Deduction acceleration opportunity for defined benefit plans.

Letter Ruling (TAM) 9935062 provides insight into the requirements for defined benefit plan contributions made after the end of the employer's tax year, but before the extended due date of its income tax return, to be deductible for the prior tax year. Although Sec. 404(a)(6) and Rev. Rul. 76-28 clearly allow employers to make contributions to qualified retirement plans during this extended period, little substantive guidance addresses how defined benefit plans actually satisfy these requirements.

Sec. 404 governs the deductibility of Contributions to qualified retirement plans. It provides that contributions are deductible in the tax year paid. Sec. 404(a)(6) provides, that a contribution is deemed to be made on the last day of the preceding tax year if it is made before the extended due date of the employer's income tax return and is on account of the preceding tax year. Under Rev. Rul. 76-28, a contribution is on account of the preceding tax year if (1) it is treated as if it were actually made to the plan on the last day of the preceding tax year and (2) the employer either deducts the contribution on its income tax return for the preceding tax year or designates in writing to the plan trustee that the contribution relates to the preceding tax year.

In TAM 9935062, the employer, whose fiscal year ended June 30, maintained a single-employer defined benefit pension plan. The employer claimed a $1.17,291,000 deduction for plan contributions on its income tax return for its fiscal year ending June 30,1984. Of the total amount, $75,443,000 was contributed during its fiscal year ending June 30, 1984; $41,848,000 was contributed from July to December 1984. On an amended Form 5500, Annual Return/Report of Employee Benefit Plans (with 100 or more participants), and amended Schedule B, the employer reported the $41,848,000 as contributions for the plan year ended June 30,1984, and deducted the entire $117,291,000 on its 1984 return.

On examination, the IRS field agent determined that the employer had overstated its pension expense for the fiscal year ending June 30, 1984, by $41,848,000--the total amount contributed after the end of the fiscal year. The National Office disagreed and upheld the deduction. Because the taxpayer made the contribution by the extended due date of its tax return and deducted the full contribution on its income tax return, the only issue for decision was whether the contribution was treated as if it were actually made on the last day of the June 30,1984 tax year.

The Service cited the following factors in holding that the $41,848,000 was so treated:

1. Contributions were recorded as such on an amended Form 5500 and Schedule B for the plan year ended June 30, 1984;

2. The credit balance in the funding standard account as of June 30, 1984 included the amounts; and

3. The calculation of experience gains and losses for Sec. 412 purposes treated such contributions as made on June 30, 1984 (and therefore would give rise to an experience loss, because no interest was earned on the contributions between June 30,1984 and the date the contributions were ultimately paid to the plan).

Thus, the IRS concluded that, "the amended returns treat the contributions as being made on June 30, 1984, for accounting and funding purposes," establishing that the plan treated the contributions in the same manner as it treats contributions received on the last day of the employer's tax year.

FROM SETH TIEVSKY, WASHINGTON, DC