Union plan is tax exempt as labor organization.

• Author: Walker, Deborah

In Morganbesser, 2d Cir., 1993, the International Union of Operating Engineers Local Union 478, A-C-D-E Pension Plan has come up with a unique, and so far successful, response to the IRS's denial of the plan's tax qualification. The union argued successfully that in the years the plan was found not to be a tax-exempt plan, the trust was exempt as a "labor organization" under Sec. 501(c)(5). If this decision stands, multiemployer plans will have a great deal less incentive to correct plan deficiencies or settle with the Service over qualification issues. Of course, the plan would still remain liable for Employee Retirement Income Security Act of 1974 (ERISA) violations, and the tax status of employer deductions for plan contributions and the plan participants' tax status under Sec. 402(b) remain open questions. (The court did not mention whether ERISA liabilities had arisen from the defects that disqualified the plan, and the majority opinion did not address the issues of the tax status of plan participants and contributing employers.)

The A-C-D-E plan was established in 1958 as a result of a collective bargaining agreement between the union and a number of construction firms. The board of trustees administering the trust is comprised equally of employer and employee representatives. The plan, funded solely by employers, covers approximately 4,000 construction workers.

Before ERISA was enacted, the trust was granted an exemption by the Service as a qualified pension plan. Following the enactment of ERISA, which imposed more stringent rules on tax qualified plans, the plan was amended a number of times; however, the plan did not request a new IRS determination letter until 1984. The Service found that the trust failed to satisfy several ERISA requirements and, therefore, was not exempt for fiscal years 1983, 1984 or 1985. The IRS determined that, if the trust retroactively adopted certain amendments, it could become exempt for fiscal years 1984 and 1985. The trust adopted those amendments, but the Service contended that the trust still was liable for over $3 million in taxes and interest for 1983. The trust paid the 1983 taxes and filed for a refund.

The plan argued that it was exempt under Sec. 501(c)(5) as a labor organization for the 1983 year--and even if it were not, the IRS abused its discretion by refusing to grant retroactive relief. The district court granted summary judgment, finding the plan to be a labor organization under Sec...