Rev. Rul. 69-525

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in PS No. 51--Part A, dated July 31, 1945. This ruling relates to the methods of allocating costs among employers for the purpose of determining deductions under section 404(a)(1) or 404(a)(2) of the Internal Revenue Code of 1954, where two or more employers maintain a joint pension or annuity plan for their employees.

An employees' plan may be qualified under section 401(a) of the Code even though several corporations make contributions thereto. However, the provisions relating to qualification under section 401(a) of the Code as well as the provisions relating to deductions under section 404(a) are applicable to each employer separately. See Rev. Rul. 69-250, C.B. 1969-1, 116. Therefore, deductions from the gross income of each employer must be based on its separate costs determined by separate computations if such a method is feasible. Where separate computations of costs are not feasible, some other method of distributing costs, such as allocation in proportion to participating payrolls, may be acceptable if it is reasonable and is consistently followed.

The acceptability of any method of allocation will depend upon its being consistently followed, unless there are sufficient reasons for change. When a method of allocation is changed, the reasons for the change must be fully explained in an attachment to Form 2950, Statement in Support of Deduction for Payment to an Employees' Pension, Profit-Sharing, Stock Bonus Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan, in order that the District Director of Internal Revenue may determine whether the new method of allocation is proper. See section 1.404(a)-2(b)(1) of the Income Tax Regulations. No method that results in manipulation will be acceptable.

The application of the foregoing principles does not depend upon whether the employers are entitled to file consolidated returns or, if they are so entitled, whether they actually file separate or consolidated returns. These principles are illustrated by the facts and results obtained in the situations described below.

Situation 1. Two corporations established a joint employees' pension plan that qualified under section 401(a) of the Code. Each corporation is able to determine the separate cost of the plan properly attributable to it.

Under the foregoing facts, it is held that each corporation's deductions under section 404(a)(1) of the Code must be based on the separate costs determined for it.

Situation 2. As of January 1, 1968, corporation X and corporation Y established a joint employees' pension plan for the benefit of their employees. The terms of the plan apply equally to the employees of both corporations, and there are no special circumstances that could reasonably result in exceptionally wide differences in distributions to employees by length of service, age, etc. Since employees are continually shifted between the two corporations, it is not feasible to determine by separate computations the costs properly attributable to each corporation. The annual compensation for 1968 of participating employees of X was $1,600,000, and for Y $800,000. The lump-sum cost of past service benefits for all employees under the plan was computed as $1,500,000, and the normal cost for the year 1968 was computed as $120,000. The corporations allocated initial past service costs as $1,000,000 for X and $500,000 for Y. The corporations allocated the normal cost for the year 1968 as $80,000 for X and $40,000 for Y.

It is held in this situation that the allocation of costs for the first year is acceptable. So long as each corporation continues to pay its share of the costs allocated by this method, this method of allocation will also be acceptable for the subsequent years. However, if either corporation pays its share of the costs, while the other fails to pay its share and thereby allows its unfunded past service costs to increase, continued allocation of the aggregate unfunded past service costs in proportion to participating payrolls would no longer be proper, since the corporation paying its share of the costs would eventually be paying the costs of the other corporation as well. It would then become necessary for each corporation to carry forward its past service base separately.

Situation 3. Several corporations established a joint pension plan that qualified under section 401(a) of the Code. Separate computations of costs are not feasible and allocation of costs in proportion to participating payrolls is not reasonable under all the circumstances.

In this situation, it is held that any reasonable method of allocating costs will be acceptable if consistently followed.

For treatment of deductions for contributions under a profit-sharing plan maintained by affiliated companies, see section 404(a)(3)(B) of the Code and section 1.404(a)-10 of the Income Tax Regulations.

PS No. 51--Part A is hereby superseded, since the positions stated therein are restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.