For section 404 purposes: any difference between nondeducted contributions and nondeductible contributions?

[Blinky the 3-eyed Fish]

For 404 purposes when performing a valuation how would the following 2 scenarios be treated differently:

1. The client makes a contribution that he does not deduct on his tax return

2. The client makes a contribution that he deducts, but he was not allowed the deduction.

In other words, would you consider both nondeductible contributions or just the first one.

[Mike Preston]

Tough call. Depends on whose ox is being gored.

In case number 2, shouldn't there be an amended tax return?

If not, hardly think you can exclude the assets and pump up subsequent contributions!

[Blinky the 3-eyed Fish]

Scenario 2 arises when clients go wild and for whatever reason end up deducting amounts they shouldn't have. A example of this occurrence is when a sole proprietor does not have enough earned income, but the accountant takes the full deduction anyway and the client is doesn't file an amended return. In the past I have treated the amount that was not allowed to be deducted as a nondeductible and reduced the 404 assets the next year. In the next year, when there is a spread between the minimum and maximum deductible contributions, the max calculation is only serving to see if the nondeductible from last year can be wiped away. Example:

2002 contribution and deduction - 50,000

2002 max deduction - 30,000

2002 nondeductible - 20,000

2003 min contribution - 50,000

2003 max deductible - 65,000

If the client contributes the 50,000, then 5,000 remains nondeductible for 2004.

I am just soliciting opinions if this is a correct approach.

[Mike Preston]

Seems right to me.