Commissioner of Internal Revenue v. Keystone Consolidated Industries, Inc

Decision Date24 May 1993
Docket NumberNo. 91-1677,91-1677
Citation124 L.Ed.2d 71,508 U.S. 152,113 S.Ct. 2006
PartiesCOMMISSIONER OF INTERNAL REVENUE, Petitioner, v. KEYSTONE CONSOLIDATED INDUSTRIES, INC
CourtU.S. Supreme Court
Syllabus *

Respondent company, which maintained several tax-qualified defined benefit pension plans for its employees during the time at issue, contributed a number of unencumbered properties to the trust fund supporting the plans and then credited the properties' fair market value against its minimum funding obligation under the Employee Retirement Income Security Act of 1974 (ERISA). Petitioner, the Commissioner of Internal Revenue, ruled that respondent owed substantial excise taxes because the transfers to the trust were "prohibited transactions" under 26 U.S.C. § 4975(c)(1)(A), which bars "any direct or indirect . . . sale or exchange . . . of . . . property between a plan and a disqualified person" such as the employer of employees covered by the plan. The Tax Court disagreed and entered summary judgment for respondent on its petition for redetermination, and the Court of Appeals affirmed.

Held: When applied to an employer's funding obligation, the contribution of unencumbered property to a defined benefit plan is a prohibited "sale or exchange" under § 4975(c)(1)(A). Pp. ____.

(a) The well-established income tax rule that the transfer of property in satisfaction of a monetary obligation is a "sale or exchange," see, e.g., Helvering v. Hammel, 311 U.S. 504, 61 S.Ct. 368, 85 L.Ed. 303, is applicable under § 4975(c)(1)(A). That the latter section forbids the transfer of property in satisfaction of a debt is demonstrated by its prohibition not merely of a "sale or exchange," but of "any direct or indirect . . . sale or exchange." The contribution of property in satisfaction of a funding obligation is at least both an indirect type of sale and a form of exchange, since the property is exchanged for diminution of the employer's funding obligation. Pp. ____.

[SC2Q!]] (b) The foregoing construction is necessary to accomplish § 4975's goal to bar categorically a transaction likely to injure the pension plan. A property transfer poses various potential problems for the plan—including a shortage of funds to pay promised benefits, assumption of the primary obligation to pay any encumbrance, overvaluation of the property by the employer, the property's nonliquidity, the burden and cost of disposing of the property, and the employer's substitution of its own judgment as to investment policy—that are solved by § 4975. P. ____.

(c) The Court of Appeals erred in reading § 4975(f)(3)—which states that a transfer of property "by a disqualified person to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien"—as implying that a transfer cannot be a "sale or exchange" under § 4975(c)(1)(A) unless the property is encumbered. The legislative history demonstrates that Congress intended § 4975(f)(3) to expand, not limit, § 4975(c)(1)(A)'s scope by extending the reach of "sale or exchange" to include contributions of encumbered property that do not satisfy funding obligations. The Commissioner's construction of § 4975 is a sensible one. A transfer of encumbered property, like the transfer of unencumbered property to satisfy an obligation, has the potential to burden a plan, while a transfer of property that is neither encumbered nor satisfies a debt presents far less potential for causing loss to the plan. P. ____.

951 F.2d 76 (CA5 1992), reversed.

BLACKMUN, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and WHITE, O'CONNOR, KENNEDY, SOUTER, and THOMAS, JJ., joined, and in all but Part III-B of which SCALIA, J., joined. STEVENS, J., filed a dissenting opinion.

Christopher J. Wright, Washington, DC, for petitioner.

Raymond P. Wexler, Chicago, IL, for respondent.

Justice BLACKMUN delivered the opinion of the Court.*

In this case, we are concerned with the legality of an employer's contributions of unencumbered property to a defined benefit pension plan. Specifically, we must address the question whether such a contribution, when applied to the employer's funding obligation, is a prohibited "sale or exchange" under 26 U.S.C. § 4975 so that the employer thereby incurs the substantial excise taxes imposed by the statute.

I

A "defined benefit pension plan," as its name implies, is one where the employee, upon retirement, is entitled to a fixed periodic payment. The size of that payment usually depends upon prior salary and years of service. The more common "defined contribution pension plan," in contrast, is typically one where the employer contributes a percentage of payroll or profits to individual employee accounts. Upon retirement, the employee is entitled to the funds in his account. See 29 U.S.C. §§ 1002(34) and (35).

