Newly Established Profit Sharing Plan--Need to Fund w/ $1.00?

[Guest aciepluch]

An employer has just adopted a profit sharing plan and plans to make a contribution by the due date of its tax return. Does the employer need to fund the plan with at least $1.00 before the end of the year in order for it to be established in 2004 or has that rule gone by the wayside?

Thanks.

[mbozek]

no. RR 81-114

[Guest aciepluch]

Thank you!

[Blinky the 3-eyed Fish]

By the wayside, down the river and into the sea by now, but you'd be surprised at the number of old-timers who insist on $100 being deposited before year-end. GBurns demands $150! (Just kidding Georgie.)

[GBurns]

See how rumors get spread and reputations ruined. Its $101 as in PS 101 the basic course. Adress for remittance can be provided.

[david rigby]

Rev.Ruling 81-114 includes this (emphasis added):

In order to be an allowable deduction under section 404(a) of the Code, a contribution to an employees' trust must be made pursuant to a plan in effect and to a valid trust which is recognized under local law.

Is it possible that the local law does require a trust to have a corpus?

Also, it may be that the financial institution requires a corpus.

[mbozek]

I have always understood that under RR 81-114 a plan was deemed established as of the end of the employer's tax year if the trust was adopted by the end of the year in accordance with local law even though no contribution was made by year end as required by local law. According to the ruling the corpus was deemed furnished by year end and the trust was deemed to be in existance for the year if the contribution was made by the date for filing the tax return.

[Guest b2kates]

Maybe I am now one of the "old timers", it has always been our advise that the trust corpus must be funded before the end of the year. As the state law requires the deposit to recognize the trust as valid.

[Belgarath]

81-114 is pretty short, so I've attached it here. I think it is very clear that there does NOT have to be any corpus as of the end of the year for the plan to be valid.

REV-RUL, PEN-RUL 19,576, Rev. Rul. 81-114, I.R.B. 1981-15, 7.

The purpose of this revenue ruling is to restate the position in Rev. Rul. 57-419, 1957-2 C.B. 264, in view of the enactment of the Employee Retirement

Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

The issue is whether deductions are allowable under section 404(a) of the Internal Revenue Code for contributions made to an employees' trust that is valid

in all respects under local law except for the existence of a corpus at the close of the taxable year. Such contributions were made after the close of the

taxable year, but during the time prescribed for filing the employer's income tax return.

In order to be an allowable deduction under section 404(a) of the Code, a contribution to an employees' trust must be made pursuant to a plan in effect and

to a valid trust which is recognized under local law.

Section 404(a)(6) of the Code provides that a contribution to an employees' trust is deemed made on the last day of the preceding taxable year if the

payment is made on account of such taxable year and is paid not later than the time prescribed by law for filing the return for such taxable year (including

extensions). This rule applies to cash basis as well as accrual basis taxpayers.

Rev. Rul. 76-28, 1976-1 C.B. 106, provides rules with respect to the application of section 404(a)(6) of the Code. These rules do not, however, change the

requirement that a plan must be in existence as of the last day of the employer's taxable year with respect to which a contribution is made.

In Dejay Stores, Inc. v. Ryan, 229 F.2d 867 (2d Cir. 1956), and Tallman Tool & Machine Corp. v. Commissioner, 27 T.C. 372 (1956), acquiescence 1957-2

C.B. 7, it was held that where trust corpus was lacking at the close of a taxable year because of the employer-taxpayer's failure to make the initial

contribution to an otherwise valid trust, such corpus was considered furnished and the trust was deemed to have been in existence for that year if the

contribution was made within the time prescribed for filing the incme tax return for that year.

Accordingly, deductions are allowable under section 404(a) of the Code for contributions paid after the close of the taxable year, but within the time

prescribed for filing the employer's income tax return for the preceding year, even though the employees' trust did not have a corpus at the close of the

preceding taxable year.

Rev. Rul. 57-419 is superseded because the position stated therein is restated under current law in this revenue ruling.

[GBurns]

I do not see where 81-114 makes that clear.

The purpose of 81-114 was to restate 57-419 which was superceded by 76-28. This seems to mean that 76-28 is null and void. Since it was 76-28 that relied on and quoted Dejay stores which allows for the "delayed" funding, and 76-28 is now null and void, then it seems to follow that "delayed" funding is no longer allowed and we are back to 57-419 which is now 81-114 which does not provide for "delayed" funding.

Under 81-114, What happens when state law requires the contribution in order to be "a valid trust which is recognized under local law" as is stated in Rev Rul 81-114?

