Correcting property contributions to qualified plans.

In Ann. 95-14, the IRS has released a correction program for plan sponsors that have contributed unencumbered property to qualified defined benefit or defined contribution plans in violation of Sec. 4975. Under the announcement, such sponsors should (1) correct the transaction and 2 on or before Aug. 21, 1995, file Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, for each year in the taxable period and pay the 5% excise tax described in Sec. 4975(a).

Ann. 95-14 is a follow-up to the Department of Labor's (DOL) Interpretative Bulletin 94-3. That bulletin essentially held that in-kind contributions of any type to a welfare or defined contribution plan to reduce an obligation measured in terms of cash, or to a defined benefit plan - even when such contributions were not required to meet funding obligations - were considered prohibited transactions in violation of Sec. 4975 and Section 406 of the Employee Retirement Income Security Act of 1974, absent some exception to those prohibitions. In Keystone Consolidated Industries, Inc., 113 Sup. Ct. 2006 (1993), the Supreme Court held that the contribution of unencumbered property to a defined benefit plan to satisfy a funding obligation was a violation of Sec. 4975.

The Service recognizes that many employers have contributed property to qualified defined contribution and qualified defined benefit plans to satisfy obligations. Ann. 95-14 gives such employers a way to cure what the DOL and the IRS now consider a violation of Sec. 4975(c)(1)(A).

Employers should write the words "Announcement 95-14" at the top of the Form 5330 used to report and pay the tax under Sec. 4975. Unless the Form 5330 indicates the transaction has been corrected, the Service will issue a deficiency notice for the second-tier 100% excise tax under Sec. 4975(b). This tax will be abated if the correction occurs within 90 days of the mailing of the notice, plus any extensions of the correction period that may apply.

"Correction" is defined in Sec. 4975(f) and further expanded in Temp. Regs. Sec. 141.4975-13, referring to Regs. Sec. 53.4941(e)-1. A "correction" includes (but is not limited to) rescission of the sale, if possible. To avoid placing the plan in a position worse than that in which it would have been if the rescission were not required, the amount received by the plan from the employer pursuant to rescission must be the greatest of (1) the extinguished obligation, (2) the property's fair market value (FMV) at the time of the contribution or (3) the property's FMV at the time of the rescission. The employer must also pay over to the plan any net profits realized from the diminution of the obligation exchanged for the contributed property.

If an employer satisfies the requirements of correction and filing and paying the tax by Aug. 21, 1995, no addition to tax will be imposed for late filing or late payment under Sec. 6651(a)(1) or (2). However, interest (which by law cannot be abated) will be due on the unpaid excise tax, at the rate defined in Sec. 6621(a)(2).