Unmortgaged property transfer to pension plan is not a prohibited transaction.Keystone key·stone n. 1. Architecture The central wedge-shaped stone of an arch that locks its parts together. Also called headstone. 2. The central supporting element of a whole. Consolidated Industries, Inc., had several pension plans for its employees. These tax-qualified plans, which were subject to the minimum funding rules of Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. section 412, were funded through a master trust. To satisfy its minimum funding liability, Keystone gave the trust five truck terminals and a piece of land, crediting itself with the contributed properties' fair market value (FMV FMV - full-motion video ). The properties were unencumbered Unencumbered Property that is not subject to any creditor claims or liens. Notes: For example, if a house is owned free and clear (meaning the owner owes no mortgage to anyone), it is unencumbered. . Keystone deducted the properties' FMV as a plan contribution and reported the properties' appreciation element as capital gain from the sale of exchange of an asset. The Internal Revenue Service claimed this contribution was a prohibited transaction subject to section 4975, which imposes excise taxes excise taxes, governmental levies on specific goods produced and consumed inside a country. They differ from tariffs, which usually apply only to foreign-made goods, and from sales taxes, which typically apply to all commodities other than those specifically exempted. on certain transactions. Specifically, section 4975(c)(1)(A) includes among prohibited transactions a "sale or exchange ... of any property between a plan and a disqualified dis·qual·i·fy tr.v. dis·qual·i·fied, dis·qual·i·fy·ing, dis·qual·i·fies 1. a. To render unqualified or unfit. b. To declare unqualified or ineligible. 2. person...." Disqualified persons would include employers, fiduciaries and others. Keystone argued the contribution of property was not a "sale or exchange" under the prohibited transaction rules, citing section 4975(f)(3). The section says, "For purposes of this section ... [a] transfer of real or personal property by a disqualified person to a plan shall be treated as a sale or exchange if the property is subject to a mortgage...." A general principle of the tax law says a transfer of property to satisfy a debt is treated as a sale or exchange. However, because of section 4975(f)(3)'s narrowing definition, the Tax Court held that Keystone's contribution was not a sale or exchange and thus not considered to be a prohibited transaction. Result: For Keystone. The court of appeals agreed with the Tax Court. Only a transfer of property subject to a mortgage or lien is treated as a sale or exchange. * Keystone Consolidated Industries, Inc. (5th Cir., 1992). Note: Fourth Circuit doesn't agree. The Fourth Circuit recently decided, in Wood, a similar contribution to a defined benefit plan Defined benefit plan A pension plan obliging the sponsor to make specified dollar payments to qualifying employees at retirement. The pension obligations are effectively the debt obligation of the plan sponsor. Related: Defined contribution plan is a prohibited transaction; the court said it disagreed with Keystone. |
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