Property transfers to qualified plans.

• Author: Zwick, Gary A.

In Keystone Consolidated Industries, Inc., 5/25/93, the Supreme Court ruled in an 8-to-1 decision that a transfer of unencumbered property by a qualified plan sponsor to the plan in order to satisfy its funding obligation gave rise to a prohibited transaction under Sec. 4975. In doing so, the court resolved a conflict between the Fourth Circuit in Wood, 955 F2d 908 (4th Cir. 1992), rev'g 95 TC 364, and the Fifth Circuit in Keystone, 951 F2d 76 (5th Cir. 1992). In its decision, the Supreme Court laid out the following rules: * A transfer of encumbered property to a plan by a disqualified person including the sponsoring entity is always a prohibited transaction. * A transfer of unencumbered property by a plan sponsor to the plan to satisfy an obligation to the plan is also a prohibited transaction. * A transfer of unencumbered property by a plan sponsor that does not satisfy an obligation to the plan is not a prohibited transaction.

The Court reasoned that the wording of Sec. 4975(f)(3) (which provides that 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 or similar lien which the plan assumes . . .") was meant to expand the universe of transactions subject to the prohibited transaction rules, and not to limit their reach. Thus, the Court reasoned that a direct or indirect sale or exchange of property between the plan sponsor and the plan, which is prohibited under Sec. 4975(c)(1)(A), included a transfer of any property, whether encumbered or not, by the plan sponsor to the plan if it was done in satisfaction of an obligation of the plan sponsor to the plan. The Tax Court and the Fifth Circuit in the Keystone case had reached a contrary conclusion. Those courts reasoned that Sec. 4975(f)(3) was meant to limit the reach of the prohibited transaction provisions on the contribution of property in kind by the sponsor to the plan to only those properties that were encumbered by a mortgage or lien.

For plan sponsors, contributions to qualified plans to satisfy a minimum funding obligation should therefore be made in cash. In Keystone, where truck terminals and other real property were contributed to the plan to satisfy its funding obligation, the sponsor would have had to refinance the properties or sell the assets and contribute the cash to the plan. In the case of a sale, this would have created no worse an income tax result than when...