DB Deduction

[pbarrett]

We have a DB plan that terminated in 2002. The actuary determined that the client needed to fund appx $300,000. The client did so. Distributions were made during 2002 and the plan assets are at -0-.

Problem- the CPA says with Corporation only had a $115,000 profit. He can't use the $300,000 contribution as a deduction.

This is out of my area but does anyone know-- can the CPA carry forward part of the contribution? All contributions were made during 2002. PYE 12/31/02 Corp YE 12/31/02.

Thanks for any thoughts.

[David MacLennan]

To my knowledge:

There is no Code Section that says a contribution made for a year that could have been deducted in that year can be deducted in a future year. There is a code section that says a contribution made by the due date of the return is deductible for the prior year (if the contribution is assigned to the prior year), and there is a code section that says a contribution is deductible in the year made if it is required to reduce an accumulated funding deficiency (IRC 412) from a prior year, and there is a code section that says a contribution can be deducted in the current year if it was made for a prior year, but was not deductible in the prior year due to not being contributed by the due date of the return ("includible" contribution). There is no code section that says that, if a contribution is made after the end of the plan year for that plan year, but before the due date of the employer's return, the employer can elect which year to deduct it in.

Can the CPA show a loss and carryforward the loss?

Another issue: when you say "needed to fund approx $300,000", was it required under 412, or allowable under 404, or was it just necessary to fund accrued benefits? If the latter is the case, it may not all be deductible in a single year, and must be amortized over future years.

[Guest merlin]

Is the plan covered by PBGC? If so,and the $300000 was necessary to fund the benefit liabilities isn't the full deduction allowed under 404(a)(1)(D)(iv) as amended by EGTRRA 652?

[Guest RSNOW]

Both a C-corp and a S-corp should be able to deduct the full amount (300k) which puts them in a net loss position for the year (given the facts you mentioned). These losses can then be carried forward or back (amended returns) in some situations to offset otherwise taxable income for other years. It's not really the same as carrying forward the pension deduction, but may have some similar impact on bottom line of the corp, depending on when the losses are taken.

[Kirk Maldonado]

I think that people may want to consider the following provisions in determining the proper tax treatment of those contributions.

Internal Revenue Code Section Section 172(d)(4)(D) provides as follows:

(4) Nonbusiness deductions of taxpayers other than corporations.

In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer's trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence—

* * *

(D) any deduction allowed under section 404 to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401©(1) shall not be treated as attributable to the trade or business of such individual.

Treasury Regulation Section 1.172-3(a)(3)(iv) provides as follows:

(iv) Self-employed retirement plans. Any deduction allowed under section 404, relating to contributions of an employer to an employees' trust or annuity plan, or under section 405©, relating to contributions to a bond purchase plan, to the extent attributable to contributions made on behalf of an individual while he is an employee within the meaning of section 401©(1), shall not be treated, for purposes of section 172(d)(4), as attributable to, or derived from, the taxpayer's trade or business, but shall be treated as a nonbusiness deduction.