District court says excise taxes were inappropriate when plan was not harmed.

• Author: Elinsky, Peter I.

A U.S. district court has held that imposition of the Sec. 4971 underfunding excise tax was unwarranted when the underfunding was a result of a book entry misallocation of funds between a pension plan and a profit-sharing plan, and neither the plans nor the sole participant was harmed. The court also held that even though the participant waited 2 1/2 years to record a mortgage he had given as security for a plan loan, imposition of the Sec. 4975 prohibited transaction excise tax was inappropriate when the plan suffered no harm (Ahlberg, DC Minn., 1991).

In January 1980, a professional association established a pension and a profit-sharing plan. Daniel Ahlberg, its sole shareholder and employee, was the sole participant and the administrator of both plans. For 1980, 1981 and 1984, the corporation made the maximum allowable contribution to the plans, paying the funds into a commingled money market account for the plans' benefit. Although the total contribution for each of those years was correct, book entry errors resulted in an incorrect allocation between the pension and profit-sharing plans. This misallocation, which resulted in an underfunding of the pension plan, was corrected by a book entry, requiring no transfer of funds and resulting in no loss of interest. Nevertheless, the IRS imposed the excise tax under Sec. 4971 for failure to meet the Sec. 412 minimum funding standards.

Ahlberg twice borrowed funds from the plans. In each case, he gave the plan a promissory note secured by a mortgage in real estate. However, he waited 10 months before recording the mortgage that secured the first loan - and 2 1/2 years before recording the mortgage that secured the second loan. The...