IRS disallowing a deduction taken for year of deposit although required for previous year.

[Earl]

timeline:

12/31/99 - PYE min contribution for 412 is $78,000

04/15/00 - files for extension of time to file 1999 return

05/21/00 - Employer files his 1999 return with a $0 deduction

08/11/00 - Employer funds his $78,000 (timely for 412 min funding)

08/15/00 - 1999 Extension expires

12/31/00 - PYE min contribution for 412 is $27,000

04/15/01 - files 2000 return with $105,000 deduction

02/03/03 - IRS initiates an audit of 2000

05/21/03 - 1999 year closes (3 yrs from actual filing)

08/15/03 - IRS gives notice saying $78,000 is disallowed as a 2000 deduction

I point out 404(a)(1)(A)(i):"amount necessary to satisfy the minimum funding standard provided by section 412(a) for plan years ending within or with such taxable year (or for any prior year)" as basis for deducting the amount in 2000.

IRS says 404(a)(6): "a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof)."

So they say that since it was deposited before 8/15/00, the extended deadline, it was ONLY deductible in the prior year (1999).

Does this sound right? Thanks for wading through this and making any comments.

[Guest penman]

Earl,

Read the post entitled "deductible contributions and tax return due date". The last posting was only a few days ago. I think that without the extension the $78,000 would be considered an "includible contribution" and it could be deducted in the following year unless there was a FFL issue (see IRS Announcement 98-1). With the extension, in the post I mentioned, I was questioning whether the extension would nullify the ability to call the 412 deposit for the prior year an includible contribution. Unfortunately, it doesn't seem to be a question in your particular IRS reviewers mind.

Here's the link:

http://www.benefitslink.com/boards/index.php?showtopic=15654

[david rigby]

Just to be clear:

(1) the $78K was considered a 412 contribution, was included in the funding standard account, and was included in the 1/1/00 412 assets as a receivable?

(2) in deriving the 2000 404 contribution limit (amount not given), the $78K was not included in the 1/1/00 404 assets?

[GBurns]

Why would they disallow something that was never deducted?

You posted that the IRS is disallowing the $78,000 for the year that is being audited which is 1999 but which is also the tax return that has $0 deduction.

What is the effect of the disalowance? Does it cause additional tax liability?

However, you also posted that the IRS said "it was ONLY deductible in the prior year (1999)". This statement does not fit since it could only have been made if they were looking at 2000 but you said that they were auditing 1999 not 2000. Why would they be involved in years other than that which is being audited?

In any event why would an amended return/returns not solve any problem?

[Earl]

penman: thanks for the link. Seems you think that it is not deductible in the current (2000) year. That is a good discussion of my dilemma. Seems the general consensus in that discussion is that prior year is only option until after 8/15.

pax: $78k was a 412 cont for 1999 and used in the 2000 assets. I do not have the 412 calculation for 2000. I took over the plan and was given the tax assessment letter 5 days before the "pay the taxes" date.

GBurns: I mistakenly wrote 1999 audit. I edited the post as it is a 2000 audit. So, yeah, the disallowance is causing a $35,000 tax bill for 2000. I am told that 1999, the year in which it MUST be deducted is closed. 2000 personal return would be open.

However, it sounds like I am being told that I should look at the 404 max and see if there was room over the amount taken in 2000, 2001 and 2002. Eat some of it up each year. I do know that the 2002 404 max was $140k and he deducted/contributed $80k, so there is $60k, if I can do it that way.

Is this correct? So money is eventually deductible?

[mbozek]

Under 404(a)(6), contributions are deductible either in the year in which they are contributed or for the prior tax year if made by the time for filing the return including extensions and the employer deducts them on the return. Rev. Rul 76-28. If the deduction was taken on the 2000 tax return it should be deductible for 2000 since it was contributed in 2000. The IRS position that the deduction can only be taken in 1999 because it was contributed prior to the expiration of the extenson for that year is wrong.

[Mike Preston]

mbozek is correct. The monies deposited in 2000 are deductible on the 2000 tax return, but there is a catch. The catch is that they are only deductible if they satisfy the definition of deductible under 404. For this purpose, you would do the 2000 year calculation, excluding the $78k. If that pushes the 2000 deductible contribution up by $78k (unlikely, but I guess theoretically possible if the plan was subject to the FFL in 2000 assuming the $78k was in the plan), then the entire amount is deductible.

You say that the minimum for 2000 was $27k. You didn't say what the maximum for 2000 was. And you didn't say whether the maximum for 2000 was calculated based on the $78k being included in assets.

The "includible" contribution stuff merely allows you to sum two minimum funding amounts. If a contribution isn't "includible", then you still get to deduct it if it falls within the 404 calculation for the year.

[Guest penman]

In this case, I think 404(a)(6) is actually the problem, not the solution. 404(a)(6) says that contributions made during the grace period on account of the prior taxable year are deemed to have been made on the last day of that taxable year. 404(a)(1)(A) says the contribution is deductible in the taxable year when paid, which because of 404(a)(6) is the prior year. I would think that putting the contribution on the Schedule B for the prior year makes it "on account" of that prior year.

In this case, I believe the contribution would have to have been made between 8/16 and 9/15 of the following year to both meet the prior year minimum funding requirement and deduct it on the current year tax return.

[Mike Preston]

Correct. If they had made the contribution 5 days later, the IRS would have gone peacefully, on one condition. The sum of the two minimums still can't exceed the FFL in the second year. From what you have described, that would not have been a problem.

[mbozek]

Maybe I am missing something but Reg. 11.412©-12(b)(2) provides that rules for determining the year for which a mimimum funding contribution is deemed made are independent of the year for which the contribution is deductible under 404(a)(6). Therefore the year for which a contribution is allocated for Schedule B purposes can be different from the year for which the deduction is claimed under 404(a)(6). See rev. rul 77-82.

[Mike Preston]

Yes, I should have said "correct, with respect to the conclusion", rather than merely "correct". 412 and 404 are indeed different animals.

[Guest penman]

mbozek, that's true and as Mike Preston said, if the contribution were made 5 days later it could have been made for the prior year and deducted in the current year (subject to limits). In this case though, since they extended the prior year tax return and made the deposit before the extended due date then 404(a)(6) says the contribution was made 12/31 of the prior year. Then 404(a)(1)(A) says contributions are deductible in the tax year when paid, which has now become the prior year because of 404(a)(6).

[mbozek]

Where is that stated? A contribution made after the end of a year but before the expiration of the time for filing a return with extension is only deducted for that prior tax year if (a) the employer desigates in writing to the Plan admin that the contribution is on account of the prior year or (b) the employer claims the contribution as a deduction for such prior year. Rev. Rul. 76-28. Most employers use (b). If an employer claims a 2000 contribution made prior to 8/16/2000 as a deduction on the 2000 tax return then it is a deduction on the 2000 return not 1999. The contribution made in 2000 is only a 1999 deduction if the employer elects to treat it as a payment for 1999 not because it is made before the expiration of the extension period for filing the 1999 return.