Short Plan Year

[flosfur]

New DB plan effective 4/1/2003 with 9 month initial plan year, switching to calendar year 2nd year on. Plan sponsor is on Calendar tax year and started buisness on 4/1/2003 (hence short fiscal year also, I assume).

For section 412 minimum, charges & credits are prorated for a short plan year. I could not find such a requirement (or restriction) for Section 404 maximum, which means that full NC plus net amortization of 10yr bases, if any, can be contributed & deducted!

Example: Using EOY val date (12/31/03) and Ind Agg cost method, NC =$100k.

S412 required = $75k. S404 Max=$100k.

Any one disagree, and if so why?

Thanks in advance for your response.

[Mike Preston]

Don't disagree. I think that Plastics Engineering is a citation that bears on the issue.

[David MacLennan]

Another approach you may want to use to reinforce the deduction: there was another topic on the message boards here where someone pointed out that Sal Tripoldi in the ERISA Outline Book stated that IRS spokespeople have repeatedly made statements at conferences that it is acceptable to make a plan effective on the first day of the plan year, even if it predates the existence of the business entity sponsoring the plan. Seems to run against common sense, but this could be a fallback position on the 404. You would however lose a nice credit balance.

[flosfur]

Thanks Dave.

Someone else pointed this out a couple of years ago but could not give me the cite for the written version of it.

I would appreciate very much if someone with a copy of it would email me a copy or send me an email so I can give my fax#.

[flosfur]

Mike, the only thing I could find closest to thos name was Plastic Engineering & Technical Sertvices, Inc. and that tax case was about Capitalizing Patent Royalty payments.

Can you give the year etc, post it here or possibly give a linkage where it could be found.

[Mike Preston]

PLASTIC ENGINEERING & MFG. CO. v. COMMR., 78 TC 1187, 06/30/1982

P was incorporated on Sept. 15, 1974, and elected to report its income on a fiscal year basis ending Jan. 31. On Sept. 30, 1974, P adopted a defined benefit pension plan with a plan year ending Sept. 30. Prior to Jan. 31, 1975, P made contributions to the plan equal to the normal cost of funding the 12-month plan year beginning Sept. 30, 1974. P claimed deductions for the full amount of its contributions on its return for its first, short taxable year covering from Sept. 15, 1974, through Jan. 31, 1975.Held, the requirement that services actually be rendered concerns only the fact of rendition and not the amount of services performed. Held, further, the contributions having been paid within the taxable year, and services actually having been rendered by each participating employee, petitioner is allowed the full deduction claimed.