Rev. Rul. 63-117

Advice has been requested as to the treatment of employer contributions to a qualified employees' profit-sharing trust which are in excess of a definite predetermined formula and which are made after the close of the taxable year to which they are intended to apply.

A corporate employer using the accrual method of accounting established a profit-sharing plan containing a definite predetermined formula for determining the amount of employer contributions to be made to the trust forming a part of the plan. The plan meets the requirements of section 401(a) of the Internal Revenue Code of 1954 and, accordingly, the trust is exempt under section 501(a) of the Code.

For the first taxable year in which the plan was put into operation, the contribution required under the plan was 20x dollars which the employer contributed to the trust. At the same time, he made an additional contribution of 8x dollars. For the second taxable year, the definite predetermined pormula required the contribution of 40x dollars from the corporation's profits. The employer contributed this amount and, at the same time, made an additional contribution of 55x dollars.

In the third taxable year of the operation of the plan, the corporation amended the plan to provide that, notwithstanding the original contribution formula contained in the plan, the employer could make greater or lesser contributions than those required by the formula. For this third year of the plan, the corporation paid 50x dollars into the trust.

The contributions for each of these three years were paid into the trust after the close of the taxable years for which they were made, but within the grace period prescribed by section 404(a)(6) of the Code.

Section 404(a)(6) of the Code provides that a taxpayer on the accrual basis shall be deemed to have made a payment on the last day of the year of accrual if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year, including extensions thereof.

Section 1.404(a)-1(c) of the Income Tax Regulations stipulates that the above Code provision is not applicable unless, during the taxable year on account of which the contribution is made, the taxpayer incurs a liability to make the contribution, the amount of which is accruable under section 461 of the Code for such taxable year.

Treasury Decision 6189, C.B. 1956-2, 972, eliminated the requirement, previously contained in the regulations, for a definite predetermined employer contribution formula under a qualified profit-sharing plan. Notwithstanding the elimination of this requirement, where a plan contains, as of the end of the taxable year of the employer, a definite formula for the computation of employer contributions, a liability accrues as of the end of such taxable year.

Revenue Ruling 56-366, C.B. 1956-2, 976, discusses the deductibility of contributions in excess of a formula commitment. It provides, in part, that contributions, to be deductible, must either be made during the taxable year under consideration or, in the case of a taxpayer using the accrual method of accounting, who makes a contribution within sixty days after the close of the taxable year of accrual, where the 1939 Code is applicable (or where the contribution is made not later than the time prescribed by law for filing the return, including extensions thereof, where the 1954 Code is applicable), the taxpayer must incur a liability to make the contribution before the end of the taxable year, the amount of which is accruable under section 43 of the 1939 Code (corresponding to section 461 of the 1954 Code) for such taxable year.

At the end of the first taxable year, the profit-sharing plan in the instant case contained a definite formula for the computation of employer contributions. Therefore, a liability to make such contributions accrued at that time. The amount required to be contributed by the formula and actually paid before the expiration of the grace period provided by section 404(a)(6) of the Code (20x dollars) is deemed paid on the last day of that first taxable year for purposes of section 404(a)(3). The additional contribution of 8x dollars, which exceeded the amount required by the formula, would not be deemed paid in that first fiscal year because the taxpayer had incurred no liability to make it. Rather, this additional contribution will be treated as paid in the second taxable year for purposes of section 404(a)(3).

The formula was still controlling in the second taxable year and, therefore, as to that year, the employer had a liability to make definite contributions of 40x dollars to the profit-sharing plan. That liability is deemed to have been satisfied by the excess payment of 8x dollars for the first fiscal year, plus that portion of the contribution of 40x dollars required to make up the amount called for by the formula. The excess, which would, in this case, be equal to the excess contribution made for the first taxable year (8x dollars plus 40x dollars minus 40x dollars equals 8x dollars), would be treated as paid in the third taxable year, as would the additional contribution of 55x dollars paid in the third year, for which there was no liability incurred during the second year.

As there was no definite formula requirement in the third taxable year, the contribution of 50x dollars actually made during the fourth taxable year will be deductible in that year to the extent that it does not exceed the limitation on deductions imposed by section 404(a)(3) of the Code.

In view of the foregoing, where an employees' profit-sharing plan provides that an employer may or may not contribute a prescribed amount, there is no definite commitment and no accruable liability. Accordingly, for a taxpayer using the accrual method of accounting, where appropriate action is not taken to establish an accruable liability before the end of a taxable year, contributions in excess of a definite formula (or any contributions where there is no formula) which are paid after the close of the taxable year are not deductible for that year notwithstanding the grace period allowed by section 404(a)(6) of the Code. Such contributions may be treated as deductible payments, within prescribed limitations, in the year in which actually made.

Revenue Ruling 56-366, C.B. 1956-2, 976, is hereby amplified.