Deducting Retirement Plan Expenses

BY MICHAEL LYNCH

IRC section 404 limits the amount of retirement plan contributions an employer can deduct. It is unclear, however, whether IRC section 404 also limits deductions for plan-related expenses.

Sklar, Greensteen & Scheer, PC, a professional services corporation, established a retirement plan, hiring a representative of Prudential-Bache Securities to manage some of the investments. The corporation became dissatisfied with the investment results and filed a complaint with the American Arbitration Association. Over the four years the complaint was litigated, Sklar, Greensteen & Scheer paid and deducted the related expenses. The IRS denied the deduction on the grounds that only recurring expenses are deductible, based on revenue ruling 86-142. The company appealed the decision.

Result. For the taxpayer. The Tax Court first determined whether the expense payments were contributions under section 404. The plan document said the corporation could pay plan expenses, but if it did not, the plan would pay them. Since the plan made payment by the corporation an option, the court concluded that the payment was not an actual or constructive contribution under section 404 and, therefore, IRC section 162 governed deductibility of the expenses. Since nonrecurring expenses are deductible under section 162 if they are ordinary and necessary, Sklar, Greensteen & Scheer could deduct the litigation expenses.

The court noted—although not directly on point—that if the plan had said all expenses were to be provided for by contribution, then the payments would be considered contributions and their deductibility limited by section 404. However, the Tax Court said, the nonrecurring nature of the item did not affect the section 404 limits, as the IRS had argued. Revenue ruling 86-142 was, according to the court, an incorrect interpretation of the regulations under section 404 and would not be followed by the court.

Based on this case, it appears a corporation can maximize its deduction and the funds available to employees at retirement by not having plan expenses provided for by contributions. In all cases, the expenses must meet the ordinary requirements. The fact the expenses are nonrecurring should be ignored in determining their deductibility.

  • Sklar, Greensteen, & Sheer, PC v. Commissioner, 113 TC no. 9.

—Prepared by Edward J. Schnee, CPA, PhD, Joe Lane Professor of Accounting and director,
MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.

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