                    109 T.C. No. 9



                UNITED STATES TAX COURT



   SQUARE D COMPANY AND SUBSIDIARIES, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 15047-94, 4991-95.       Filed October 9, 1997.



     During December 1982, P established a voluntary
employees' beneficiary association (VEBA) which
qualified for exemption under sec. 501(c)(9), I.R.C.,
and as a welfare benefit fund (WBF) under sec. 419(e),
I.R.C. During the initial years of the VEBA, P
contributed amounts to the VEBA to provide certain
employee welfare benefits and for claims which were
incurred but unpaid (CIBU's) at yearend. During 1985,
P changed its VEBA yearend to Nov. 30, while P retained
a calendar yearend. Also during 1985, P began
prefunding for benefits the VEBA was expected to
provide in later years.
     1. Held, P is not automatically entitled to the
safe harbor percentages of sec. 419A(c)(5)(B)(i) and
(ii), I.R.C., in computing additions to its account
limit for CIBU's for the taxable years 1986 and 1987.
General Signal Corp. & Subs. v. Commissioner, 103 T.C.
216 (1994), followed.
                               - 2 -

          2. Held, further, P's CIBU's for 1986 and 1987
     are based upon stipulated percentages of its qualified
     direct costs for each year. See sec. 419A(c)(1), (5),
     I.R.C.
          3. Held, further, the creation of a reserve under
     sec. 419A(c)(2), I.R.C., requires the accumulation of
     assets and does not result from the accrual of a
     liability. General Signal Corp. & Subs v.
     Commissioner, supra, followed.
          4. Held, further, because P's contributions to
     its VEBA during 1986 did not result in the creation of
     a reserve for postretirement medical benefits for its
     employees, P is not entitled to an increase in its
     account limit for 1986 pursuant to sec. 419A(c)(2),
     I.R.C., with respect to that year.
          5. Held, further, the limit of sec. 1.419-1T,
     Q&A-5(b)(1), Temporary Income Tax Regs., 51 Fed. Reg.
     4324 (Feb. 4, 1986), is valid.



     Robert H. Aland, Gregg Douglas Lemein, Taylor S. Reid,

Tamara L. Frantzen, Maura Ann McBreen, and Brian K. Wydajewski,

for petitioner in docket No. 15047-94.

     Robert H. Aland, Gregg Douglas Lemein, Neal J. Block,

Frederick Edward Henry III, Maura Ann McBreen, Tamara L.

Frantzen, Taylor S. Reid, Brett L. Gold, and Brian K. Wydajewski,

for petitioner in docket No. 4991-95.

     Lawrence C. Letkewicz and Randall P. Andreozzi, for

respondent.



                              OPINION


     WELLS, Chief Judge:   The instant cases were consolidated for

purposes of trial, briefing, and opinion (hereinafter referred to

as the instant case).   The instant case is before the Court on
                                 - 3 -

the parties' cross-motions for partial summary judgment.   We must

decide whether petitioner's contribution to its trust created as

part of its voluntary employees' beneficiary association (VEBA)

plan for the 1986 taxable year is deductible.   Specifically, we

must decide:   (1) Whether petitioner is entitled to the safe

harbor limits of section 419A(c)(5)(B)(i) and (ii)1 in computing

the addition to the qualified asset account for medical, dental,

and short-term disability (also referred to as accident and

sickness) benefit claims and associated administrative costs

pursuant to section 419A(c)(1); (2) whether petitioner's $27

million contribution to its VEBA trust during 1986 constituted "a

reserve funded over the working lives of the covered employees"

for postretirement medical benefits (PRMB's) within the meaning

of section 419A(c)(2); and (3) whether the limitation of section

1.419-1T, Q&A-5(b)(1), Temporary Income Tax Regs., 51 Fed. Reg.

4324 (Feb. 4, 1986), is valid.

                            Background

     Some of the facts and certain exhibits have been stipulated

by the parties for the purpose of the instant motion.   The

stipulation of facts is incorporated in this Opinion by

reference.   When its petition was filed, petitioner's principal

office was located in Palatine, Illinois.   Petitioner is a


1
     All Code and section references are to the Internal Revenue
Code in effect for the year at issue. All Rule references are to
the Tax Court Rules of Practice and Procedure.
                               - 4 -

worldwide manufacturer of electrical distribution and control

equipment and electronic materials, components, products, and

systems for industrial and construction markets.    Petitioner is

an accrual basis taxpayer and uses a calendar yearend.    Prior to

June 1991, petitioner's common stock was traded on the New York

Stock Exchange.

Establishment of the VEBA Trust

     On December 22, 1982, petitioner established the Square D

Company and Subsidiaries Employee Welfare Benefit Trust (the VEBA

Trust) to serve as the funding vehicle for a single welfare

benefit plan, known as the Square D Company and Subsidiaries

Employee Welfare Benefit Plan (the Plan).    The Plan provided for

medical, dental, accident, sickness (short-term disability), and

long-term disability benefits for eligible employees and retirees

of petitioner and its subsidiaries.    The trustees of the VEBA

Trust were Dexter S. Free, James M. Vetta, and Donald E. Wilson,

all of whom are officers of petitioner.    The trust agreement

authorized the establishment of a depository account for trust

assets.   Funds of the VEBA Trust were deposited in an account

with First Interstate Bank of Washington, N.A., pursuant to a

custodial agreement dated December 31, 1982.    The VEBA Trust was

a "welfare benefit fund" under section 419(e) at all relevant

times.

     Prior to 1985, petitioner funded the VEBA Trust during each

year for that year's employee benefit liabilities (and
                               - 5 -

administrative costs) as they were incurred (although it could

also have made a contribution for the following year's expected

liabilities).   Petitioner also funded the VEBA Trust at yearend

for employee benefit claims that were incurred but unpaid

(CIBU's) and associated administrative costs based on actuarial

assumptions made by Prudential Insurance Co. (Prudential),

petitioner's medical claims adjuster, with respect to medical,

dental, accident, and sickness claims, and the Wyatt Co. (Wyatt),

petitioner's actuarial firm, with respect to long-term disability

claims.   Those assumptions were then reviewed by petitioner's

risk management department.   Prior to 1985, the VEBA Trust was

not funded for any other liabilities.     Petitioner contributed a

total of $57,992,061 to the VEBA Trust between December 31, 1982,

and December 31, 1984, as follows:

           Trust Yearend               Amount of Contribution

           Dec. 31, 1982                     $4,806,000
           Dec. 31, 1983                     25,761,346
           Dec. 31, 1984                     27,424,715

Petitioner's 1985 VEBA Trust Contributions

     During November 1985, the VEBA Trust filed with respondent a

Form 1128 to change its taxable year from a calendar year to a

fiscal year ending November 30.   This change was approved by

respondent and became effective as of November 30, 1985.        An

internal memorandum dated October 3, 1985, from R.G. Halliday, a

member of petitioner's tax department, to Dexter S. Free, an

officer of petitioner and trustee of the VEBA Trust, stated that
                              - 6 -

     The change in the Trust year would allow the
     contribution to be made in December of future years,
     thus providing a permanent deferral of the related tax
     liability. This change is necessary because the limit
     on the addition to a qualified asset account is tested
     at the Trust's year end. With the contribution in
     December, a full year's funding could be made, and
     therefore, the addition to asset account limits would
     be satisfied (at November 30), and the deduction would
     still fall within Square D's calendar year.

