61, 110 (1991), revd. on other grounds 972

F.2d 858 (7th Cir. 1992).
                              - 51 -

C.   Investment Rates

     The pretax and after-tax investment rates22 Mercer used in the

1991-94 valuation reports were as follows:

                               1991     1992      1993         1994

     Pretax rate               9.0%    8.0%       6.0%         6.0%
     After-tax rate            5.5     4.9        3.6          3.6

The after-tax investment rate was determined by applying a tax rate

of 39 percent for 1991-92 and 40 percent for 1993-94.

     In the notices of deficiency, respondent did not dispute the

actuarial   assumptions,   including   the     pretax    and     after-tax

investment rates, Mercer used in the 1991-94 valuation reports. In

an amended answer, however, respondent asserted that the pretax

investment rates used in the 1993 and 1994 calculations and the

after-tax investment rate used in the computation for all years

1991-94 were too low.

     Respondent asserts that the pretax and after-tax rates Mr.

Daskais proposed are reasonable and demonstrate that the rates

petitioners used are unreasonable.       The pretax and after-tax

investment rates Mr. Daskais proposed are as follows:

                               1991     1992      1993         1994

     Pretax rate               9.0%    8.0%       8.0%         7.0%
     After-tax rate            6.6     6.0        5.7          4.9

     Mr. Daskais determined the after-tax investment rates by

applying a tax rate of 29 percent for 1991-92 and 31.9 percent for

     22
          Unless otherwise indicated, all rates are rounded to the
nearest tenth of 1 percent.
                               - 52 -

1992-94.   In our opinion, Mr. Daskais’s after-tax rates are too

high because they do not take into account the Minnesota State tax

on unrelated business income. Minnesota taxes the unrelated income

of an exempt organization at the corporate rate of 9.8 percent.

Minn. Stat. Ann. secs. 290.05, subd. 3, and 290.06, subd. 1 (West

1999 & Supp. 2003).     Since State taxes paid are deducted for

purposes of Federal tax, the combined tax rate would be 36 percent23

for 1991-92 and 38.6 percent24 for 1993-94.    Applying the combined

tax rates to the pretax investment rates Mr. Daskais considers

reasonable results in the following after-tax investment rates

(rounded to nearest tenth of a percent):

                               1991     1992      1993        1994

     Pretax rate               9.0%     8.0%      8.0%        7.0%
     After-tax rate            5.8      5.1       4.9         4.3


     23
           The combined tax rate for 1991-92 is computed as follows:

           Starting point                            100.0%
           Minn. State tax at 9.8% (100 x 9.8%)      - 9.8
                                                      90.2
           Federal tax at 29% (90.2 x 29%)           -26.2
                                                      64.0

           Combined tax rate (100% - 64%)                36

     24
           The combined tax rate for 1993-94 is computed as follows:

           Starting point                            100.0 %
           Minn. State tax at 9.8% (100 x 9.8%)      - 9.8
                                                      90.2
           Federal tax at 31.9% (90.2 x 31.9%)       -28.8
                                                      61.4

           Combined tax rate (100% - 61.4%)              38.6
                                  - 53 -

     The difference of 0.3 percent between the 5.8-percent after-

tax rate computed for 1991 and the 5.5-percent after-tax rate

petitioners   used   in   1991   is   relatively   minimal   and   does   not

establish that the 5.5-percent rate was unreasonable.

     Moreover, the Internal Revenue Service publishes a permissible

range of interest rates used to calculate the current liability for

purposes of the full-funding limitation for pensions under section

412(c)(7).    See Notice 88-73, 1988-2 C.B. 383.         Although we are

mindful that Notice 88-73, supra, provides that no inference should

be drawn from the notice as to any issue not specifically addressed

therein, in the absence of regulations or other guidance to the

contrary, in our opinion rates that fall within the permissible

range of rates for purposes of the full-funding limitations on

pensions are reasonable for purposes of computing the reserve under

section 419A(c)(2).

     The published range for a January 1991 valuation date is 7.77-

9.49 percent.    Notice 91-5, 1991-1 C.B. 315.          The income of a

pension trust is not taxable, and the interest rates provided for

purposes of the full-funding limitation represent pretax rates.

Application of a 36-percent combined tax rate to 7.8 percent (the

lowest investment rate (rounded) in the permissible range for

purposes of section 412(c)(7)) gives an after-tax investment rate

of 5.0 percent, which we believe supports the reasonableness of the

5.5-percent after-tax rate petitioners used for 1991.
                                    - 54 -

     In computing Norwest’s contribution for 1991, Mercer applied

a reasonable investment rate and used the appropriate individual

level premium cost method.        We conclude, therefore, that Norwest’s

contribution to fund the reserve under section 419A(c)(2) for 1991

did not exceed the account limit.

     Further, for years 1992-94, even using the higher after-tax

investment rates Mr. Daskais proposed of 6.0 percent for 1992, 5.7

percent for 1993, and 4.9 percent for 1994, it is clear that

Norwest’s contributions to fund the reserve do not exceed the

account    limit   when   the    reserve    is   computed   by   applying     the

individual level premium cost method.

     We conclude that Norwest’s contributions to the postretirement

benefit trust to fund a reserve for postretirement medical benefits

for 1991-94 did not exceed the account limit for a reserve under

section    419A(c)(2).      We    hold,    therefore,    that    in   computing

petitioners’ consolidated income tax for 1991-94, petitioners are

entitled    to     deductions    for   postretirement       medical        benefit

contributions      of   $30,689,717    in    1991,    $2,170,000      in    1992,

$13,791,600 in 1993, and $12,247,933 in 1994.

     To reflect the foregoing, and because other issues in these

cases remain for resolution,



                                                  An appropriate order will

                                            be issued.
