Keystone Consol. Industries, Inc. v. C.I.R., 91-4208

Citation951 F.2d 76
Decision Date17 January 1992
Docket NumberNo. 91-4208,91-4208
Parties-517, 60 USLW 2474, 92-1 USTC P 50,045, 14 Employee Benefits Cas. 2284 KEYSTONE CONSOLIDATED INDUSTRIES, INC., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Steven W. Parks, Gary R. Allen, Chief, Kenneth L. Greene, Appellate Sec., Tax Div., Dept. of Justice, Shirley D. Peterson, Asst. Atty. Gen., U.S. Dept. of Justice, Tax Div., Abraham N.M. Shashy, Jr., Chief Counsel, Washington, D.C., for respondent-appellant.

Raymond P. Wexler, Todd F. Maynes, Timothy M. Mlsna, Kirkland & Ellis, Chicago, Ill., Ralph P. End. Keystone Consol. Industries, Inc., Dallas, Tex., for petitioner-appellee.

Appeal from a decision of the United States Tax Court.

Before JOLLY, JONES, and EMILIO M. GARZA, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

Keystone, the taxpayer, transferred property to its tax qualified defined benefit pension plan in satisfaction of its statutory minimum funding requirements. The Commissioner asserted that this transfer of property in satisfaction of an obligation was a sale or exchange within the meaning of Section 4975(c)(1)(A), and therefore asserted tax deficiencies under Section 4975(a) and (b).

Keystone filed suit in the tax court, contending that it was not liable for the deficiencies. The tax court granted summary judgment in favor of Keystone, holding that neither the plain language of the statute nor the congressional intent in drafting it suggest that Section 4975 was meant to apply to the transfer of unencumbered property. We agree with the tax court's reasoning, and therefore affirm the tax court's order.

I

The relevant facts are undisputed. Keystone Consolidated Industries, Inc. ("Keystone") maintained several tax qualified defined benefit pension plans. The plans were subject to the minimum funding requirements of Section 302 of ERISA. 26 U.S.C. § 412. Keystone funded the plans through contributions to the Keystone Consolidated Master Pension Trust (the "Trust").

In 1983, Keystone contributed five truck terminals to the Trust. Keystone credited the fair market value of the terminals against its statutory minimum funding obligations for its taxable years ending on June 30, 1982 and June 30, 1983. In March of 1984, Keystone contributed real property to the Trust and credited the fair market value of this property against its statutory funding obligations for the tax year ending on June 30, 1984.

The terminals and the property were not subject to any mortgage at the time they were transferred to the Trust. The terminals and the real property were not the subject of any leaseback agreements with Keystone.

Keystone claimed deductions in the amount of the fair market value of the terminals and the real property under Section 404 of the Internal Revenue Code. Keystone reported the difference between its cost to acquire those properties and their fair market value at the time of their transfer as capital gains from the sale or exchange of an asset under Section 1222.

The Tax Commissioner determined that Keystone's transfer of the truck terminals and real property to the Trust in satisfaction of its statutory funding requirements was a "sale or exchange" within the meaning of Section 4975(c)(1)(A) of the Code, and was therefore a prohibited transaction. Accordingly, the Commissioner asserted tax deficiencies under Section 4975(a) and (b).

II

Keystone filed a petition in the tax court contesting its liability for these deficiencies. The Commissioner argued that it is well established that a transfer of property in satisfaction of indebtedness is treated as a sale or exchange. The Commissioner also argued that the congressional intent behind the prohibited transactions provision is consistent with his view of a sale or exchange.

The tax court decided the case on cross-motions for summary judgment. The tax court held that the transfers were not sales or exchanges. The court held that a definition of the sale or exchange that involves the transfer of property is provided by Section 4975(f)(3), which states that a transfer of property encumbered by a mortgage or a lien, which the plan assumes, shall be treated as a sale or exchange. The tax court noted that neither the terminals nor the real property was subject to a mortgage or lien, and therefore, held that the transfers were not sales or exchanges. The Commissioner now appeals.