              *     *     *     *      *    *     *

     Conclusion

     The delay in the enactment of the more stringent
     funding requirements passed by the Tax Reform Act of
     1984 has left open a window of opportunity that will be
     closed on January 1, 1986. By accruing or actually
     making a payment to the VEBA, Square D will be able to
     accelerate a deduction which would otherwise be taken
     in the following year. Continuing this funding pattern
     in future years will allow Square D in essence to
     receive a permanent deferral of tax on the amount.

An internal memorandum dated December 17, 1985, from D.S. Free to

D. E. Wilson and J. M. Vetta states:

     The Tax Department has proposed that the Trust adopt a
     fiscal taxable year ending November 30th in order to
     avoid the new limitation on pre-funding of the Trust.
     Because the limit on additions to the Trust's reserves
     is tested at the Trust's year end, the fiscal year
     would allow the Trust to meet the test as of November
     30th, which means Square D could pre-fund its entire
     liability for the following year in December of the
     current year.

     Pre-funding of the Trust will allow Square D to
     accelerate the recognition, for tax purposes only, of
     $36,500,000 of 1986 expenses into 1985. Assuming the
     Company's contributions to the Trust do not decline in
     future years, we will have deferred payment of
     $18,250,000 of taxes permanently. If tax reform
     legislation produces a corporate tax decrease, this
     plan will also produce a permanent tax benefit.
                                 - 7 -

Petitioner did not change the nature or type of medical, dental,

accident, sickness, and long-term disability benefits paid

through the VEBA Trust.   Additionally, petitioner did not change

the procedures for payment of such benefit claims by the VEBA

Trust at the time the yearend was changed.

     The VEBA Trust's account balance at First Interstate on

November 30, 1985, was $1,835,475.       On December 11 and 20, 1985,

petitioner contributed $700,000 and $300,000, respectively, to

the VEBA Trust.   On December 27, 1985, petitioner contributed

$36,600,000 to the VEBA Trust.    Petitioner claimed a deduction on

its 1985 Federal income tax return for these contributions

($37,600,000) and other contributions made earlier during 1985.

Of the total deduction, $1,937,701 was disallowed by respondent

as an amount in excess of petitioner's allowable deduction.      In

accordance with the trust agreement, the VEBA Trust's assets,

including the December 1985 contributions and the VEBA Trust's

investment income, were used to pay medical, dental, accident,

sickness, and long-term disability benefits (and administrative

costs) under the plan to petitioner's employees and retirees as

those benefits (and costs) came due during the 1986 plan year.2

No contributions were made to the VEBA Trust from January 1986

through November 30, 1986.   The VEBA's account balance at First

Interstate on November 30, 1986, was $11,297,108.

2
     References to VEBA Trust years after the yearend change
include December of the previous year.
                               - 8 -

Petitioner's 1986 VEBA Trust Contribution

      During 1986, petitioner became aware that the regulations

might remove the benefit of the VEBA Trust's yearend on November

30.   An internal memorandum dated April 23, 1986, states:

      the statute and the Committee Report could be
      interpreted as allowing the qualified asset account to
      be tested at the Trust's year end. Therefore, we
      changed the Trust's year end to November 30th. At
      November 30th, the Trust's reserves will always be low
      enough to meet the qualified asset account limit. The
      Trust can then be prefunded in December and a deduction
      for the contribution taken on Square D's return for the
      calendar year.

      Pursuant to the regulations, the amount of an
      employer's deduction for contributions to a §501(c)(9)
      year is now limited to the qualified cost of the trust
      for the taxable year of the trust which falls within
      the taxable year of the employer. Thus, there is no
      advantage to our trust having a November fiscal year
      end as the qualified cost test will always be applied
      as of Square D Company's calendar year end. In other
      words, the new regulations will prevent Square D
      Company from prefunding the trust for 1987 and
      deducting the contribution in 1986.

      Bob, it is obvious the IRS perceived the loophole
      created by the statute's ambiguity about whose taxable
      year, the trust's or the corporation's, should be used
      to measure the qualified cost has opened for taxpayers.
      It remains to be seen whether the IRS can correct this
      defect in the statute through regulations. We are
      going to contact our legal counsel to see if there is
      any merit in challenging the regulations. In the
      meantime, we are proceeding under the assumption that
      Square D Company will not be allowed to deduct
      contributions to the Trust in 1986.

      On December 30, 1986, petitioner contributed $27 million to

the VEBA Trust and claimed a deduction for the full amount of

this contribution on its 1986 Federal income tax return.     That

$27 million contribution was petitioner's only contribution to
                               - 9 -

the VEBA Trust during the 1986 calendar year.   The amount of the

1986 contribution was based on an actuarial valuation by Wyatt.

Wyatt ascertained that the maximum deductible contribution for

1986 for PRMB's was $25,391,059.   Administrative expenses were

considered to be 6.5 percent of the PRMB's, or $1,650,419, making

the total deductible amount $27,041,478.   Regarding the

calculation of the deductible amounts, a December 24, 1986,

letter to petitioner from Wyatt stated the following:

     As mentioned on the phone, there are rulings several
     years old providing slim guidance to amounts which may
     be deducted for postretirement medical benefits. In
     general, deductible amounts are to be determined on an
     "actuarial basis", and are specified to be in one lump
     sum (or alternatively, over the remaining average
     lifetime) for persons who are already retired, and are
     specified as level amounts (or percentages) over the
     future working lifetimes for persons who are currently
     actively at work.

     These rules would apparently permit the full
     $20,446,059 to be deducted in 1986 for pensioners, and
     approximately $4,945,000 for currently active
     employees. Lesser amounts could, of course, be
     deducted for 1986.

Petitioner was obligated by the Plan to pay all medical, dental,

accident, sickness, and long-term disability benefits offered

under the plan.   The VEBA Trust used its assets, including the

1986 contribution and its investment earnings, to pay such

benefits (and administrative costs) to petitioner's employees and

retirees as those benefits (and costs) came due (or arose) during

the next 11 months of the Plan year.   During the calendar year

1987, the VEBA Trust paid medical and dental benefit claims under
                              - 10 -

the plan for retirees in the amount of $2,787,000.   During the

Plan year, the VEBA Trust paid benefit claims, including related

expenses, in the amount of $31,572,854.   The VEBA Trust's balance

at First Interstate on November 30, 1987, was $7,992,215.   The

balance on December 31, 1986, was $35,058,670.

     The parties have stipulated that the addition to the account

limit for CIBU's for the trust year ended November 30, 1986, if

based on the safe harbor limits of section 419A(c), is

$10,020,825 (plus $617,245 of related administrative costs), and

if not based on the safe harbor limits, is $7,619,925 (plus

$395,683 of related administrative costs).   The parties also

stipulated an increase, pursuant to section 419A(f)(7), in the

amount of $432,010.

Petitioner's 1987 VEBA Trust Contribution

     Pursuant to an amendment to the VEBA Trust agreement on

December 29, 1987, employee welfare benefits for collectively

bargained employees ceased to be funded through the VEBA Trust

and were thereafter funded through a separate VEBA trust for

collectively bargained employees.   On December 29, 1987,

petitioner contributed $12,400,000 to the VEBA Trust and

$37,700,000 to the VEBA trust for the collectively bargained

employees.   The amounts contributed to the VEBA trust for the

collectively bargained employees are not in issue in the instant

case.
                               - 11 -

     Petitioner calculated the amount of the 1987 contribution

based on an actuarial valuation by Wyatt.    Wyatt ascertained, as

of November 30, 1987, that the maximum deductible combined

contribution for 1987 for postretirement medical benefits was

$22,476,975.   Of that amount, $13,243,405 was attributable to

employees and retirees not covered by collectively bargained

agreements.    In its report dated December 9, 1987, Wyatt stated:

     The maximum tax deductible contribution for 1987 is
     equal to $22,476,975 plus the any [sic] contributions
     for postretirement medical paid but not previously
     deducted. This subtotal must further be reduced by any
     assets attributable to the postretirement medical plan
     remaining in the trust at the end of the plan year.

