Rev. Rul. 56-216

Advice has been requested whether the amount of a contribution for past services to a pension plan or trust qualified under section 165(a) of the Internal Revenue Code of 1939 which, due to the limitations of section 23(p)(1)(A) of the Code, is not deductible in the current year, but which may be carried forward and deducted in a subsequent year or years, constitutes an asset of the taxpayer for equity capital purposes under section 437(c) of the Code. Advice has also been requested whether a similar amount in the case of a mutual savings bank is considered to be an asset for the purpose of determining surplus, undivided profits, or reserves under section 23(k) of the Code.

Section 23(p) of the Code provides, in part, that an employer's contribution to or under a pension plan shall be deductible in the taxable year when paid, except that amounts paid in excess of certain specified limitations shall be deductible in the succeeding taxable years to the extent of the difference between the amount paid and deductible in such succeeding year and the maximum amount deductible for such year in accordance with the specified limitations.

Section 23(k)(1) of the Code provides, in part, that in the case of a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, and a cooperative bank without capital stock organized and operated for mutual purposes and without profit, the reasonable addition to a reserve for bad debts shall in no case be less than the amount determined as the reasonable addition for such year, except that the amount determined shall not be greater than the lesser of (A) the amount of net income for the tax year, or (B) the amount by which 12 percent of the total deposits or withdrawable accounts at the close of the year exceeds the sum of its surplus, undivided profits, and reserves at the beginning of the taxable year.

Section 437(c) of the Code provides that, for excess profits tax purposes, the equity capital of the taxpayer shall be the total assets held for the purposes of the business reduced by the total of its liabilities, and that, with certain exceptions not pertinent here, the adjusted basis of each asset shall be the adjusted basis for determining gain upon sale or exchange. Section 40.437-5(b)(1) of Regulations 130 further provides that, in general, section 113 of the Code and the regulations prescribed thereunder are the pertinent provisions relating to adjusted basis of assets.

Prior to 1942, lump-sum, non-trusteed payments by an employer to purchase annuities based on past service were deductible in full in the year paid, as a business expense, under section 23(a) of the Code, if such payments did not exceed a reasonable compensation for services rendered. See I.T. 2910, C.B. XIV-2 (1935), 152. Thus, for the years prior to 1942 such lump-sum payments were not capitalized and amortized ratably over subsequent years.

Under the Revenue Act of 1942, lump-sum payments to a nontrusteed plan were treated in the same manner as payments to trusteed plans and prorated over a period of years. However, this change cannot in any manner be construed as creating an asset out of such expenditure.

Deductions under the Internal Revenue Code are matters of legislative grace. The fact that Congress has been fit to limit the deductibility of an expenditure in no way converts that expenditure or any portion thereof into an asset. For example, accountingwise, it may be noted with respect to a net capital loss of a corporation that the income is reduced in the year the loss is sustained; yet, for tax purposes, no deduction is allowable for a net capital loss. In a later year, such loss may be availed of to reduce income for tax purposes; however, the loss in no sense may be considered as an asset.

The mere fact that by reason of the funding of benefits for past services the taxpayer obtains an economic benefit through increased employee retention and efficiency, reflected over the future years, does not create an asset. Similar benefits are obtained by a taxpayer through liberal employee remuneration policies, yet such expenditures in no way create an asset for Federal tax purposes.

Accordingly, it is held that the amount of a contribution for past services made to a pension plan or trust qualified under section 165(a) of the Code which, due to the limitations of section 23(p)(1)(A) of the Code, is not deductible in the current year of payment, but which may be carried forward as a deduction in a subsequent year or years, does not constitute an asset of the taxpayer for equity capital purposes under section 437(c) of the Code nor, in the case of a mutual savings bank, an asset for the purpose of determining surplus, undivided profits, or reserves under section 23(k) of the Code.