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Supreme Court: using unmortgaged property to fund pension plan triggers excise tax.

Keystone 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 section 412, were funded through a master trust.

To satisfy its minimum funding liability, Keystone gave five truck terminals and a piece of land to the trust, crediting itself with the contributed property's fair market value. The property was not subject to debt. Keystone deducted the property's fair market value as a contribution to the plans and reported the appreciation element as capital gain from the sale or exchange of an asset.

The Internal Revenue Service claimed this contribution was a prohibited transaction subject to IRC section 4975, which imposes excise taxes on certain transactions, including sales and loans, between qualified plans and disqualified persons - employers, fiduciaries and others.

Keystone argued the contribution of property was not a sale or exchange for purposes of the prohibited transaction rules.

Section 4975(c)(1)(A) includes among prohibited transactions a "sale or exchange ... of any property between a plan and a disqualified person. ..." Section 4975(f)(3) 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. ..."

It is a general principle of tax law that a transfer of property to satisfy a debt or obligation is a sale or exchange.

The Tax Court ruled in Keystone's favor. It held Keystone's contribution was not a sale or exchange and thus not a prohibited transaction. The Tax Court held only a transfer of property subject to mortgage or lien is a sale or exchange for purposes of the prohibited transaction rules. The Fifth Circuit agreed with the Tax Court. The IRS appealed to the U.S. Supreme Court.

Result: For the IRS. The transfer of property to the plan to satisfy funding g obligations was a sale or exchange and thus a prohibited transaction under section 4975. The language of section 4975(f)(3) was intended not to limit sale-or-exchange treatment to encumbered property but, rather, to expand the reach of the excise tax to contributions of mortgaged property not intended to satisfy funding obligations. Therefore, the prohibited transaction excise tax is applicable to the contributions.

* Keystone Consolidated Industries (Sup. Ct., 1993).
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Title Annotation:Keystone Consolidated Industries
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Aug 1, 1993
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