Wyatt offered no explanation as to why the associated

administration expenses were not included.

     The lump-sum present values, as of December 1, 1987, of

future retiree medical benefits for current pensioners and for

current active employees not covered by a collectively bargained

agreement, were $10,732,153 and $23,766,492, respectively.

     Pursuant to the VEBA Trust agreement, the VEBA Trust's

assets, including the December 29, 1987, contribution, additional

contributions made during 1988, and the trust's investment

earnings, were used to pay the cost of providing welfare benefits

under the Plan to petitioner's employees and retirees as those

benefits (and costs) arose during the VEBA Trust's 1988 year.

The VEBA Trust's balance on November 30, 1988, was $1,525,484.

During the 1988 calendar year, the VEBA Trust paid benefit claims
                              - 12 -

plus related expenses in the amount of $26,902,481, and   medical

and dental benefit claims under the Plan for retirees in the

amount of $4,092,000.

Post-1987 Facts and Circumstances

     Petitioner ceased prefunding the VEBA Trust after the

December 1987 contribution when, sometime during October 1988,

the VEBA Trust assets were depleted.   After that time, petitioner

funded the VEBA Trust as the benefit claims were incurred.

Because petitioner was no longer prefunding the VEBA Trust,

during May 1990 it changed its VEBA Trust yearend from November

30 back to a calendar yearend.

     Petitioner did not disclose in its financial reports that it

funded a reserve for the provision of postretirement medical

benefits.   The only reference to the VEBA Trust in petitioner's

financial reports was to the fact that petitioner received a

deferred tax benefit as a result of prefunding its group health

insurance trust.3

     During 1988, for retirees and disabled employees, and during

1990, for active employees, petitioner began disclosing to such

employees the existence of the VEBA Trust.   No disclosure was

ever made to retirees, employees, or collective bargaining units

3
     For example, petitioner's 1986 annual report indicates that
$12,420,000 of Federal income taxes (46 percent of petitioner's
$27 million contribution) was deferred by prefunding the
company's group health insurance trust, and the deferral of the
tax effect of prefunding in 1985 in the amount of $13,648,000 was
reversed.
                              - 13 -

representing its employees that petitioner prefunded a reserve

within the VEBA Trust to accumulate assets for PRMB's for

employees.

     Petitioner engaged the accounting firm of Touche Ross & Co.

(Touche Ross) to audit4 the VEBA Trust's financial statements as

of December 31, 1986, and November 30, 1987.   Petitioner informed

Touche Ross of the liabilities of the VEBA Trust.   Although

petitioner did disclose to Touche Ross that there existed

liabilities for unrevealed claims for medical, dental, short- and

long-term disabilities, and associated administrative costs,

petitioner did not disclose any "liabilities" of the VEBA Trust

for PRMB's and did not disclose that any portion of the

contributions made was for the purpose of funding a reserve.

Consequently, the VEBA Trust's financial statements disclose

neither a reserve nor a liability for a reserve for PRMB's.

     Financial Accounting Standards Board (FASB) Statement No.

81, entitled "Disclosure of Post Retirement Health Care and Life

Insurance Benefits" (FASB 81), was in effect during petitioner's

1986 year.   FASB section 81.06 provides that employers, at a

minimum, must disclose (1) a description of the benefits provided

and the employee groups covered; (2) a description of the

accounting and funding policies followed for those benefits; and


4
     Touche Ross's audit was limited, and it did not express an
opinion as to certain elements of the financial statements.
Those areas are not relevant to the instant case.
                                - 14 -

(3) the cost of those benefits recognized in the period.      FASB 81

offers examples of appropriate disclosure statements.    When

benefits are annually funded based on estimated accruals, a

proper disclosure could state:    "The estimated cost of such

benefits is accrued over the working lives of those employees

expected to qualify for such benefits as a level percentage of

their payroll costs".   Alternatively, when benefit costs are

expensed as paid, a proper disclosure could state:    "The cost of

retiree health care and life insurance benefits is recognized as

an expense as claims are paid".    Petitioner's disclosure for

retiree health and life insurance benefits for its 1986 year

stated: "The cost of retiree health coverage is recognized as an

expense when claims are paid.    The cost of life insurance

benefits is recognized as an expense as premiums are paid."

     The parties have stipulated that the addition to the account

limit for incurred but unpaid claims for the VEBA Trust's year

ended November 30, 1987, if based on the safe harbor limits of

section 419A(c)(5), is $11,193,974 (plus $731,907 of related

administrative costs), and if not based on the safe harbor

limits, is $5,290,729 (plus $261,232 of related administrative

costs).

                            Discussion

     Summary judgment may be granted if the pleadings and other

materials demonstrate that no genuine issue exists as to any of

the material facts and that a decision may be rendered as a
                                 - 15 -

matter of law.    Rule 121(b); Sundstrand Corp. v. Commissioner, 98

T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994);

Colestock v. Commissioner, 102 T.C. 380, 381 (1994).      In the

instant case, each party has moved for partial summary judgment.

Neither party argues that there is any material issue of fact

remaining if we decide the three issues in the manner in which we

do.

Legal Framework

      In sections 419 and 419A, enacted as part of the Deficit

Reduction Act of 1984 (DEFRA), Pub. L. 98-369, 98 Stat. 494,

Congress limited the deductibility of contributions to welfare

benefit funds (WBF's) in order to restrict an employer from

taking a current deduction for welfare benefits to be provided in

the future.   Section 419 provides, in relevant part, the

following:

      SEC. 419. TREATMENT OF FUNDED WELFARE BENEFIT PLANS.

           (a) General Rule.--Contributions paid or accrued by an
      employer to a welfare benefit fund--

                  (1)   shall not be deductible under this chapter,
           but

                (2) if they would otherwise be deductible, shall
           (subject to the limitation of subsection (b)) be
           deductible under this section for the taxable year in
           which paid.

           (b) Limitation.--The amount of the deduction allowable
      under subsection (a)(2) for any taxable year shall not
      exceed the welfare benefit fund's qualified cost for the
      taxable year.

           (c)    Qualified Cost.--For purposes of this section--
                      - 16 -

     (1) In general.--Except as otherwise provided in
this subsection, the term "qualified cost" means, with
respect to any taxable year, the sum of--

           (A) the qualified direct cost for such
      taxable year, and

           (B) subject to the limitation of section
      419A(b), any addition to a qualified asset account
      for the taxable year.

     (2) Reduction for funds after-tax income.--In the
case of any welfare benefit fund, the qualified cost
for any taxable year shall be reduced by such fund's
after-tax income for such taxable year.

      (3)    Qualified direct cost.--

           (A) In general.--The term "qualified direct
      cost" means, with respect to any taxable year, the
      aggregate amount (including administrative
      expenses) which would have been allowable as a
      deduction to the employer with respect to the
      benefits provided during the taxable year, if--

                  (i) such benefits were provided
             directly by the employer, and

                  (ii) the employer used the cash receipts
             and disbursements method of accounting.

