Foreign pension plan qualifies and later contributions remain deductible

Plain-English summary

A U.S.-owned foreign partnership assumed obligations under a foreign pension plan through a series of acquisitions and restructurings. The written plan held assets in an irrevocable trust for employees and beneficiaries, prohibited assignment, and attributed more than 90 percent of covered amounts to services of nonresident aliens whose compensation was not subject to chapter 1 tax. The IRS ruled that the plan was a qualified foreign plan under section 404A. It also ruled that contributions made after 2002 to fund the assumed pension obligations did not have to be capitalized as acquisition liabilities and could instead receive the deduction treatment contemplated by sections 404 and 404A.

Ruling snapshot

• Question: Whether the foreign pension plan qualified under section 404A and whether later contributions had to be capitalized
• Outcome: Approved on both issues
• Key authorities: I.R.C. §§ 338, 404, 404A

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224
Number: 201540015
                                                               Third Party Communication: None
Release Date: 10/2/2015                                        Date of Communication: Not Applicable

Index Number: 404A.00-00                                       Person To Contact:
                                                               ------------------, ID No. ----------------
-------------------------                                      Telephone Number:
-------------------------                                      --------------------
-----------------------------------------                      Refer Reply To:
------------------------------                                 CC:TEGE:EB:QP2
 --------------------------------                              PLR-T-103529-15
                                                               Date:
                                                               June 29, 2015




Legend

Plan X            =    -------------------------------------------------------
Company A         =    ----------------------
Company B         =    -----------------------------------------------------------
Company C         =    ------------------------
Company D         =    ------------
Company E         =    -------
State             =    -----------------
Country           =    ---------------------
Amount Y          =    -------------


Dear -------------------------:

This letter is in response to your ruling request, dated January 25, 2011, as
supplemented by correspondence dated May 1, 2015, submitted by your authorized
representative, concerning the treatment of Plan X under section 404A of the Internal
Revenue Code (the Code).

The following facts and representations are submitted under penalties of perjury in
support of your request:

Company A is a State corporation. Company B is indirectly wholly owned by Company
A. Company B is organized under the laws of Country and is classified as a partnership
for U.S. federal tax purposes.

During 2000, Company A and Company C (an entity otherwise unrelated to Company
A) formed Company D. Company A and Company C each owned 50 percent of
Company D. Also during 2000, Company D acquired all of the outstanding shares of
PLR-T-103529-15                              2

Company E and assumed approximately Amount Y of liabilities. Company E was a
Country entity classified as a corporation for U.S. tax purposes. Pursuant to a section
338(g) election, the acquisition was treated as if Company E transferred all of its assets
to a new corporation unrelated to Company E in exchange for consideration that
included the assumption of the liabilities of Company E. Among the liabilities assumed
were any liabilities related to Plan X. Prior to the acquisition, Company E maintained
Plan X and had made all contributions required under Country law.

After the acquisition of Company E, various internal restructurings were undertaken. In
2002, a partnership, 50% of which was owned by Company A and 50% of which was
owned by Company C, purchased certain assets and assumed certain liabilities of
Company E (including liabilities under Plan X) in a taxable asset sale. Later in 2002,
Company A acquired Company C’s interests in that partnership. In 2003, the
partnership transferred its assets and liabilities (including liabilities under Plan X) to
Company B.

Plan X was established by Company E in 1998. The plan is written and maintained to
provide deferred compensation. When Plan X was established, individuals that
participated in two predecessor retirement plans of Company E were eligible to
participate. Prior to April 1, 2002, permanent employees were eligible to participate. As
of April 1, 2002, Plan X was closed to new participants. Currently, no participants
continue to accrue benefits under Plan X. Upon retirement at normal retirement age, a
participant is entitled to an immediate pension. The assets of Plan X are held in an
irrevocable trust established by the employer to fund compensation obligations to its
employees. The assets are held for the exclusive benefit of the employer’s employees
and their beneficiaries, and are not subject to the claims of the employer’s creditors.
Plan X prohibits the assignment of benefits. Over 90% of the amounts taken into
account for all taxable years under Plan X are attributable to services that were
performed by nonresident aliens and the compensation for which was not subject to tax
under Chapter 1 of the Code. An election under section 404A has been made with
respect to Plan X under which Plan X is designated as a qualified funded plan.

You request the following rulings:

   1. Plan X is a “qualified foreign plan” under section 404A.
   2. Company B is not required to capitalize post-2002 contributions to Plan X as
      liabilities assumed in 2000 and 2002.

