WASHINGTON - Twenty British and Dutch pension funds have moved the battle over tax exemption of union-linked pension plans into yet another arena.
The 20 filed suit in U.S. Tax Court May 16, claiming the Internal Revenue Service is wrong in demanding the funds pay back a total of $18.3 million in tax refunds.
Originally, the U.S. agents for the overseas pension plans had withheld the money and paid it to the IRS as income tax. The taxes had been figured on the dividend income the plans earned on U.S. investments.
But then the plans took the position that as labor unions, they are exempt from taxation under Section 501(c)(5) of the Internal Revenue Code. They asked the IRS for refunds, and got them.
However, the IRS changed its mind and in December demanded all of the money back.
The IRS seeks the return of large refunds, like the $8.2 million refunded to the Stichting Pensioenfonds ABP of Heerlen, the Netherlands, as well as smaller amounts, like the $4,372 refunded to the Stichting Bedrijfspensioenfonds Voor De Kledingindustrie, Amsterdam.
All fall within the 1989-'94 period.
In their petitions, all 20 (including the Rolls-Royce Pension Fund and the Unilever Superannuation Trustees Ltd., both of London) insist they're "labor organizations" as defined by Section 501(c)(5).
In demanding the money back, the IRS said the Dutch funds failed to establish they are exempt. So, they're subject to a 15% tax on U.S. gross dividend income under the U.S.-Netherlands Income Tax Convention, according to the IRS. For the British funds, the IRS cited the U.S.-United Kingdom Income Tax Convention.
Unless the disputes are settled by negotiation, which often occurs in the Tax Court, they will be tried in Washington.
Meanwhile, other federal courts have come down with disparate rulings on the same issue.
The IRS still is considering a proposed regulation that would cause unions (U.S. or foreign) to lose their tax-exempt status if they manage retirement, savings or investment funds.
"The final regs are expected to be released soon," said Jodi Patterson, an IRS spokeswoman in Washington.
"It's not any labor union that manages pension funds that would lose their exempt status, it's unions that do nothing but manage funds."
At an IRS hearing last year, representatives of several U.S. unions, including the AFL-CIO and the National Coordinating Committee for Multi-employer Plans, urged the IRS to withdraw the proposal.
The regulation, proposed in December 1995, was in reaction to a 1993 ruling by the 2nd U.S. Circuit Court of Appeals in New York City. The court ruled the IRS had no authority to say "the term 'labor organization' does not include an entity that is a pension plan." That decision upheld an earlier decision by a U.S. District Court in Connecticut that ruled a pension fund of an Operating Engineers local union qualified as a labor organization under 501(c)(5).
But since then, two other federal courts have come down on the side of the IRS.
In a December ruling, U.S. District Court Judge Charles R. Richey in Washington rejected as "unpersuasive" the claim of the Dutch health-care industry pension plan - Stichting Pensioenfonds voor de Gezondheid Geestelijke en Maatschappelijke Belangen - that it is a labor organization (Pensions & Investments, Jan. 20).
That case is being appealed.