            (B) Time when benefits provided.--For
       purposes of subparagraph (A), a benefit shall be
       treated as provided when such benefit would be
       includible in the gross income of the employee if
       provided directly by the employer (or would be so
       includible but for any provision of this chapter
       excluding such benefit from gross income).

      *      *    *     *      *    *     *

(d)    Carryover of Excess Contributions.--If--

     (1) the amount of the contributions paid (or
deemed paid under this subsection) by the employer
during any taxable year to a welfare benefit fund,
exceeds

       (2)   the limitation of subsection (b),
                               - 17 -

           such excess shall be treated as an amount paid by the
           employer to such fund during the succeeding taxable
           year.

Section 419 provides that an employer's deduction for

contributions to a WBF, including a VEBA, during a taxable year

may not exceed the fund's "qualified cost" for the taxable year.

     The qualified cost is the sum of qualified direct cost (QDC)

and any additions to a qualified asset account (QAA), subject to

the limitations of section 419A(b), less after-tax income for the

year.   Sec. 419(c).   The QDC is the aggregate amount, including

administrative expenses, which would have been allowable as a

deduction to the employer with respect to the benefits provided

during the tax year if the employer had provided those benefits

directly rather than through the funds and used the cash receipts

and disbursements method of accounting.   Sec. 419(c)(3)(A).   Such

benefits are deemed provided at the time they would have been

includable in the gross income of the employees if provided

directly by the employer (disregarding any provision which would

otherwise exclude such benefits from gross income).   Sec.

419(c)(3)(B).   If a contribution exceeds the year's qualified

cost, the excess is treated as a contribution by the employer to

the fund during the succeeding taxable year.   Sec. 419(d).

Pursuant to the foregoing framework, a deduction is available

only for contributions made during the taxable year for benefits

actually provided during the taxable year (with the exception of

additions made to QAA's for CIBU's and PRMB's).   Accordingly,
                                 - 18 -

employers are prohibited from prefunding benefits expected to be

provided in later years (other than additions made to QAA's).

Stated another way, after the enactment of DEFRA, employers are

no longer allowed to accelerate deductions into one taxable year

for employee welfare benefits to be provided in later taxable

years, except as provided in sections 419(c)(1)(B) and 419A.

     Section 419A provides, in relevant part:

     SEC. 419A.    QUALIFIED ASSET ACCOUNT; LIMITATION ON ADDITIONS
                   TO ACCOUNT.

          (a) General Rule.--For purposes of this subpart and
     section 512, the term "qualified asset account" means any
     account consisting of assets set aside to provide for the
     payment of--

                  (1)   disability benefits,

                  (2)   medical benefits,

                  (3)   SUB or severance pay benefits, or

                  (4)   life insurance benefits.

          (b) Limitation on Additions to Account.--No addition
     to any qualified asset account may be taken into account
     under section 419(c)(1)(B) to the extent such addition
     results in the amount in such account exceeding the account
     limit.

          (c)     Account Limit.--For purposes of this section--

               (1) In general.--Except as otherwise provided in
          this subsection, the account limit for any qualified
          asset account for any taxable year is the amount
          reasonably and actuarially necessary to fund--

                       (A) claims incurred but unpaid (as of the
                  close of such taxable year) for benefits referred
                  to in subsection (a), and

                       (B) administrative costs with respect to
                  such claims.
                    - 19 -

     (2) Additional reserve for post-retirement
medical and life insurance benefits.--The account limit
for any taxable year may include a reserve funded over
the working lives of the covered employees and
actuarially determined on a level basis (using
assumptions that are reasonable in the aggregate) as
necessary for--

          (A) post-retirement medical benefits to be
     provided to covered employees (determined on the
     basis of current medical costs), or

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

    *     *     *     *      *    *     *

     (5) Special limitation where no actuarial
certification.--

          (A) In general.--Unless there is an
     actuarial certification of the account limit
     determined under this subsection for any taxable
     year, the account limit for such taxable year
     shall not exceed the sum of the safe harbor limits
     for such taxable year.

          (B)   Safe harbor limits.--

               (i) Short-term disability benefits.--In
          the case of short-term disability benefits,
          the safe harbor limit for any taxable year is
          17.5 percent of the qualified direct costs
          (other than insurance premiums) for the
          immediately preceding taxable year with
          respect to such benefits.

               (ii) Medical benefits.--In the case of
          medical benefits, the safe harbor limit for
          any taxable year is 35 percent of the
          qualified direct costs (other than insurance
          premiums) for the immediately preceding
          taxable year with respect to medical
          benefits.

    *     *     *     *      *    *     *

               (i) Regulations.--The Secretary shall
          prescribe such regulations as may be
                                - 20 -

                     appropriate to carry out the purposes of this
                     subpart. Such regulations may provide that
                     the plan administrator of any welfare benefit
                     fund which is part of a plan to which more
                     than 1 employer contributes shall submit such
                     information to the employers contributing to
                     the fund as may be necessary to enable the
                     employers to comply with the provisions of
                     this section.

     A fund's QAA consists of any assets set aside to provide for

the payment of (1) disability    benefits, (2) medical benefits,

(3) supplemental unemployment compensation benefits (SUB) or

severance pay benefits, or (4) life insurance benefits.     Sec.

419A(a).   No addition to a QAA which causes the account balance

to exceed the account limit may be considered as a portion of the

qualified cost under section 419(c)(1)(B).    Sec. 419A(b).   The

account limit for any taxable year consists of two separate

elements, each of which is in issue in the instant case.

     The first element of the account limit is the amount

reasonably and actuarially necessary to fund CIBU's as of the

close of the taxable year, as well as administrative costs

related to such claims.   Sec. 419A(c)(1).   In the event that the

CIBU's are not actuarially determined, the deduction can be no

greater than certain safe harbor percentages.    Sec. 419A(c)(5).

The second element of the account limit is a reserve funded over

the working lives of covered employees and actuarially determined

on a level basis (using assumptions that are reasonable in the

aggregate) as necessary for PRMB's to be provided to covered

employees (determined on the basis of current medical costs) or
                                - 21 -

postretirement life insurance benefits to be provided to covered

employees.   Sec. 419A(c)(2).

     In the event that a taxpayer did not fund a reserve for

CIBU's or postretirement medical or life insurance benefits, the

account limit for that taxable year would be zero.      Any amount

left in the VEBA Trust at yearend in such a case would cause a

reduction in the deduction equal to that remaining balance

because that amount would not qualify as QDC, for although the

requirement that the contribution be made during the taxable is

satisfied, such remaining funds were not used to provide welfare

benefits during the taxable year.    Sec. 419(c).

Issues

     The parties disagree as to whether petitioner is

automatically (i.e., without having to show reasonableness)

entitled to use the safe harbor limits of section

419A(c)(5)(B)(i) and (ii) (discussed infra) in computing the

addition to the QAA for medical, dental, and short-term

disability benefit CIBU's, and associated administrative costs.

The parties also disagree as to whether petitioner's $27 million

contribution, or a part of that contribution, to its VEBA Trust

during 1986 funded a reserve over the working lives of the

covered employees for the provision of PRMB's.      Finally,

petitioner challenges the validity of section 1.419-1T, Q&A-

5(b)(1), Temporary Income Tax Regs., 51 Fed. Reg. 4324 (Feb. 4,
                               - 22 -

1986), on the ground that it contradicts the plain language of

section 419.

