508 U.S. 152 (1993), 91-1677, Commissioner v. Keystone Consol. Industries

Docket Nº:No. 91-1677
Citation:508 U.S. 152, 113 S.Ct. 2006, 124 L.Ed.2d 71, 61 U.S.L.W. 4481
Party Name:Commissioner v. Keystone Consol. Industries
Case Date:May 24, 1993
Court:United States Supreme Court
 
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Page 152

508 U.S. 152 (1993)

113 S.Ct. 2006, 124 L.Ed.2d 71, 61 U.S.L.W. 4481

Commissioner

v.

Keystone Consol. Industries

No. 91-1677

United States Supreme Court

May 24, 1993

Argued Feb. 22, 1993

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

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. 158-162.

(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, 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. 158-159.

(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

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its own judgment as to investment policy -- that are solved by § 4975. P. 160-161.

(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. 161-162.

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 which SCALIA, J., joined as to all but Part III-B. STEVENS, J., filed a dissenting opinion, post, p. 162.

BLACKMUN, J., lead opinion

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

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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

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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...

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