Keystone raises red flags for pensions and foundations.

• Author: Burt, Charles J., II
• Position: Keystone Consolidated Industries

The Supreme Court, in an 8-to-1 decision, held in Keystone Consolidated Industries, Inc., 5/24/93, rev'g 951 F2d 76 (5th Cir. 1992), aff'g TC Memo 1990-628, that a contribution of unencumbered property by an employer to a defined benefit pension plan in satisfaction of the employer's minimum funding obligation constituted a prohibited sale or exchange under Sec. 4975(c)(1)(A). Although Keystone resolved a controversy over prohibited transactions under pension law, the decision clearly has ramifications for similar excise taxes imposed on self-dealing transactions by private foundations. In light of this decision, practitioners may want to advise their pension and private foundation clients, including certain charitable trusts, to proceed with the remedial steps necessary in order to prevent the application of the additional 100% (pensions) Sec. 4975(b) and 200% (private foundations) Sec. 4941(b) taxes.

The facts

Keystone Consolidated Industries, Inc. maintained several qualified defined-benefit pension plans, funding them with contributions to the Trust. In 1983, the company contributed five truck terminals (with a total fair market value (FMV) of approximately $9.7 million), and in 1984 real property (located in Key West, with an FMV of approximately $5.3 million). None of the contributed properties were encumbered by any type of mortgage or lien at the time of transfer, and the properties' FMVs were never in dispute. Keystone reported the transactions on its income tax returns for 1983 and 1984, taking a deduction under Sec. 412 for the FMV of the properties contributed and recognizing a capital gain for the difference between their bases and their FMVs.

The IRS determined that Keystone's transfer of the properties was tantamount to a sale between a disqualified person and a plan and, therefore, was a prohibited transaction under Sec. 4975(c)(1)(A). The Service issued a deficiency notice to Keystone for approximately $12.8 million, which Keystone contested.

The applicable law

Sec. 4975 was enacted by the Employee Retirement Income Security Act of 1974 (ERISA) in order to provide a disincentive for engaging in certain prohibited transactions without causing a tax-qualified retirement plan to lose its tax-qualified status. An initial first-tier excise tax of 5% of the amount of the prohibited transaction is imposed on the disqualified person involved; the failure to correct the prohibited transaction within the tax period results in the...