If either type of plan qualifies for favorable tax treatment, the employer, for income tax purposes, may deduct its current contributions to the plan; the retiree, however, is not taxed until he receives payment from the plan. See 26 U.S.C. §§ 402(a)(1) and 404(a)(1).

II

The facts that are pertinent for resolving the present litigation are not in dispute. During its taxable years ended June 30, 1983, through June 30, 1988, inclusive, respondent Keystone Consolidated Industries, Inc., a Delaware corporation with principal place of business in Dallas, Tex., maintained several tax-qualified defined benefit pension plans. These were subject to the minimum funding requirements prescribed by § 302 of the Employee Retirement Income Security Act of 1974 (ERISA), Pub.L. 93-406, § 302, 88 Stat. 869, as amended, 29 U.S.C. § 1082. See also 26 U.S.C. § 412. Respondent funded the plans by contributions to the Keystone Consolidated Master Pension Trust.

On March 8, 1983, respondent contributed to the Pension Trust five truck terminals having a stated fair market value of $9,655,454 at that time. Respondent credited that value against its minimum funding obligation to its defined benefit pension plans for its fiscal years 1982 and 1983. On March 13, 1984, respondent contributed to the Pension Trust certain Key West, Fla., real property having a stated fair market value of $5,336,751 at that time. Respondent credited that value against its minimum funding obligation for its fiscal year 1984. The truck terminals were not encumbered at the times of their transfers. Neither was the Key West property. Their respective stated fair market values are not challenged here.

Respondent claimed deductions on its federal income tax returns for the fair market values of the five truck terminals and the Key West property. It also reported as taxable capital gain, the difference between its income tax basis in each property and that property's stated fair market value. Thus, for income tax purposes, respondent treated the disposal of each property as a "sale or exchange" of a capital asset. See 26 U.S.C. § 1222.

Section 4975 of the Internal Revenue Code, 26 U.S.C. § 4975, was added by § 2003(a) of ERISA. See 88 Stat. 971. It imposes a two-tier excise tax 1 on specified "prohibited transactions" between a pension plan and a "disqualified person." Among the "disqualified persons" listed in the statute is the employer of employees covered by the pension plan. See § 4975(e)(2)(C). Among the transactions prohibited is "any direct or indirect . . . sale or exchange . . . of any property between a plan and a disqualified person." See § 4975(c)(1)(A).

The Commissioner of Internal Revenue, who is the petitioner here, ruled that respondent's transfers to the Pension Trust of the five truck terminals and the Key West property were sales or exchanges prohibited under § 4975(c)(1)(A). This ruling resulted in determined deficiencies in respondent's first-tier excise tax liability of $749,610 for its fiscal year 1984 and of $482,773 for each of its fiscal years 1983 and 1985-1988, inclusive. The Commissioner also determined that respondent incurred second-tier excise tax liability in the amount of $9,655,454 for its fiscal year 1988.

Respondent timely filed a petition for redetermination with the United States Tax Court. That court, with an unreviewed opinion on cross-motions for summary judgment, ruled in respondent's favor. 60 TCM 1423 (1990).

The Tax Court acknowledged that "there is a potential for abuse by allowing unencumbered property transferred to plans in satisfaction of minimum funding requirements." Id., at 1424. Nonetheless, it did not agree that the transfers in this case constituted sales or exchanges under § 4975. It rejected the Commissioner's attempt to analogize the property transfers to the recognition of income for income tax purposes, for it considered the issue whether a transfer is a prohibited transaction under § 4975 to be "separate and distinct from income tax recognition." 60 TCM, at 1425.

In drawing this distinction, the Tax Court cited 26 U.S.C. § 4975(f)(3). That section specifically states that a transfer of property "by a disqualified person to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien." The court observed: "Since section 4975(f)(3) specifically describes certain transfers of real or personal property to a plan by a disqualified person as a sale or exchange for purposes of section 4975, the definitional concerns of 'sale or exchange' are removed from the general definitions found in other areas of the tax law." 60 TCM, at 1425. The Tax Court thus seemed to say that § 4975(f)(3) limits the reach of § 4975(c)(1)(A), so that only transfers of encumbered property are prohibited.

The Tax Court also rejected the Commissioner's argument that by contributing noncash property to its plan, the employer was in a position to exert unwarranted influence over the Pension Trust's investment policy. The court's answer was that the trustee "can dispose of" the property. 60 TCM, at 1425. The court noted that...

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