Deductibility of employer contributions.

[Guest Barton Haag]

I have a client whose bank failed to execute a wire transfer of employer contributions to trustee on tax filing deadline (September 15, 2000). My client submitted the request in a timely manner and followed up with phone calls to the bank. They made a good faith effort, it just didn't get done. Does anyone know whether the constructive payment or agency relationship rules apply to this situation? Is there other basis for deducting the contribution?

Thanks!

[rcline46]

If there is proof that the bank failed to act and had enough time to act, the bank is liable for lost deductions and the excise taxes if this is a 412 plan.

On the other hand, there exist PLRs which state in a brokerage acount,if the order to make a transaction is given, it is considered executed that day even if it does not happen until a later date. We won an IRS audit on a 412 plan for a client with that rule. If the order to the bank can be proven, I would take the position it happened. If the IRS audits and disagrees, see paragraph 1.

[Kristina]

Barton Haag's question about the deductibility of a contribution when the wire transfer was not executed has raised a question in my mind as to when a contribution is considered to have been made. Is it when the check is written? Or, is it when the funds are showing in the plan account?

[Guest Barton Haag]

According to IRC para 28,113, a post year-end contribution is considered to have been made on the due date of the taxpayers return if the payment is "on account of" that tax year. The code states that a post year-end payment will be "on account of" the preceding tax year if:

1. the payment is treated by the plan in the same manner that the plan would treat a payment received on the last day of that preceding tax year of the employer, and

2. either (a) the employer designates in writing to the plan administrator or trustee at any time on or before the return due date (including extensions) that the payment is on account of the earlier tax year, or (B) the employer claims as a deduction on his return for the earlier tax year. Any designation made or deduction taken is irrevocable.

There are several PLRs that reference use of the US Postal Service and reliance on an agent to transmit a contribution check. If your contribution check is postmarked by the return due date, the contribution is deductible. If you write the check and deliver it to an agent for the plan (ie; employee, treasurer), it will be presumed that the person whose duty it was to transfer the check actually did so. I have not found anything specific to wire transfer instructions. However, I believe I can piece together enough of these other cases to argue that an agency relationship existed with the bank and that constructive payment (wire instructions) of the contribution was timely.

[Guest SHP]

A contribution mailed and bearing a postage cancellation date no later then the due date of the employer's tax return (with applicable extensions)is considered timely and thus currently deductible. PLR 8536085

The employer should designate in writing that the contribution is for the prior year and claim the contribution as a deduction on its tax return for the prior year.