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Guest Michael Spaid

In-kind contribution to DB plan

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Guest Michael Spaid

The plan sponsor of a DB plan that currently only covers the sole prop owner wants to transfer a mutual fund into the plan in order to satisfy the minimum funding requirements for 1998. Is this a prohibited transaction as laid out in the Supreme Court ruling of IRS v. Keystone. This case involved truck terminals and property in Key West. This mutual fund is highly liquid. To me this transfer of the mutual fund would be a prohibited transaction as described in PWBA Interpretive Bulletin 94-3. I cannot believe that I have never encountered this situation before.

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Another point to consider is the taxes due on the transfer. If your client has a cost basis of $20k for example in the potential transfer, and the current market value is $30k, I would have to think that capital gains taxes would be due on the increase in value. Keystone tended to focus on the illiquidity of the non-cash contribution (I believe it was a trucking terminal in the Keystone situation). Plus other issues are raised as to the real value of the nonpublicly traded security (is the true value higher or lower than the "market value" specified by the client - it is easy to imagine the abuse that could take place).

We tend to get our clients to contribute cash to be on the safe side- usually bringing up the capital gains tax is enough to discourage all but the most persistent. What are other people's thoughts on this subject?

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The transfer of property to a db plan to satisfy minimum funding requirements is considered a sale of property by the employer to the plan, which would be a prohibited transaction, unless it is eligible for an exemption.

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Guest Martin Silfen

Even though the plan is not governed by Title I of ERISA since it only covers the sole owner, the Internal Revenue Code's prohibited transaction penalties still apply. And there would be a capital gain tax imposed on the appreciation in the property contributed in accordance with the Tasty Baking case.

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