Debt paid to pension plan deductible when repaid

Tax Hot Topics newsletterThe IRS determined in a private letter ruling (PLR 201945024) that a company can contribute its own debt to its pension plan. However, the value of the debt when contributed may not be deducted, but the repayment of the debt may be deductible by the company under Section 404(a) as a contribution for the taxable year in which the payment is made if a payment of principal made pursuant to the terms of the debt satisfies the objective “outlay-of-assets” test. The employer debt contributed to the pension plan was various investment-grade debt securities issued by the company that are readily traded on an established securities market.

In reaching its decision, the IRS relied on a prior U.S. Supreme Court case, Don E. Williams Co. v. Commissioner, 429 U.S. 569 (1977), which held that an accrual-basis corporate taxpayer, in delivering its fully secured promissory demand note to the trustees of its qualified employees’ profit-sharing trust, was not entitled to a deduction under Section 404(a) for the taxable year in which the note was contributed because the note did not constitute an actual payment under Section 404. The Court stated that regardless of the method of accounting, all taxpayers must pay out cash or its equivalent by the end of the grace period for making such payment in order to qualify for the Section 404(a) deduction (the objective “outlay-of-assets” test). Furthermore, the note, even though fully secured, was still only a promise to pay and did not in itself constitute an outlay of cash or other property.

Jeff Martin
Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

James Sanchez
Senior Associate
Washington National Tax Office
T +1 202 861 4107

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