Another contribution due date question

[AndyH]

2012 Calendar year DB sponsored by a self employed person who's tax return is on extension to 10/15

2012 Minimum Required contribution $0

2012 Maximum Deductible Contribution $400,000

Contribution is made 10/1. Is it deductible for 2012?

[Lou S.]

Great question. No clue on the answer.

[david rigby]

I'll say no.

Gray Book 2011-7

Funding: Grace Period Contributions

A company has a calendar taxable year and sponsors a pension plan with a calendar plan year. Which of the following combinations are acceptable for a contribution made during the 2010 §404 contribution grace period (January 1, 2011 to September 15, 2011)?

a) Deduct contribution in 2010, reflect on 2010 Schedule SB.

b) Deduct contribution in 2010, reflect on 2011 Schedule SB.

c) Deduct contribution in 2011, reflect on 2010 Schedule SB.

d) Deduct contribution in 2011, reflect on 2011 Schedule SB.

RESPONSE

a), c), and d) are acceptable. IRC §404(a)(6) deems a contribution made after the last day of a taxable year to be made on the last day of a taxable year if the payment is made on account of such taxable year. A contribution is considered to be on account of the 2011 plan year when reported on the 2011 Schedule SB and thus cannot be deducted on the sponsor’s 2010 tax return.

[AndyH]

Thanks David. Someone else tells me he heard the IRS say it must be on the SB - not sure if it was this same Q&A being cited or not.

That interpretation seems like a stretch to me though since it is deposited in time to be deductible. Didn't they used to say the tax year designation could be via either tax return or SB, and they don't have to necessarily be the same?

Also, this seems to contradict the "includible contribution" or "flip flop funding" schemes if for example the tax return were filed by 4/15 and the deposit was made 9/15. Or maybe it was the flip flop advocates who had it wrong.

Or another case would be when the plan and tax years are not the same.

[Andy the Actuary]

Agree with David Rigby. Understanding and there are some earlier posts, extrapolating the answer the Gray Book provided:-- You can't deduct a contribution for a year earlier than the year you claim on schedule B. So in calendar year plan/fiscal year scenario, you can't deduct in 2012 but claim on 2013 Schedule SB. Since 9/15/2013 has passed, you can't claim on 2012 Schedule SB, and therefore would have to claim on 2013 SB, which means it may be deducted in 2013 but not 2012.

To my knowledge, the only published IRS opinion on this is in the IRS Gray Book cited.

[AndyH]

Thanks. Reluctantly agree.

[Effen]

I agree with everything said, but don't undervalue Andy's final statement that "the only published IRS opinion on this is in the IRS Gray Book". The Gray Book has no real legal authority, although most treat it like it does. There are some who disagree strongly with the current IRS position.

Most actuaries will also tell you that deductability is an accounting issue. Therefore, the actuary can tell the client what they think, but at the end of the day, it should be the clients/accountants call.

[Calavera]

Just a thought - I recall old 404 regulations would mention the adjustment to the asset for contributions deducted but not made. I always thought this was exactly for situation described in the original question.

Here is also 14:18 from DB Answer Book

Contributions to a defined benefit plan can be deducted for a taxable year if the contribution is deposited to the plan's assets no later than the due date for filing the tax return for that taxable year (including extensions). [ I.R.C. § 404(a)(6)] Although the deposit may be timely for deduction purposes, it may not be timely for purposes of satisfying the minimum funding standard. Conversely, a deposit may be timely for purposes of satisfying the minimum funding standard and may not be timely for deduction purposes.

Example.

Fred Flintrock is a sole proprietor and sponsors a defined benefit plan. If his tax return for 2000 is not on extension, he must make contributions by April 15, 2001, in order to deduct them on his 2000 tax return. If Fred makes the contributions after April 15, 2001, but before September 15, 2001, the contributions will be timely for purposes of satisfying the minimum funding standard for 2000 but must be deducted in 2001. Conversely, if Fred's tax return is on extension until October 15, 2001, and the contributions are made on this date, they will be timely for deduction purposes but not for purposes of satisfying the minimum funding standard for 2000.

If the employer files for an extension of time to file its tax return and then files its return before the original filing date, the due date for deductible contributions is the extended due date. [ Rev. Rul. 66-144, 1966-1 C.B. 91] If, however the employer first files its tax return and then applies for an extension of time, the IRS has ruled that the extension is not valid for purposes of increasing the time for making deductible contributions to the plan. [ Ltr. Rul. 8336006]

I think ERISA Outline has some example like this as well.

So nothing against Gray Book 2011-7, but I like Effen's reply - it should be the clients/accountants call.

[AndyH]

Thanks for the additional information. This is consistent with my memory.

I don't understand the Gray Book SB link even more now.

But, yes, we all know or should know this is not our call.