III

On appeal, the Commissioner argues mainly that Section 4975(f)(3) is not the exclusive definition of a sale or exchange that involves the transfer of property. He argues that this definition applies only to voluntary transfers of property, i.e., transfers over and above minimum funding requirements, and that involuntary transfers of property, i.e., transfers to satisfy minimum funding requirements, are sales or exchanges irrespective of Section 4975(f)(3). Keystone argues that according to the plain language of the statute, only transfers of encumbered property are to be treated as sales or exchanges under Section 4975.

IV

Thus, we are presented with the question whether a taxpayer's contribution of property to a tax qualified defined benefit pension plan in satisfaction of its statutory funding requirement is a sale or exchange under Section 4975(c)(1)(A). Section 4975(c)(1)(A) defines a prohibited transaction as any direct or indirect "sale or exchange, or leasing, of any property between a plan and a disqualified person." Section 4975(a) imposes a tax on the disqualified person equal to five percent of the amount involved in the prohibited transaction. Section 4975(b) imposes an additional tax on the prohibited transaction equal to one hundred percent of the amount involved. This tax may be avoided by correcting the transaction within the taxable period. Keystone is a disqualified person under Section 4975(e)(2)(C). The tax qualified defined benefit pension plan at issue is a plan covered by Section 4975. 26 U.S.C. § 4975(e)(1). Therefore, the only question we are required to decide is whether the contribution of property was a sale or exchange under Section 4975(c)(1)(A).

V

Keystone argues that in accordance with Section 4975(f)(3), only a transfer of property that is subject to a mortgage or lien is to be treated as a sale or exchange. 1 We agree with the taxpayer. If all transfers of property to a plan were to be treated as a sale or exchange, then this definition would be superfluous. The definition states that a transfer of property encumbered by a mortgage or lien shall be treated as a sale or exchange, implying that unless it is encumbered by a mortgage or lien, a transfer of property is not to be treated as if it were a sale or exchange.

The Commissioner argues that this definition of a sale or exchange that involves the transfer of property is not an exclusive definition; he argues that if Congress had intended it to be, it would have said a sale or exchange includes only these transfers. The Commissioner argues that Section 4975(f)(3) is not superfluous because it applies to voluntary transfers. He argues that involuntary transfers of property, that is, transfers in satisfaction of a statutory obligation, are "exchanges," irrespective of Section 4975(f)(3).

We cannot accept the Commissioner's arguments. In the first place, there is no basis for this distinction between involuntary and voluntary transfers anywhere in the Code. Furthermore, this distinction also makes no economic sense. A contribution is involuntary because the contribution is required to satisfy the minimum funding requirement for that year. However, when an employer makes a voluntary contribution to a plan, he effectively supplements the assets of the plan, receives a credit in his funding standard account, and thereby reduces the amount of mandatory contributions in future years. 26 U.S.C. § 412. The potential for abuse, that is, satisfaction of minimum mandatory obligations to the pension fund with property with inflated values, would be the same regardless of whether the transfer was involuntary. Thus, there is neither statutory nor economic support for the Commissioner's argument.

The Commissioner argues further that the congressional intent behind the prohibited transaction provision supports his interpretation of "sale or exchange." We disagree. The Commissioner only points to one excerpt from a Senate Report that states that one of the principle purposes of Section 4975 was to prevent the possibility that a non-arm's length transaction might go undiscovered. The Commissioner offers no evidence that Congress intended Section 4975(c)(1)(A) to apply to the transfer of unencumbered property. Accordingly, we reject the Commissioner's statutory construction of Section 4975(f)(3).

Next, he argues that it is well established that a transfer of property in satisfaction of a debt or a bequest is a sale or exchange. The fact that a transfer of property is treated as a sale or exchange for income tax purposes is not determinative...

