Rev. Rul. 57-549

Advice has been requested whether the revaluation of the book value of trust assets to recognize unrealized appreciation or depreciation in market values of stocks held by the trust forming part of an employees' pension plan, for the purpose of determining the amount of employer contributions to be made to the trust, will adversely affect the qualification of such plan and trust under section 401(a) of the Internal Revenue Code of 1954.

An employees' trusteed pension plan, which is not a money-purchase pension plan referred to in Part 2(l) of Revenue Ruling 57-163 C. B. 1957-1, 128, at page 137, had been held to meet the requirements of section 401(a) of the Code and the trust to be exempt under section 501(a) of the Code. The assets of the trust, in addition to a certain amount of cash, consisted of real estate, corporate interest bearing bonds, and stock of various corporations. An actuarial valuation of the trust indicated that the cost of all past service benefits was completely funded and the plan appears to be in no present danger of being under funded. The employer, who established the plan, determined to recognize the appreciation in market value of the corporate stocks held by the trust for the purpose of determining the amount of contributions to be made to the trust each year. This was accomplished by taking into consideration a certain percentage of the difference between the cost and market value of the stocks, on an individual basis.

For each succeeding taxable year, the market value of the corporate stocks will be determined and an adjustment will be made for the stated percentage of the difference between the cost and market value after first taking into account any adjustment made in a previous year by adding to or subtracting from cost the previous adjustments for unrealized appreciation or depreciation in the value of the stock. Valuation of bonds and real estate will remain on an amortized cost basis and will continue to be valued at cost, because these assets represent fixed income obligations and are regarded as long-term investments.

Thus, the employer will determine its contributions to the trust by first multiplying the accrual rate (determined by actuarial valuation) by the applicable payroll and adjusting the result by the amount to be taken into consideration under the above method of valuing trust assets. Having once established this method of determining the value of the trust assets and the amount of contributions necessary to maintain the funding of the pension plan, it will be consistently followed and in no event will the employer revert to the cost method of valuing the trust stocks.

It is the opinion of the Internal Revenue Service that the revaluation of the book value of trust assets, in the manner described above, to recognize unrealized appreciation or depreciation in market value of stocks held by a trust forming part of an employees' pension plan, for the purpose of determining the amount of employer contributions to be made to the trust, will not adversely affect the qualification of such plan and trust under section 401(a) of the Code, so long as the method is consistently applied and there is no reversion to the cost method of valuing trust stocks. This opinion, however, should not be construed as determining the limitations on deductions under section 404 of the Code, in case contributions determined in the above manner include funding to make up any net depreciation in the value of the trust assets. See Rev. Rul. 57-550, page 266.