CCA addresses deduction and funding treatment of scheduled pension payments

Number

201330030

Outcome

Advice

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

Source

View Official PDF

Apply this to your situation

This page covers legal advice the IRS Office of Chief Counsel wrote for IRS staff, issued in 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 is advice from the IRS Office of Chief Counsel to IRS personnel on the facts they presented, 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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B = ---------------------------------------------------------------------------
POSTF-100290-12
2

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

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

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

Year M = -------

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

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

ISSUES

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

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

CONCLUSIONS

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

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

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-------------------. 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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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
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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.

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.

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