Contribution in excess of maximum deductible amount

[ac]

The maximum tax-deductible contibution for 2003 was $95,000. The client contributed and deducted $100,000 (return filed).

We told the client that $5,000 was not deductible and the matter should be discussed with his tax advisor.

Is there anything else we should do?

[david rigby]

That might depend on who "we" is. One hopes the communication was in writing.

Other relevant issues might be:

- timing of the actual contribution(s),

- whether the plan year and the sponsor's fiscal year are the same.

[Guest flogger]

When was the contribution made? If at least $5,000 of the $100,000 was made in 2004, the client could:

1. Amend the return to reflect the proper deduction of $95,000;

2. Avoid the 10% non-deductible contribution penalty and apply the $5k toward 2004.

I have known accountants that have taken the approach that they would rather not amend the corporate return for 2003. These accountants say that the aggregate deduction between 2003 and 2004 will be the same (for ex., if the proper deduction for 2004 is $120,000, then the client would deduct $115,000 for 2004 and the two year aggregate deduction is $215,000.) By the time the IRS might audit the plan year(s), the accountants would argue that an amendment is not necessary because the "disallowed" deduction for 2003 would just get moved into 2004, causing little or no change. I realize that this is not right, but the accountants and client may want to take the risk.

[AndyH]

Who actually determines the deduction limit? It is not a direct Schedule B item. Ever wonder why? Isn't it ultimately the client's tax counsel arguing in tax court?

ac, my two cents says that you tell the client (in writing as pax suggests) that the deduction exceeds the amout that you believe to be deductible, and recommend that they review the matter with a tax advisor. And this is pretty much what you said.

My point it to avoid absolutes. Who says the actuarial assumptions, for example, pass muster? Is it deductible if the interest assumption was 1%? 10? What about the range of current liability rates and the possible use of the unfunded current liability calculation?

Just because your report may outline a deductible range, that may not be set in cement and should not be stated in terms of absolutes.

Just my restatement of something an old wise man named Max Rosenberg told me 20 years ago.

[Blinky the 3-eyed Fish]

Just because your report may outline a deductible range, that may not be set in cement and should not be stated in terms of absolutes.

I think then you could argue the minimum funding is not stated in terms of absolutes, yet if a client fails to meet that he will absolutely have to pay some excise tax. The maximum deductible is a product of the assumptions used to generate the minimum required funding. It is no less absolute.

Now while you are correct that you cannot determine the maximum deductible from the Sch B, if the plan is audited, the auditor will ask for a copy of the valuation report. The maximum deductible should be on that report. So, unless the actuary is going to doctor the report, the maximum deductible will be easily determinable upon audit.

[AndyH]

All true of course, but as you know these reports are not always perfect and what legal standing does the valuation report actually hold, as opposed to the Schedule B?

[Blinky the 3-eyed Fish]

I can't comment on legal standing, but how many instances are there where there is any room for manipulation of the 404 numbers when the 412 numbers have already been reported on the B? I can think of one and that is the decision on whether or not to fresh start the 404 bases. So without any flexibility the 404 numbers are what they are because they are based on the assumptions used to generate the 412 numbers.

[david rigby]

The other choice is the CL rate for purposes of the Unfunded Current Liability. Prior to PFEA, the CL rate for this purpose was related to the CL for 412 purposes. Under PFEA, this issue may not be as important, although PFEA is temporary.

[AndyH]

Good point, no argument from me on those points, but who is to say that the B has been filed?

Maybe because today is 10/15 everybody is thinking calendar year 2003 and everything has been filed, but often the tax return is filed before the B, so all there is is a valuation report. Certainly the client has the right to replace one actuary with another, in the extreme case.

So an actuary may make a determinion or finding but that does not necessarily decide whether or not a deduction is proper. Some actuaries may represent that a certain figure is the maximum deductible but others may not feel that that is his or her role and may instead state figures in terms of minimum and maximum amortization and the like.

Another example is a non profit. Is it the role of the actuary to determine whether a particular figure is the maximum deductible contribution for a non profit that may have a taxable subsidiary, or that has in the past been subject to UBTI?

A furher argument because we are down 2-0 is that it is possible that the valuation may not have even been done by an actuary.

One more thing, how about the IRS disallowing a deduction either due to the use of unreasonable assumptions or because a peice of the underlying census or assets were in error? And of course there is the standard caviat (in some valuations) but not all.

Just an academic discussion, I hope we all realize. I certainly respect all of your opinions and points.