Exempt employer's excise tax for nondeductible contributions to qualified plan.

• Author: Amoroso, Vincent

The IRS has ruled in Letter Ruling 9304033 that a tax-exempt employer with an unrelated business income tax liability could be subject to the Sec. 4972 excise tax on nondeductible contributions even though it derived no tax benefit from the contributions--but only to the extent the contributions were attributable to employees involved in generating unrelated business income. The ruling also addressed how much of the nondeductible contribution the employer could get back from the plan.

Company, a Sec. 501(c)(3) tax-exempt organization, maintained a qualified defined benefit plan for its employees. The plan included language stating that contributions were conditioned on their deductibility. For 1989, Company made contributions to the plan totaling $227,730. However, sometime after making these contributions, Company was advised by its actuarial consultant that the maximum deductible contribution for 1989 was zero.

Company also reported unrelated business taxable income (UBTI) of $27,809 and paid unrelated business income tax (UBIT) of $4,171 for 1989. Company did not claim any part of its $227,730 plan contributions as a deduction in calculating its UBTI, and did not allocate contributions between employees involved in exempt operations and those involved in income-producing operations.

Company requested a ruling that the Sec. 4972 excise tax on nondeductible contributions did not apply to a tax-exempt employer with UBTI if the employer did not deduct its pension contributions. Company also requested, under Rev. Proc. 89-35, a ruling that the contributions would be nondeductible if claimed as a deduction, so that those amounts could be returned to Company under Rev. Rul. 77-200. (Note: Rev. Proc. 89-35 has since been superseded by Rev. Proc. 90-49; Rev. Rul. 77-200 has since been superseded by Rev. Rul. 91-4.)

Sec. 4972 imposes a 10% excise tax on nondeductible contributions to qualified plans that are not returned to the employer by the due date of the employer's tax return. Employers that have, at all times, been tax exempt are generally exempt from this excise tax (Sec. 4972(d)(1)(b)). The legislative history of Sec. 4972 indicates that Congress did not intend to deny this exemption entirely when a tax-exempt employer has been subject to unrelated business income tax: "Under rules to be prescribed by the Secretary, this exception does not apply to the extent that the employer has been subject to UBIT or has otherwise derived a tax benefit...