Rev. Rul. 71-371

Advice has been requested as to the acceptability of assumptions proposed to be used to determine deductible limits under section 404(a)(1) of the Internal Revenue Code of 1954.

An employer maintains an employee's pension plan and trust that meet the requirements of section 401(a) of the Code; the trust is exempt under section 501(a) of the Code. The plan provides that an employee's retirement benefit will vary with the fluctuations, after retirement, of the Consumer Price Index, a generally recognized cost-of-living index. The employer proposes that the determination of the deductible limits under section 404(a)(1) of the Code will be based in part on the assumption that the cost-of-living index will increase at an annual rate of 3 percent after an employee's retirement.

Section 1.404(a)-3(b) of the Income Tax Regulations provides that costs for the purpose of limitations under section 404(a)(1) shall in no event exceed costs based on assumptions and methods which are reasonable in view of the provisions and coverage of the plan, the funding medium, and all other relevant conditions and circumstances.

Revenue Ruling 63-11, C.B. 1963-1, 94, points out that for the purpose of determining deductible limits, it is not essential that each individual assumption used be reasonable, but rather, that the combination of all assumptions should produce reasonable results.

It is held that the assumption that the cost-of-living index will increase at an annual rate of 3 percent will, under present conditions, be considered reasonable for the purpose of determining deductible limits under section 404(a)(1) of the Code in connection with the plan referred to above, provided (1) the interest assumption realistically reflects expected investment income, including future appreciation of asset values, (2) the method of asset valuation reflects to a reasonable extent the excess of market value over book value, and (3) the combination of all assumptions produces reasonable results, as required by Revenue Ruling 63-11.