     A.     Claims Incurred But Unpaid

     Section 419A(c)(5)(A) provides that, without an actuarial

certification with respect to an account limit determined under

section 419A(c), the account limit may not exceed certain "safe

harbor" limits for the taxable year.     In the case of short-term

disability benefits, the safe harbor limit for any taxable year

is 17.5 percent of the QDC (other than insurance premiums) for

the immediately preceding taxable year with respect to such

benefits.    Sec. 419A(c)(5)(B)(i).   In the case of medical

benefits, the safe harbor limit for any taxable year is 35

percent of the QDC (other than insurance premiums) incurred for

such benefits in the prior taxable year.     Sec. 419A(c)(5)(B)(ii).

The safe harbor limits are not automatic safe harbors because a

taxpayer will not be entitled to use such limits unless they are

reasonable, as required by section 419A(c)(1).     General Signal

Corp. & Subs. v. Commissioner, 103 T.C. 216, 232 (1994).       If a

taxpayer obtains an actuarial certification, however, it is not

limited to the safe harbors.

     Petitioner contends that there is no reasonableness

requirement in section 419A(c)(5), and therefore it is entitled

to use the safe harbor limits.    Based on those limits, the

additions to the account limit attributable to medical, dental

and short-term disability CIBU's are $10,020,825 (plus $617,245
                              - 23 -

of related administrative costs) for the VEBA Trust year ended

November 30, 1986, and $11,193,974 (plus $731,907 of related

administrative costs) for the VEBA Trust year ended November 30,

1987.   The parties have stipulated that the additions to the

account limit for CIBU's, if not based on the safe harbor limits,

are $7,619,925 (plus $395,683 of related administrative costs)

and $5,290,729 (plus $261,232 of related administrative costs)

for the VEBA Trust years ended November 30, 1986 and 1987,

respectively.

     Petitioner contends that the phrase in section 419A(c)(1)

"Except as otherwise provided in this subsection" means that

any other provision, i.e., section 419A(c)(5), is outside of, and

not subject to, the general requirement of section 419A(c)(1).

Accordingly, petitioner contends that, because section 419A(c)(5)

does not require that the account limit be reasonable, no such

requirement exists.   Petitioner also argues that the safe harbor

limits allow taxpayers to avoid the burden of demonstrating that

additions to the account limit are reasonable, because the only

way to show reasonableness would be to obtain an actuarial

certification.

     We disagree with petitioner.   Although Congress sought to

reduce the cost of compliance by allowing certain additions to

the account limit to be made without having to incur the cost of

obtaining actuarial certification, a taxpayer must still show

that the additions to the account limit for CIBU's during the tax
                              - 24 -

year are reasonable.   In General Signal Corp. & Subs. v.

Commissioner, supra, we found that the taxpayer's calculations

were not reasonable where the estimates were not made as of the

fund's yearend, the computations did not apportion administrative

costs between insurance premiums and other qualified direct

costs, and the calculations were made using direct costs from the

wrong years.   If there were no reasonableness standard, taxpayers

would automatically be entitled to the safe harbor limits.      The

legislative history, however, states that "Even if the safe

harbors are satisfied, the taxpayer is to show that the reserves,

as allowed under the general standards provided by the bill

(e.g., claims incurred by unpaid) are reasonable."    General

Signal Corp. & Subs. v. Commissioner, supra at 232 (quoting H.

Conf. Rept. 98-861, at 1158 (1984), 1984-3 C.B. (Vol. 2) 1, 412).

     In General Signal, we addressed and rejected much of the

argument petitioner makes in the instant case.   Petitioner

neither cites nor addresses the analysis provided in General

Signal.   Our reasoning in General Signal is supported by the

legislative history, and, because petitioner has neither argued

that the additions to the account limit based on the safe harbors

are reasonable nor offered a compelling argument to abandon the

General Signal reasoning in the instant case, we will not do so.

Consequently, we grant respondent's motion for partial summary

judgment with regard to the CIBU's, and deny petitioner's motion

for partial summary judgment with regard thereto.    In so doing,
                              - 25 -

we conclude that petitioner is entitled to an increase in the

account limit attributable to medical, dental and short-term

disability CIBU's in the amounts of $7,619,925 (plus $395,683 of

related administrative costs) and $5,290,729 (plus $261,232 of

related administrative costs) for the VEBA Trust years ended 1986

and 1987, respectively.

     B.   Reserve for Postretirement Medical Benefits

     Petitioner argues that the phrase "reserve funded over the

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

describes a method of measuring a liability to provide PRMB's and

does not require a separate accumulation of assets.     The issue of

whether an actual reserve must be created has been addressed by

this Court in General Signal Corp. & Subs. v. Commissioner,

supra, and Parker-Hannifin Corp. v. Commissioner, T.C. Memo.

1996-337.   In those cases, we held that the phrase "reserve

funded over the working lives of covered employees" requires an

accumulation of assets equal to the deduction taken, and that

those assets must be used to pay retiree welfare benefit

expenses.   In General Signal, we stated that

     the plain language of section 419A(c)(2) suggests that
     Congress intended to allow the accumulation of funds
     over the working lives of employees for the purpose of
     providing postretirement benefits. This interpretation
     is supported by repeated references in the legislative
     history to the accumulation of reserves for purposes of
     funding postretirement benefits and by the reference to
     revenue rulings which dealt with reserves used to
     accumulate funds for postretirement benefits.
     Additionally, the legislative history also establishes
     that Congress intended "to prevent employers from
                               - 26 -

       taking premature deductions, for expenses which have
       not yet been incurred". * * * [General Signal Corp. &
       Subs. v. Commissioner, supra at 243-244; emphasis
       added.]

In both General Signal and Parker-Hannifin Corp., we found that

no reserve had been created, obviating the need to consider

whether the contributions were excessive from an actuarial

standpoint.

       In General Signal, we stated that the phrase "reserve

funded", on its face, "suggests that Congress intended this

provision to allow the accumulation of funds by a welfare benefit

fund for the purpose of providing postretirement benefits."

General Signal Corp. & Subs. v. Commissioner, 103 T.C. at 239.

Where a statute is ambiguous we may look to its legislative

history and to the reason for its enactment.     United States v.

American Trucking Associations, 310 U.S. 534, 543-544 (1940);

U.S. Padding Corp. v. Commissioner, 88 T.C. 177, 184 (1987),

affd. 865 F.2d 750 (6th Cir. 1989).     In General Signal, in light

of the taxpayer's assertions that the phrase "reserve funded"

does not have a commonly understood meaning, we assumed arguendo

that the phrase was ambiguous and considered the legislative

history.    General Signal Corp. & Subs. v. Commissioner, supra at

240.

       The relevant portion of the committee report states:

            Prefunding of life insurance, death benefits, or
       medical benefits for retirees.--The qualified asset account
       limits allow amounts reasonably necessary to accumulate
       reserves under a welfare benefit plan so that the medical
                               - 27 -

     benefit or life insurance (including death benefit) payable
     to a retired employee during retirement is fully funded upon
     retirement. * * * The conferees intend that the Treasury
     Department prescribe rules requiring that the funding of
     retiree benefits be based on reasonable and consistently
     applied actuarial cost methods * * * [H. Conf. Rept. 98-861,
     at 1157 (1984), 1984-3 C.B. (Vol. 2) 1, 411; emphasis
     added.]

