Chief Counsel Advice 1330030 Released July 26, 2013 Advice

CCA addresses deduction and funding treatment of scheduled pension payments

Apply this to your situation

This page covers one taxpayer's ruling from 2013, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.

About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.

View official IRS release (PDF)

Plain-English summary

Chief Counsel Advice considers whether payments connected with an acquisition and certain defined benefit pension plans could be deducted or capitalized, and whether they could count toward minimum funding requirements. The advice concludes that the identified entity could neither deduct nor capitalize the payments. It also concludes that the payments could not be used to satisfy the plans' minimum funding requirements under IRC § 412. The analysis applies the rules for otherwise deductible pension contributions and the employer responsible for required funding.

Ruling snapshot

Question: Could the scheduled payments be deducted or capitalized, or used to satisfy minimum funding requirements?
Outcome: Advice given, the payments could not be deducted, capitalized, or counted toward minimum funding requirements.
Key authorities: IRC §§ 404, 412, and 430; Treas. Reg. § 1.404(a)-1(b).

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201330030
       Release Date: 7/26/2013
       CC:TEGE:EB:QP1
       POSTF-100290-12

UILC: 404.00-00, 412.00-00, 430.00-00

date: March 19, 2013

 to:   Associate Area Counsel (     )
       (Large Business & International)

from: Kyle N. Brown, Special Counsel (Employee Benefits)
(Tax Exempt & Government Entities)

subject: Treatment of Payments ----------------------------------------------------------------------------------
-----------------

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.

       LEGEND

       Pension Plans        =     ----------------------------------------------------
                                  ---------------------------------------------------------------------------------------
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                                  --------------------
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                                  ----------------------------------------------------------------
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                                  ---------------------------------------------
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       B                   =      ---------------------------------------------------------------------------

POSTF-100290-12 2

C = ---------------------------------------------------------------------------------------
--------------------------------------------------------------------------------- -----
------------------------------------------------------

D = -----------------------------------------------------

Payment Dates = -----------------------------------

Year M = -------

$Y = -------------------

$Z = ----------------------

ISSUES

May B either take a deduction on account of or capitalize the ----------------Payments?

May the ----------------Payments be used to satisfy the minimum funding requirements
under § 412?

CONCLUSIONS

No. B may neither take a deduction on account of nor capitalize the ------------------
Payments.

No. The ----------------Payments may not be used to satisfy the minimum funding
requirements under § 412.

FACTS

The Pension Plans are single-employer defined benefit pension plans subject to the
minimum funding standards of § 412 of the Internal Revenue Code. In Year M, B and C
entered into a transaction that resulted in B acquiring substantially all of the assets of C
(the Asset Acquisition). Prior to the Asset Acquisition, C was the plan sponsor of the
POSTF-100290-12 3

Pension Plans, and B became the plan sponsor of the Pension Plans as part of the
Asset Acquisition.

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POSTF-100290-12 4

-------------------. B took a deduction under § 404 in Year M and the following year for
contributions of the Scheduled Payments paid to the trustee of the Pension Plans.

For purposes of the minimum funding requirements of § 412, B and the Pension Plans
treated the ---------------- Payments as contributions from B to the Pension Plans.
Accordingly, B and the Pension Plans treated a portion of the Scheduled Payments as
counting toward the minimum required contribution under § 412 in Year M and the
following year.

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May B either take a deduction on account of or capitalize the ----------------
Payments?

Section 404(a) provides that pension contributions are not deductible under chapter 1 of
Title 26 of the United States Code, but if they would be “otherwise deductible” they are
deductible under § 404 if certain limitations are met. Thus, the threshold requirement
for all deductions under § 404 is that the contribution must be otherwise deductible
under some other provision of the Code. Prior to amendment by the Tax Reform Act of
1986, Pub.L. No. 514, § 404(a) provided that the retirement plan contributions paid by
an employer “shall not be deductible under section 162 (relating to trade or business
expenses) or section 212 (relating to expenses for the production of income), but if they
satisfy the conditions of such sections, they shall be deductible...” See also, § 1.404(a)-
1(b). Section 404(a) no longer specifically refers to §§ 162 and 212, but the legislative
history makes it clear that the change was not intended to be substantive. See Gale v.
United States, 768 F.Supp. 1305 (N.D.Ill., 1991) (explaining that, “The omission of the
reference to sections 162 and 212, was not a substantive change, but was intended to
prevent taxpayer avoidance of the deduction-timing rules of § 404(a)(5), which relate to
nonqualified plans.”). See also, LaFlamme v. Commissioner, T.C. Memo. 2012-36
(stating “In general, an employer is permitted to deduct a contribution to a pension plan
if the contribution satisfies section 162 (relating to trade or business expenses) or 212
(relating to expenses for production of income).”).

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POSTF-100290-12 8

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May the ----------------Payments be used to satisfy the minimum funding requirements
under § 412?

Section 412(a)(1) provides that, in general, “[a] plan to which this section applies shall
satisfy the minimum funding standard applicable to the plan for any plan year.” Section
412(a)(2)(A) provides that a defined benefit plan that is not a multiemployer plan shall
be treated as satisfying the minimum funding standard for a plan year if “the employer
makes contributions to or under the plan for the plan year which, in the aggregate, are
not less than the minimum required contribution determined under section 430 for the
plan for the plan year.”

Section 412(b)(1) provides that, “[e]xcept as provided in paragraph (2), the amount of
any contribution required by this section . . . shall be paid by the employer responsible
for making contributions to or under the plan.” Section 412(b)(2) provides that “[i]f the

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POSTF-100290-12 9

employer referred to paragraph (1) is a member of a controlled group, each member of
such group shall be jointly and severally liable for the payment of such contributions.”
Taken together, §§ 412(b)(1) and (b)(2) provide that any contribution required by § 412
shall be paid by either (1) the employer responsible for making contributions to or under
the plan, or (2) if such employer is a member of a controlled group, a member of the
controlled group.

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Accordingly, the ----------------Payments are not contributions that are counted toward
satisfaction of the minimum funding requirements of section 412.

                                                 *****

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call ---------------------- if you have any further questions.

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Apply this to your situation

This page covers one taxpayer's ruling from 2013, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

On this page

Document type

Chief Counsel Advice

IRS subject

Deduction for Contributions of Employer to an Employee's Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan (Deduct. v. Not Deduct.); Minimum Funding Standards for Single-Employer Defined Benefit Plans

Topics

Retirement plans, IRAs, and annuities

Code sections

§ 404, § 412, § 430, § 6110

Ruling dated

March 19, 2013

Publicly released

July 26, 2013

View Official PDF