On October 21, the U.S. Court of Federal Claims found, in CNG Transmission Management VEBA v. U.S., Fed. Cl., No. 06-541T, that a volunteer employees’ beneficiary association (VEBA) may not avoid the limitation on exempt function income in Section 512(a)(3)(E)(i) merely by allocating investment income toward the payment of welfare benefits during the course of the tax year. Section 512(a)(3) (E)(i) places limits on the accumulation of set-aside income. Typically, a VEBA maintains certain setaside funds to provide for welfare benefits (life, sick, accident) to its members, who usually are the active employees and retirees of a sponsoring corporation in an employer-funded VEBA. A VEBA must pay tax on unrelated business taxable income. In CNG Transmission, CNG claimed that investment income originally reported as unrelated business taxable income should have been excluded as exempt income because a VEBA’s investment income may be allocated and fully spent on member benefits prior to the close of the taxable year, thus leaving no investment income to result in an excess in the VEBA’s qualified asset account. The court, granting summary judgment to the government, based its finding on Treasury regulation 1.512(a)-5T and the fact that the United States did not stipulate to a particular characterization of the VEBA’s allocation and spending of investment income. The court held that the VEBA could not allocate investment income to the payment of welfare benefits and thereby offset that income before the close of the tax year because such an allocation would allow the VEBA to avoid the limitation on exempt function income.