In General Signal, we concluded that Congress' intent was to

allow for the accumulation of assets to fund certain

postretirement benefits.    In the instant case, petitioner has

offered no arguments, beyond those made and rejected in General

Signal Corp. & Subs. v. Commissioner, supra, and Parker-Hannifin

Corp. v. Commissioner, supra, as to whether the language of

section 419A requires an accumulation of funds in order to create

a reserve.   Consequently, we hold that such an accumulation of

funds is necessary.   Accordingly, we next consider whether such

an accumulation was made.

     We consider all of the facts and circumstances in deciding

whether a reserve funded over the working lives of covered

employees for postretirement welfare benefits was created.

General Signal Corp. & Subs. v. Commissioner, supra; Parker-

Hannifin Corp. v. Commissioner, supra.

     In General Signal, the taxpayer established its VEBA Trust

to prefund benefit payments it expected to incur in the calendar

year following the year during which the contribution was made.

For contributions to a VEBA made after December 31, 1985, the

employer's deduction was limited to the employer's qualified
                               - 28 -

direct cost for the year, plus any contributions to a QAA

reasonably necessary to fund CIBU's and/or to provide a reserve

for postretirement medical or life insurance benefits.   Secs. 419

and 419A.   The taxpayer in General Signal increased its VEBA

contributions during 1986 by making additions to a QAA, although

it did not intend the VEBA trust to establish a reserve for

postretirement benefits or accumulate assets for purposes of

funding a reserve.   The taxpayer's additional QAA contributions

during 1986 and 1987 totaled $63,300,000.   The VEBA trust's

balance increased by only $8,782,003 between November 30, 1986,

and November 30, 1988, while its financial statements showed

expenses for retiree liabilities of only $8,813,000.

Accordingly, of the $63,300,000 contributed to fund a reserve, at

least $45,700,000 ($63,300,000 less $8,782,003 and $8,813,000)

was used to pay active employee welfare benefits during 1987 and

1988.   Additionally, the taxpayer made no disclosures on its

financial reports of the establishment or maintenance of reserves

for postretirement medical or life insurance benefits, nor did it

make any disclosure to its employees or their unions of the

establishment or maintenance of such reserves.   Finally, the

taxpayer's Form 1024, containing projected yearend balances for

1986 through 1988, did not show reserves established for any

purpose.    On the basis of all of the facts and circumstances, we

concluded that the VEBA trust did not accumulate assets for the
                               - 29 -

purpose of funding a reserve for postretirement medical and life

insurance benefits.

     In Parker-Hannifin Corp. v. Commissioner, supra, the

taxpayer argued that during its 1987 tax year it contributed

$26,913,158 for postretirement employee welfare benefits.      The

taxpayer neither disclosed any assets set aside for

postretirement welfare benefits in its 1987 financial statements,

nor informed its employees of the existence or maintenance of

such assets.   An internal document indicated that the 1987

contribution was expected to be depleted by benefit payments over

the 12 to 18 months following the creation of the VEBA Trust,

and, in fact, the contribution was depleted by the second month

of the taxpayer's 1989 year.   During its 1988 year, petitioner

made no contributions to the VEBA trust, and in the following

years, only monthly contributions which approximated the monthly

welfare benefits paid were made to the trust.   The ending balance

in the VEBA trust for each of the years 1989 and 1990 was zero.

The taxpayer's Form 1024, Application for Recognition of

Exemption, did not disclose the existence of a reserve.    Although

such a disclosure was not required by the Code or the

regulations, the taxpayer's lack of disclosure, together with

other evidence, indicated that reserves did not exist.    We

concluded that the taxpayer did not accumulate assets in the VEBA

trust for the purposes of establishing a reserve for the payment

of retiree welfare benefits.
                               - 30 -

     In the instant case, respondent's position, simply stated,

is that, considering all of the evidence, petitioner did not

create a reserve.

     The VEBA Trust was created by petitioner during 1982.    One

of its purposes was to accelerate the company's deduction for

CIBU's.   During 1985, petitioner recognized that statutory

amendments made by DEFRA, which did not become effective until

January 1, 1986, would tighten the limitations governing the

deduction of contributions to VEBA trusts.   An internal

memorandum dated December 17, 1985, indicates that petitioner

believed that prefunding the VEBA Trust would allow an

acceleration of $36,500,000 of 1986 expenses into 1985,

producing, assuming continued contributions to the trust, a

permanent deferral of taxes.   The memorandum also notes that if

tax reform legislation produced a corporate tax decrease,

prefunding would produce additional tax benefits.   Petitioner

funded the VEBA Trust with contributions totaling $37,600,000

during December 1985.   That contribution was the only

contribution made to the VEBA Trust during its year ending

November 30, 1986.   The VEBA Trust's beginning balance on

December 1, 1985, of $1,835,475, its investment income of

$360,578, and the December contributions were used to pay

medical, dental, accident, sickness, and long-term disability

benefits under the plan as they were incurred during the year,

leaving a yearend balance of $11,297,108 on November 30, 1986.
                               - 31 -

     As discussed infra, section 1.419-1T, Q&A-5(b)(1), Temporary

Income Tax Regs., 51 Fed. Reg. 4324 (Feb. 4, 1986), effectively

denies the prefunding of claims by using differing taxable year

ends.   In an internal memorandum dated April 23, 1986, petitioner

recognized that that regulation could close the "loophole created

by the statute's ambiguity."   During 1986, petitioner increased

its section 419A account limit by allegedly creating a reserve

for PRMB's under section 419A(c)(2).    Wyatt, petitioner's

actuary, calculated that the present value of petitioner's

PRMB's, as of December 1, 1986, for retirees was $20,446,059, and

for current active employees was $46,699,569, the deductible

portion of which was $4,945,000.    Accordingly, in Wyatt's view

the total deductible cost of PRMB's for petitioner's tax year

ending December 31, 1986, was $25,391,059.    The associated

administrative expenses were $1,650,419, which is 6.5 percent of

the deductible PRMB's, and when they are added to the cost of the

PRMB's, the total is $27,041,478.

     On December 30, 1986, petitioner contributed $27 million to

the VEBA Trust.   That contribution was the only one made to the

VEBA Trust during the 1986 calendar year.    The balance of the

VEBA Trust on December 31, 1986, was $35,058,670.    During the

1987 Plan year, the VEBA Trust paid benefit claims, including

related expenses, of $31,572,854.    During the 1987 Plan year,

only $2,787,000 was paid by the VEBA Trust for benefit claims of
                               - 32 -

retirees.   The VEBA Trust's balance on November 30, 1987, was

$7,992,215.

     Wyatt calculated that the present value of petitioner's

PRMB's, as of December 1, 1987, for retirees was $10,732,153, and

for current active employees was $23,766,492, the deductible

portion of which was $2,511,252, for a total deductible reserve

contribution of $13,243,405.

     On December 29, 1987, petitioner made a $12,400,000

contribution to the VEBA Trust.   During the 1988 Plan year, the

December 29, 1987, contribution, additional contributions made

during 1988, and the VEBA Trust investment income were used to

pay the cost of providing medical, dental, accident, sickness,

and long-term disability benefits (and administrative costs)

under the Plan to petitioner's employees and retirees as those

benefits and costs came due during the VEBA Trust's 1988 year.

During the 1988 calendar year, only $4,092,000 was actually paid

by the VEBA Trust under the Plan for PRMB's.    The VEBA Trust's

balance on November 30, 1988, was $1,525,484.

     If there had been an accumulation of assets, the balance

would have reflected the reserve contributions for 1986 and 1987,

less any amounts actually paid for PRMB's during 1986 and 1987.