Ruling Request #1

For purposes of section 404A, section 404A(e) defines a “qualified foreign plan” as any
written plan of an employer for deferring the receipt of compensation but only if—
     such plan is for the exclusive benefit of the employer’s employees or their
       beneficiaries,
     90 percent or more of the amounts taken into account for the taxable year under
       the plan are attributable to services—
PLR-T-103529-15                              3

          o Performed by nonresident aliens, and
          o the compensation for which is not subject to tax under chapter 1, (the
              “90% rule”) and
      the employer elects to have section 404A apply to the plan pursuant to Treasury
       regulations.

Plan X meets the definition of a “qualified foreign plan” under section 404A. It is a
written plan of an employer deferring the receipt of compensation in the form of a
pension. Plan X is for the exclusive benefit of the employer’s employees or their
beneficiaries. Eligibility is reserved for employees, former employees and their
beneficiaries. The plan prohibits assignment of benefits. Plan X meets the 90% rule. For
all relevant taxable years, over 90% of the amounts taken into account under the plan
are attributable to services performed by nonresident aliens and compensation that is
not subject to tax under chapter 1. The employer has elected to have section 404A
apply to Plan X pursuant to Prop. Treas. Reg. § 1.404A-1(a)(4).

We conclude that Plan X is a “qualified foreign plan” under 404A.

Ruling Request #2

Rev. Rul. 58-165, 1958-1 C.B. 209, holds that a parent corporation may, within the limits
of section 404(a)(1) of the Code, deduct contributions to fund benefits for past service
rendered by its employees, including benefits with respect to services previously
rendered by such employees to a subsidiary corporation, provided that there is no
duplication of benefits by both the present employer and the subsidiary. Also, if a
subsidiary is liquidated and its assets, liabilities, and employees are transferred to the
parent corporation, the parent corporation, as a complete successor to the subsidiary
corporation, may, within the limitations of section 404(a)(1) of the Code, deduct
contributions to fund benefits for the transferred employees with respect to all services
rendered to either the parent or subsidiary, or both, on or before the plan's effective
date.

Rev. Rul. 62-139, 1962-2 C.B. 123, holds that an employee’s past service with a former
employer may be taken into account in determining benefits under his present
employer’s plan, regardless of the degree of affiliation, if any, between the present and
former employers. The contributions for such prior service benefits are deductible under
section 404(a)(1), provided that there is no duplication of benefits by both the present
employer and the former employer.

In F & D Rentals, Inc., 44 T.C. 335 (1965), aff’d, 365 F.2d 34 (7th Cir.1966), cert.
denied, 385 U.S. 1004 (1967), the taxpayer corporation purchased all of the assets of
another corporation and became obligated to continue the seller’s pension plans and
assume the burden of the seller’s unpaid obligations to the pension plans. The taxpayer
corporation failed to make a timely contribution to the plan in 1957 and was, therefore,
unable to claim a deduction for any amount under section 404(a)(1) of the Code for
1957. The taxpayer corporation contended that it should be allowed to include the cost
PLR-T-103529-15                                4

basis of the assets it acquired from the seller by adding to such cost basis the amount
of its unpaid obligations to the pension plans. The Tax Court stated that the effect of this
procedure would be to allow the taxpayer corporation to deduct, by way of depreciation
deductions, the very amounts which it failed to deduct under the only statutory authority
for the deduction of contributions to pension plans, i.e., section 404(a)(1).

Section 338 of the Code permits a purchasing corporation, in the case of a qualified
stock purchase, to make an election to treat an acquired target corporation as if it sold
all of its assets in a complete liquidation on the stock acquisition date. The target
corporation is then treated as a new corporation that purchased its assets on the day
after such date.

Although the above revenue rulings allow a successor employer to deduct contributions
to fund benefits based on service for a prior employer under section 404(a)(1), the
rationale of these revenue rulings applies also if the successor employer contributes to
a qualified foreign plan under section 404A in order to fund liabilities transferred
pursuant to a section 338 election. Accordingly, we conclude that the post-2002
contributions to Plan X are not required to be capitalized as liabilities assumed by
Company B in 2000 and 2002.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                       Sincerely,



                                       Linda S. F. Marshall
                                       Senior Counsel, Qualified Plans Branch 1
                                       (Employee Benefits)
                                       (Tax Exempt & Government Entities)


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