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6 cases
  • Commissioner of Internal Revenue v. Keystone Consolidated Industries, Inc
    • United States
    • U.S. Supreme Court
    • May 24, 1993
    ...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), BLACKMUN, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and WHITE, O'CONNOR, KENNEDY, SOUTER, and THOMAS, JJ., joined, a......
  • Barker v. Pick N Pull Auto Dismantlers, Inc., Civ. No. S-91-1695
    • United States
    • U.S. District Court — Eastern District of California
    • April 22, 1993
    ...is binding only on the parties to the letter, and that such letters have no precedential effect. See Keystone Consolidated Industries v. C.I.R., 951 F.2d 76, 79 (5th Cir.1992). The advisory opinion is not entitled to deference. See Nationwide Mutual Insurance Co. v. Darden, ___ U.S. ___, __......
  • Wood v. C.I.R.
    • United States
    • U.S. Court of Appeals — Fourth Circuit
    • January 31, 1992
    ...(as is involved here) is not subject to the § 4975 prohibition. The recent Fifth Circuit decision in Keystone Consol. Indus., Inc. v. Commissioner, 951 F.2d 76 (5th Cir.1992), supports this Section 4975(f)(3) states: Sale or exchange; encumbered property.--A transfer of real or personal pro......
  • Allbaugh v. Cal. Field Ironworkers Pension Trust
    • United States
    • U.S. District Court — District of Nevada
    • October 18, 2016
    ...at 26. 37. Barker v. Pick N Pull Auto Dismantlers, Inc., 819 F. Supp. 889, 896 n.11 (E.D. Cal. 1993) (citing Keystone Consolidated Indust. v. C.I.R., 951 F.2d 76, 79 (5th Cir. 1992); Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326 n.5 (1992)). 38. Fargo v. C.I.R., 447 F.3d 706, 713 (9......
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6 books & journal articles
  • Prohibited transactions for qualified employee benefits plans.
    • United States
    • The Tax Adviser Vol. 25 No. 7, July 1994
    • July 1, 1994
    ...dismissed. (9) Keystone Consolidated Industries, Inc., 113 Sup. Ct. 2006 (1993) (71 AFTR2d 93-1809, 93-1 USTC [paragraph] 50,298), rev'g 951 F2d 76 (5th Cir. 1992) (69 AFTR2d 92-517, 92-1 USTC [paragraph] 50,045), aff'g TC Memo 1990-628. (10) Energy Resources, Ltd., 91 TC 913, 916-917 (1988......
  • Prohibited transactions with retirement plans.
    • United States
    • The Tax Adviser Vol. 25 No. 2, February 1994
    • February 1, 1994
    ...88 TC 1440 (1987); IRS Letter Ruling (TAM) 8744004 (7/13/87). (7) See Keystone Consolidated Industries, Inc., TC Memo 1990-628, aff'd, 951 F2d 76 (5th Cir. 1992)(69 AFTR2d 92-517, 92-1 USTC [paragraph] 50,045) rev'd, 113 Sup. Ct. 2006 (1993)(71 AFTR2d 93-1812, 93-1 USTC [paragraph] 50,298);......
  • Revenue Reconciliation Act of 1993; Voluntary Compliance Resolution program; fiduciary responsibilities; distribution rules; excise taxes.
    • United States
    • The Tax Adviser Vol. 24 No. 11, November 1993
    • November 1, 1993
    ...Cir. 1988). (19) Keystone Consolidated Industries, Inc. 113 Sup. Ct. 2006 (1993)(71 AFTR2d 93-1809, 93-1 USTC [paragraph]50,298), rev'g 951 F2d 76 (5th Cir. 1992)(69 AFTR2d 92-517, 92-1 USTC [paragraph]50,045), aff'g TC Memo 1990-628. (20) IRS Letter Ruling 9318035 (2/10/93). (21) Hillsboro......
  • Property transfers to qualified plans.
    • United States
    • The Tax Adviser Vol. 24 No. 8, August 1993
    • August 1, 1993
    ...resolved a conflict between the Fourth Circuit in Wood, 955 F2d 908 (4th Cir. 1992), rev'g 95 TC 364, and the Fifth Circuit in Keystone, 951 F2d 76 (5th Cir. 1992). In its decision, the Supreme Court laid out the following rules: * A transfer of encumbered property to a plan by a disqualifi......
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