The 1986 deductible contribution amount (the amount actuarially

determined as necessary to create a reserve for PRMB's) was

$27,041,478.   During the 1987 plan year, $2,787,000 was paid by

the VEBA Trust for PRMB's.   Accordingly, the beginning balance
                              - 33 -

for the 1988 plan year should have been, if properly funded,

$24,254,478 ($27,041,478 less $2,787,000).   The yearend balance

on November 30, 1987, was in fact only $7,992,215.   The

deductible contribution amount for the 1988 plan year was

$13,243,405.5   During the 1988 year, $4,092,000 was paid for

PRMB's.   Accordingly, the increase in the required reserve at the

1988 plan yearend is $9,151,405 ($13,243,405 less $4,092,000).

Consequently, the total reserve balance should be $33,405,883 at

the 1988 yearend ($24,254,478 plus $9,151,405).   The November 30,

1988, yearend balance of the VEBA Trust, however, was $1,525,484,

which supports a conclusion that, in fact, no reserve was funded.

     Petitioner claims that it continued to fund the reserve for

PRMB's during 1988.   Petitioner, however, ceased funding the VEBA

Trust for PRMB's after the December 1987 contribution, and

sometime during October 1988, the VEBA Trust's assets were

depleted.   If petitioner had funded a reserve for the provision

of PRMB's, it would not have depleted the VEBA Trust by October

1988.   What apparently caused that depletion was that all of the

assets of the VEBA Trust were used to pay welfare benefit claims

incurred, which is inconsistent with funding a reserve.

     Although petitioner did make reference to an insurance trust

on its financial statements, it gave no notice to shareholders,


5
     This figure represents only the deductible contribution
amount for employees not covered by collectively bargained
agreements.
                               - 34 -

employees, retirees or disabled employees of the existence of a

reserve within the VEBA Trust for the accumulation of assets,

i.e., the creation of a reserve, for the provision of

postretirement medical benefits.    This circumstance also supports

the conclusion that petitioner did not fund or create a reserve.

     Petitioner engaged the services of Touche Ross to audit its

VEBA Trust financial statements, but it did not disclose to

Touche Ross the existence of a reserve or liabilities for the

provision of PRMB's.    Petitioner, however, did disclose its

reserve for CIBU's, and it was reported on the VEBA Trust's

financial statements.

     Although FASB 81 requires disclosure of the funding policies

followed for providing benefits and sets out an example of how a

company could disclose the fact that it funded benefits on the

basis of an accrual over the working lives of the covered

employees, the funding method for the cost of retiree health

coverage that petitioner actually disclosed was that claims would

be expensed as they were incurred.      This circumstance is

additional support for the conclusion that petitioner did not

fund a reserve for the provision of PRMB's.

     In an attempt to distinguish General Signal Corp. & Subs. v.

Commissioner, 103 T.C. 216 (1994), and Parker-Hannifin Corp. v.

Commissioner, T.C. Memo. 1996-337, from the instant case,

petitioner points out that it established the VEBA Trust in 1982

and used it at all times thereafter to pay employee welfare
                                - 35 -

benefits, whereas petitioner asserts that in General Signal and

Parker-Hannifin Corp. the VEBA's were short-lived tools utilized

primarily as a mechanism for accelerating expenses prior to the

corporate tax rate reduction.    Although it may be true that

petitioner's VEBA Trust has been used to provide employee welfare

benefits since 1982, our inquiry is not whether the VEBA Trust

was used improperly for tax avoidance purposes.    Rather, the

question is whether petitioner created a reserve for PRMB's

funded over the working lives of its covered employees.    Such

reserves were not provided for by the Code for tax years ending

prior to December 31, 1985.    Petitioner increased its account

limit for a reserve contribution in 1986 and 1987 but then ceased

such funding.    Because we must decide whether a reserve was in

fact created, it is irrelevant how long petitioner utilized a

VEBA Trust, or that it still has its VEBA Trust.

     For the foregoing reasons, we hold that no reserve was

created.


     C.    Section 1.419-1T, Q&A-5(b)(1), Temporary Income Tax
           Regs.

     The parties, on brief, agree that under section 419 a

contribution to a VEBA Trust is not deductible unless it

satisfies the following two conditions (among others).    First,

the contribution is deductible only to the extent it is paid to

the fund during the taxable year.    Sec. 419(a)(2).   The parties

agree that $28,937,701 was paid or deemed paid to the fund during
                               - 36 -

1986.6    Second, the amount of the deduction shall not exceed the

fund's qualified cost for the fund's taxable year.    Sec. 419(b);

sec. 1.419-1T, Q&A-4, Temporary Income Tax Regs., 51 Fed. Reg.

4324 (Feb. 4, 1986).    As discussed supra, the qualified cost is

the qualified direct cost, $29,651,067, plus any additions to a

QAA, $8,447,418,7 less the fund's after-tax income for the year,

$1,512,700, which in the instant case yields $36,585,785.    Sec.

419(c).    The third limitation, contained in section 1.419-1T,

Q&A-5(b)(1), Temporary Income Tax Regs., 51 Fed. Reg. 4324 (Feb.

4, 1986), causes contributions made after the close of a fund's

taxable year, but during the taxpayer's taxable year, to be

included in the fund's yearend balance.    The dispute of the

parties is whether the regulation is valid.



     1.    Mechanics of the Regulation

     Section 1.419-1T, Q&A-5(b)(1), Temporary Income Tax Regs.,

supra, provides:

       (b)(1) Pursuant to section 419A(i), notwithstanding
     section 419 and § 1.419-1T, contributions to a welfare
     benefit fund during any taxable year of the employer
     beginning after December 31, 1985, shall not be
     deductible for such taxable year to the extent that
     such contributions result in the total amount in the

6
     This amount comprises the Dec. 30, 1986, contribution of $27
million and the $1,937,701 disallowed in 1985 and deemed to have
been contributed on Jan. 1, 1986.
7
     The $8,447,418 addition to the QAA comprises CIBU's of
$7,619,725, associated administrative costs of $395,683, and an
increase pursuant to sec. 419A(f)(7) of $432,010.
                              - 37 -

     fund as of the end of the last taxable year of the fund
     ending with or within such taxable year of the employer
     exceeding the account limit applicable to such taxable
     year of the fund (as adjusted under section
     419A(f)(7)). Solely for purposes of this subparagraph,
     (i) contributions paid to a welfare benefit fund during
     the taxable year of the employer but after the end of
     the last taxable year of the fund that relates to such
     taxable year of the employer, and (ii) contributions
     accrued with respect to a welfare benefit fund during
     the taxable year of the employer or during any prior
     taxable year of the employer (but not actually paid to
     such fund on or before the end of a taxable year of the
     employer) and deducted by the employer for such or any
     prior taxable year of the employer, shall be treated as
     an amount in the fund as of the end of the last taxable
     year of the fund that relates to the taxable year of
     the employer. Contributions that are not deductible
     under this subparagraph are in excess of the qualified
     cost of the welfare benefit fund for the taxable year
     of the fund that relates to the taxable year of the
     employer and thus are treated as contributed to the
     fund on the first day of the employer's next taxable
     year.