It seems that any contribution made to a trust not recognized under local law would be not "be an allowable deduction under section 404(a) of the Code" again as per 81-114. So what would be the purpose, if no deduction?

[Belgarath]

Where emphasis is added, it is my emphasis.

The issue is whether deductions are allowable under section 404(a) of the Internal Revenue Code for contributions made to an employees' trust that is valid

in all respects under local law except for the existence of a corpus at the close of the taxable year.

Conclusion by the IRS?

Accordingly, deductions are allowable under section 404(a) of the Code for contributions paid after the close of the taxable year, but within the time

prescribed for filing the employer's income tax return for the preceding year, even though the employees' trust did not have a corpus at the close of the

preceding taxable year.

So, assuming your trust is valid under local law EXCEPT FOR the existence of corpus as of the end of the year, I don't see the problem.

This has been a subject of intermittent discussion over many years. I've had approximately 40 (give or take a half dozen) attorneys agree with this, and no dissenters until what I've seen on this message board. So I'll respectfully agree to disagree, and continue to refer clients to their legal counsel for an opinion, as always. If their legal counsel says it must be funded, no problem by me!

[GBurns]

But that conclusion is in 76-28 which is nulled by 81-114 which states "The purpose of this revenue ruling is to restate the position in Rev. Rul. 57-419"

Or are you saying that 76-28 is not nulled?

[J2D2]

FWIW, I agree with Belgarath that Rev Rul 81-114 is clear. Rev Rul 81-114 supersedes RR 57-419, but does not "null" [sic] RR 76-28.

In RR 81-114, "[t]he issue is whether deductions are allowable . . . for contributions made to an employees' trust that is valid in all respects under local law except for the existence of a corpus at the close of the taxpayer year." The conclusion in RR 81-114 is that "deductions are allowable [if made timely after the end of the year] even though the employees' trust did not have a corpus at the close of the preceding taxable year."

RR 76-28 deals with the timeliness of contributions and the requirement that a valid plan exist at the end of the year. It does not address the valid trust under local law issue.

Putting it all together: RR 76-28 says no deductible contributions unless you have a valid plan at year end. RR 81-114 says that you must also have a valid trust at year end and that you will have a valid trust, even though there is no corpus, if the trust is otherwise valid under local law.

[GBurns]

Then What is the position in 57-419 that is being restated in 81-114? Is 57-419 not in opposition to 76-28 and therefore 81-114?

[J2D2]

Don't know what position is being restated, all RR81-114 says is that its purpose is to restate 57-419 "in view of the enactment" of ERISA. For purposes of this discussion, does it matter?

Since 57-419 was superseded by 81-114 over 2 decades ago, I don't believe it really matters if those 2 rulings are in conflict. 76-28 doesn't mention 57-419; if those rulings were in conflict I'd expect the IRS to note that fact and resolve (or at least discuss) the issue.

As I tried to state (obviously unsuccessfully), I read 76-28 as requiring that the plan be in existence at plan year end and 81-114 as requiring that the trust be in existence at year end. Those are 2 related, but distinct, notions.

[Guest forohonek]

but you'd be surprised at the number of old-timers who insist on $100 being deposited before year-end.

As an old-timer who tells clients to deposit $500 in their newly established plans by December 31st, FYI it is not solely due to being old or being ignorant.

For one reason, as evidenced here, there is confusion on the matter that would be totally avoided by merely prepaying a few dollars. The potential professional fees to resolve any confusion goes way beyond the interest income forgone on the prepaid funds.

But the reason I suggest clients pay in $500 (or any other minimal amount they choose and that the administrator will accept) is that it is bona fide evidence that indeed the plan has been established. No matter how sloppy the client gets in future years as he misplaces the paperwork documenting the establishment of the plan... the record of that canceled check is always going to be available.

[Blinky the 3-eyed Fish]

No offense by my reference intended. The use of "old-timers" was used to reference the fact that they were most likely around before the RR.

As for confusion, there shouldn't be any. This question has been asked over and over again through the years at many conferences and the answer is a clear and consistent one from the IRS. The professional fees should be $0 to resolve this question.

As for evidence of the document's establishment, I always get back signed copies of everything. ALWAYS. The client's records could burn to a cinder and the evidence would be preserved. I believe every TPA also gets signed copies back, and if they don't, they should. Now, if the IRS was to question the legitimacy of the signing date, well then yes, an established trust account is further evidence the plan was established. But the reality is that they would never question a date something was signed unless there was evidence to the contrary.