Employer Deduction

<div class="Section1"><br /> <br /> The U.S. Supreme Court has held that an employer&rsquo;s transfer of unencumbered property to a defined benefit plan in satisfaction of a funding obligation is a prohibited transaction.<a href="#_ftn1" name="_ftnref1">¹</a> The Court left open the question of whether a transfer of unencumbered property that is not in satisfaction of a funding obligation might be permissible without violating prohibited transaction rules.<br /> <br /> The Department of Labor has expressed the view that a contribution of property other than cash that reduces a sponsor&rsquo;s funding obligation would be a prohibited transaction in the absence of a statutory or administrative exemption, whether it is made to a defined benefit or a defined contribution plan; a contribution in excess of amounts needed to meet a plan&rsquo;s funding requirements may be permissible, provided that acceptance of the contribution is consistent with the general standards of fiduciary conduct under ERISA.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Certain contributions of employer stock and employer real property are exempt from the prohibited transaction rules ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3980">3980</a>). Furthermore, there is an administrative exemption for the contribution of a life insurance policy to a plan if certain conditions are met ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3974">3974</a>). This exemption also protects self-employed owner-employees and more-than-5-percent shareholder-employees of S corporations from the prohibited transaction rules of Title I of ERISA ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3980">3980</a>).<a href="#_ftn3" name="_ftnref3">³</a> If only a sole proprietor or partners and their spouses participate in the plan, Title I of ERISA does not apply.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> A contribution of an employer&rsquo;s promissory note to a trust does not constitute payment and no deduction is allowable until the note is paid.<a href="#_ftn5" name="_ftnref5">⁵</a> The IRS has taken the position that the contribution of an employer&rsquo;s own term promissory note is a prohibited transaction.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> A sale by plan fiduciaries of some of their customers&rsquo; promissory notes to a plan was a prohibited transaction, notwithstanding the fact that the notes generated a competitive rate of return.<a href="#_ftn7" name="_ftnref7">⁷</a> An earlier letter ruling indicated that a contribution of a third party promissory note was payment and that its fair market value could be deducted.<a href="#_ftn8" name="_ftnref8">⁸</a> Contribution of a check is only conditional payment; if the check is not paid, the deduction will be disallowed.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> The fair market value of contributed property is considered to be the amount contributed for purposes of calculating annual additions within the overall Section 415 limits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3868">3868</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3719">3719</a>, and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3728">3728</a>).<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> For special rules applying to the sale of employer securities to a defined contribution plan, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3731">3731</a>. The requirements for a Section&nbsp;1042 election upon the sale of employer stock to an ESOP are explained at Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3820">3820</a>.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; <em><em>Keystone Consol. Indus., Inc. v. Comm</em></em>., 508 U.S. 152, 113 S. Ct. 2006 (1993).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; DOL Interpretive Bulletin 94-3, 59 Fed. Reg. 66735 (Dec.&nbsp;28, 1994).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; PTE 92-5, 57 Fed. Reg. 5019, (formerly PTE 77-7, 1977-2 CB 423).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; See Labor Reg. &sect;&nbsp;2510.3-3.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Rev. Rul. 55-608, 1955-2 CB 546; Rev. Rul. 80-140, 1980-1 CB 89; <em>Don E. Williams Co. v. U.S.</em>, 429 U.S. 569 (1977).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Rev. Rul. 80-140, 1980-1 CB 89.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; See <em>Westoak Realty &amp; Inv. Co., Inc. v. Comm.</em>, 999 F.2d 308, 93-2 USTC &para;&nbsp;50,395 (8th Cir. 1993).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Let. Rul. 7852116.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; <em><em>Springfield Prod., Inc., v. Comm</em></em>., TC Memo 1979-23.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.415(c)-1(b)(4).<br /> <br /> </div></div><br />