Property contributions to pension plans are prohibited, but what about profit-sharing plans?

• Author: Langford, Brady J.

The Supreme Court ruled on May 24, 1993 that a contribution of unencumbered real property to a company-sponsored pension plan in satisfaction of its funding obligations is a prohibited transaction (Keystone Consolidated Industries, Inc., Sup. Ct., rev'g 951 F2d 72 (5th Cir. 1992), aff'g TC Memo 1990-628). While not without doubt, it appears that the prohibition will not be extended to profit-sharing, Sec. 401(k), employee stock ownership plans (ESOPs) and other types of plans that are not subject to statutorily created funding obligations. Furthermore, it appears that the IRS will soon issue guidance that may provide limited relief from excise taxes with respect to property contributions that took place before the Keystone decision.

Background

Sec. 4975(c)(1)(A) lists those transactions between a retirement plan and a disqualified person that are deemed prohibited. One of the listed transactions is any direct or indirect sale or exchange of property. if such a transaction takes place, a two-tier excise tax is imposed. The first tier is a 5% penalty on the amount involved; the second tier is a 100% penalty, imposed if the prohibited transaction is not corrected within a prescribed time frame.

In January 1992, the Fifth Circuit affirmed the Tax Court holding that contributions of real property by Keystone to one of its company-sponsored defined benefit plans were not a sale or exchange. Two weeks later, the Fourth Circuit reversed the Tax Court in Wood, 955 F2d 908 (4th Cir. 1992), rev'g 95 TC 364 (1990), by holding that the contribution of a third-party promissory note to its defined benefit plan in satisfaction of its funding obligation was a sale or exchange, and therefore prohibited. The U.S. Supreme Court granted certiorari as a result of this conflict.

The argument for limiting the meaning of the phrase "sale or exchange" is based on Sec. 4975(f)(3). That subsection provides that if encumbered property (real or personal) is transferred to a plan by a disqualified party (which includes the sponsoring employer), the transaction will be treated as a sale or exchange, and therefore prohibited. It was argued by the taxpayer in Keystone that by including this provision in the Tax Code Congress indicated its intent to limit the meaning of "sale or exchange" to those situations involving the contribution of encumbered property. Absent an encumbrance, a contribution of property would not be prohibited.

The Keystone decision

The majority of the...