     The first sentence of the foregoing regulation reiterates

the rule established by sections 419 and 419A, and General Signal

Corp. & Subs. v. Commissioner, supra, providing that

contributions to a WBF which cause the amount in the VEBA Trust

to be greater than the account limit during a tax year will cause

a reduction in the deductible amount of any contribution made

during the year.   The second sentence eliminates the tax benefit

to be obtained by having the taxable year of a WBF end prior to

the taxable yearend of a taxpayer.     That sentence causes any

contribution or portion thereof made to a WBF after the fund's

yearend, but prior to the taxpayer's yearend (intrayearend
                                - 38 -

contributions), to be "treated as an amount in" the WBF as of the

end of the WBF's taxable year.8

     In the instant case, the second sentence of the regulation

would prevent petitioner's deduction on the basis of the

following calculation.    The fund balance on November 30, 1986,

was $11,297,108.    Petitioner contributed $27 million to the VEBA

Trust during December 1986, which under the regulation is deemed

part of the November 30, 1986, yearend balance, equal to

$38,297,108.    As was mentioned supra, any balance remaining in

the VEBA Trust which is greater than the QAA account limit is not

allowed as a deduction.    Sec. 419A(b).   The deemed yearend

balance on November 30, 1986 ($38,297,108), less the QAA account

limit ($8,447,418) equals the amount of the actual contribution

which is not allowable ($29,849,690) as a current deduction.

Because the disallowed amount ($29,849,690) is greater than the

actual contribution for the year ($27 million), there is no

amount of the 1986 contribution which is allowable as a current

deduction.     Consequently, the deductible amount for 1986,

pursuant to section 1.419-1T, Q&A-5(b)(1), Temporary Income Tax

Regs., supra, is zero.

     Petitioner contends that the limitation in the regulation is

not supported by sections 419 and 419A and, therefore, is an

8
     See also sec. 1.419-1T, Q&A-4, Temporary Income Tax Regs.,
51 Fed. Reg. 4324 (Feb. 4, 1986), which similarly defines the
taxable year where the employer and the fund have a different
yearend.
                                - 39 -

impermissible broadening of the statute.     Petitioner changed the

tax year of the VEBA Trust from a calendar yearend to a fiscal

year ending November 30 during November of 1985.       Changing the

yearend of the VEBA Trust was an attempt to avoid the limit on

additions to a qualified asset account as imposed by section

419A.     By making a full contribution during December for the next

year's claims, petitioner sought to take a deduction for the year

of the contribution while treating the contribution as being made

in the following year of the VEBA Trust and avoiding the account

limit imposed by sections 419 and 419A.     Petitioner argues that,

but for the regulation, its intrayearend contribution, made

during December 1986, would be deductible in 1986, because that

contribution would not be required to be included as part of the

VEBA as of its taxable year ending November 30, 1986.

Accordingly, petitioner argues, the regulation contradicts the

plain language of section 419 and is invalid.     Petitioner

contends that it is therefore entitled to a deduction for the

1986 contribution without application of the limitation.

     2.     Review of the Regulation

        In General Signal Corp. & Subs. v. Commissioner, supra,

where the facts were virtually identical to the facts in this

case, the taxpayer did not argue that section 1.419-1T, Q&A-

5(b)(1), Temporary Income Tax Regs., supra, was invalid, so we

left that question for another day.      Id. at 238.   Accordingly, we
                               - 40 -

are now called upon to answer the question of the validity of the

regulation.

     Generally, temporary regulations are accorded the same

weight as final regulations.   Redlark v. Commissioner, 106 T.C.

31, 38 (1996); Peterson Marital Trust v. Commissioner, 102 T.C.

790, 797 (1994), affd. 78 F.3d 795 (2d Cir. 1996).   Section

419A(i) provides that the regulations shall be promulgated by the

Secretary as may be necessary to carry out the purposes of

sections 419 and 419A.9

     If the intent of Congress on a matter is clear, then the

Secretary must give effect to the unambiguously expressed intent

of Congress.   Chevron U.S.A. Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837, 842 (1983).   If, however, the

statute is silent or ambiguous with respect to the specific

issue, a court must let stand any permissible construction of the

statute by the agency, unless the construction is arbitrary,

capricious, or manifestly contrary to the statute.   Id. at 843.

If the administrator's regulation fills a gap or defines a term

in a way that is reasonable in light of congressional intent, the

regulation should be given controlling weight.   NationsBank v.

Variable Annuity Life Ins. Co., 513 U.S. 251, 257 (1995); Chevron

U.S.A. Inc. v. Natural Resources Defense Council, Inc., supra at



9
     Based on our analysis infra, we find it unnecessary to
decide whether the regulations are interpretive or legislative.
                               - 41 -

843; Bell Fed. Sav. & Loan Association v. Commissioner, 40 F.3d

224 (7th Cir. 1994), revg. T.C. Memo. 1991-368.

     3.   Legislative Intent

     Sections 419 and 419(A) were enacted as part of DEFRA, which

made these sections effective for contributions paid or accrued

after December 31, 1985, in taxable years ending after December

31, 1985.   Speaking to the special grant of regulatory authority

in section 419(e)(3)(C), with respect to the definition of

"fund", the conference committee report states:

     In prescribing regulations relating to the definition
     of the term "fund," the conferees wish to emphasize
     that the principal purpose of this provision of the
     bill is to prevent employers from taking premature
     deductions, for expenses which have not yet been
     incurred, by interposing an intermediary organization
     which holds assets which are used to provide benefits
     to the employees of the employer. * * * [H. Conf.
     Rept. 98-861, at 1155 (1984), 1984-3 C.B. (Vol. 2) 1,
     409; emphasis added.]

Although the foregoing portion of the legislative history

specifically deals with section 419(e), it demonstrates that

Congress was primarily concerned with preventing employers from

accelerating deductions prior to their being incurred.    General

Signal Corp. & Subs. v. Commissioner, 103 T.C. at 243.    As stated

above, prior to the enactment of DEFRA, an employer generally

could deduct a contribution to a WBF in the year it was made or

accrued even though the corresponding benefits were not

includable in the income of the recipient until a later year.   H.

Conf. Rept. 98-861, supra at 1154, 1984-3 C.B. (Vol. 2) at 408;
                              - 42 -

see also Moser v. Commissioner, T.C. Memo. 1989-142 (allowing a

deduction for a single contribution to a VEBA which funded all of

the welfare benefits the VEBA was expected to pay), affd. on

other grounds 914 F.2d 1040 (8th Cir. 1990).

     Both sections 419 and 419A, in their attempt to end the

acceleration of deductions for contributions to VEBA's, refer to

the taxable year, or taxable yearend.    These sections, by their

terms, do not deal specifically with a situation where the trust

and the employer use different taxable years, creating a gap in

the statutes.   The regulation fills the gap by treating

contributions to a VEBA after the VEBA yearend but prior to the

taxpayer's yearend as being in the fund at the time of the VEBA

yearend.10

     Because the regulation is consistent with the intent of

DEFRA, and because it permissibly fills a gap created by sections

419 and 419A, we conclude that section 1.419-1T, Q&A-5(b)(1),

Temporary Income Tax Regs., 51 Fed. Reg. 4324 (Feb. 4, 1986), is

not impermissibly broader than sections 419 and 419A   and,

accordingly, we hold that it is valid.    Chevron U.S.A., Inc. v.

Natural Resources Defense Council, Inc., supra.    We have



10
     Respondent also argues that the deduction limited by the
regulation would not otherwise be allowable, as required by sec.
419(a)(2), i.e., under secs. 162, 446, 461, and 7852, and that
therefore the regulation is valid. Because we hold that the
regulation is valid on other grounds, we do not address this
argument.
                             - 43 -

considered the remaining arguments of the parties and find them

either without merit or unnecessary to reach.

     To reflect the foregoing,

                                      An appropriate order

                                 will be issued.
