Commissioner v. Keystone Consolidated Industries, Inc.
124 L. Ed. 2d 71, 1993 U.S. LEXIS 3565, 508 U.S. 152 (1993)
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Rule of Law:
An employer's contribution of unencumbered property to a defined benefit pension plan, in satisfaction of its statutory minimum funding obligation, is a prohibited "sale or exchange" under 26 U.S.C. § 4975(c)(1)(A).
Facts:
- Keystone Consolidated Industries, Inc. maintained several tax-qualified defined benefit pension plans for its employees, which were subject to minimum funding requirements.
- On March 8, 1983, to help meet its funding obligation, Keystone contributed five unencumbered truck terminals to its Pension Trust, stating their fair market value as $9,655,454.
- On March 13, 1984, Keystone contributed unencumbered real property in Key West, Florida, to the Pension Trust, stating its fair market value as $5,336,751.
- Keystone credited the value of both property transfers against its minimum funding obligations for the respective fiscal years.
- For its own income tax purposes, Keystone treated the property transfers as a "sale or exchange" of a capital asset, claiming deductions for their value and reporting a taxable capital gain.
Procedural Posture:
- The Commissioner of Internal Revenue ruled that Keystone's property transfers were prohibited transactions and determined deficiencies in excise taxes.
- Keystone filed a petition for redetermination in the United States Tax Court.
- The Tax Court ruled in favor of Keystone on cross-motions for summary judgment.
- The Commissioner of Internal Revenue, as appellant, appealed the decision to the United States Court of Appeals for the Fifth Circuit.
- The Court of Appeals affirmed the Tax Court's judgment in favor of Keystone, the appellee.
- The U.S. Supreme Court granted certiorari to resolve a circuit split on the issue.
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Issue:
Does an employer's contribution of unencumbered property to a defined benefit pension plan, in satisfaction of a minimum funding obligation, constitute a prohibited "sale or exchange" under 26 U.S.C. § 4975?
Opinions:
Majority - Justice Blackmun
Yes. An employer's contribution of unencumbered property to a pension plan to satisfy a funding obligation is a prohibited "sale or exchange" under § 4975. The phrase "sale or exchange" has a long-settled meaning in tax law that includes the transfer of property to satisfy a monetary debt, and Congress is presumed to have adopted this meaning. The statute's purpose is to categorically bar transactions that pose a high potential for abuse, such as overvaluation or the contribution of non-liquid assets, a risk that exists regardless of whether the property is encumbered. The Court reasoned that § 4975(f)(3), which explicitly deems the transfer of encumbered property a sale or exchange, serves to expand, not limit, the statute's scope by covering voluntary contributions of encumbered property that do not satisfy a funding obligation, thereby closing a potential loophole.
Dissenting - Justice Stevens
No. The transfer of unencumbered property to a pension trust to satisfy a funding obligation is not a prohibited "sale or exchange" under the statute. The majority improperly imports the definition of "sale or exchange" from the income-tax context; in that context, any property contribution, whether voluntary or to satisfy a debt, was historically considered a sale or exchange, a broad interpretation the majority itself does not fully adopt. The better interpretation, favored by the lower courts, is that § 4975(f)(3)'s specific prohibition of transfers of encumbered property implies that transfers of unencumbered property are not prohibited. Furthermore, the potential for abuse is mitigated by the pension trustees' fiduciary duty to reject any property transfers that are disadvantageous to the trust.
Analysis:
This decision significantly broadens the scope of ERISA's prohibited transaction rules by establishing a categorical, bright-line ban on in-kind contributions made to satisfy minimum funding obligations. It rejects a case-by-case analysis of potential harm, instead prioritizing the pre-emptive prevention of potential self-dealing and conflicts of interest by employers. This ruling limits employers' flexibility in funding their pension plans, mandating cash contributions to satisfy these specific debts and reinforcing the separation between the employer's assets and the plan's assets. The decision solidifies the principle that the phrase "sale or exchange" in this context should be interpreted broadly to protect plan beneficiaries.
