Plan "Contribution"?

[J Simmons]

ER has a 'private' investment account with brokerage house where ER also has a profit sharing plan. The day before the due date for the ER's income tax return, ER gives written instruction to broker to sell $30,000 worth of the investments in the 'private' account and add them to profit sharing plan account. ER takes a $30,000 deduction for the contribution.

Later, it is discovered that the brokerage house liquidated shares in the private account, raising $30,000 that automatically were money market funds under the private account. The brokerage however failed to move the $30,000 to the profit sharing plan account. This failure was not discovered until 45 days later, well after the due date for and the date that the ER's tax return was filed claiming the $30,000 deduction.

Is the deduction proper? May the brokerage house now remedy the situation simply by moving the $30,000 into the plan's account?

[Appleby]

I would say yes. Most of these firms have the ability to add 'trailers' to their transactions, such as 'deposited as of 00/00/00'. Since the employer did provide the instructions before the deadline and they dropped the ball, then they need to do what they can to ensure the transaction is recorded properly.

[Guest Sieve]

I'm not so sure. If you instructed the brokerage house on 12/30 to liquidate & then send $30,000 to a charity by 12/31, and the check wasn't sent until 2/15, I don't think you'd be asking whether the $30,000 would be deductible as a charitable contribution. The difference here, of course, is that the location of the investment account and the PS account are the same, and it presumably was just an error of administration that caused the transfer not to occur. But, does that (ought that) matter at all? Fact is that the transfer you refer to never did occur, and I wonder why the IRS would agree to overlook the substance of the transaction in order to permit a deduction that ought not be available. Would that an extension to file had been obtained . . .!

Of course, whether the brokerage would have to make good on your damages as a result of failing to follow your instructions is a separate and distinct issue from whether the deduction is permissible.

So, I guess if you argue that the contribution was being held in trust in the employer's account as of the date the trade/liquidation was to be made & the instructions given--and let's assume that it was being held in trust--do you then have a prohibited transaction because the plan assets were not segregated from employer assets timely?

The reason that the IRS can rule in a PLR that the 60-day rollover rule should be extended in certain circumstances is because such a waiver by the IRS is permitted by statute, and there is no authority I know of which permits a deduction when assets have not been transferred into a trust timely.

I suspect I'm over-analyzing, but I think your facts pose a problem.

[J Simmons]

Thanks, Appleby and Larry.

The case of Rowell v CIR, TC Memo 1988-410, 56 TCM 11 (1988), gives me heartburn on this one. The only case that I could find that allowed for a properly instructed transaction that was carried out wrong to be considered properly done was a botched direct transfer of a plan from one bank to another. In Doing v CIR, 58 TC 115 (1972), the Tax Court found no problem and the IRS has acquiesced. Problem is, Rowell is much closer factually to the OP.