Rev. Rul. 71-436

The purpose of this Revenue Ruling is to update and restate Revenue Ruling 59-278, C.B. 1959-2, 174, under the current provisions of the statute and regulations. The question presented is what portion of the employer's contributions under a funded pension plan is considered as the employee's contributions for the purposes of section 72 of the Internal Revenue Code of 1954 under the circumstances described below.

The plan was established in 1957. Until 1965, it provided that an employee could retire after completing thirty years of service and receive a yearly pension benefit of one percent of the average basic annual salary earned during his final five years of service times his total years of service. The plan was amended in 1965 to increase the percentage used in computing the pension benefit from one to two percent. No employee contributions were ever made under the plan.

While he was a participant under the plan, an employee's salary for services rendered was excludable from his gross income under section 911(a) of the Internal Revenue Code of 1954 (and corresponding provisions of prior revenue laws) because he was a citizen of the United States, and his services were rendered outside the United States while he was a bona fide resident of a foreign country. The cost to the employer to fund a one percent pension benefit for this employee was $1,000 for each year of credited service.

On December 31, 1969, the employee retired with thirty years of uninterrupted service.

Section 72(f) of the Code provides that, in computing the aggregate amount of consideration paid by the employee under a pension plan, the employer's contribution for the benefit of the employee will be included, but only to the extent that, if such amounts had been paid directly to the employee at the time they were contributed, they would not have been includible in the gross income of the employee under the law applicable at the time of such contributions. This does not apply to amounts which were contributed by the employer after December 31, 1962, and which would not have been includible in the gross income of the employee by reason of the application of section 911 of the Code if such amounts had been paid directly to the employee at the time of contribution. The preceding sentence does not apply to amounts which were contributed by the employer to provide pension or annuity credits, to the extent such credits are attributable to services performed before January 1, 1963, and are provided pursuant to pension or annuity plan provisions in existence on March 12, 1962, and on that date applicable to such services.

Section 1.72-8(a) of the Income Tax Regulations provides that if, under the terms of the pension or annuity plan under which employer contributions were made, such contributions may be identified as attributable to foreign service performed before January 1, 1963, with respect to which the employee qualified for the benefits of section 911(a) of the Code (or corresponding provisions of prior revenue laws), and made under pension or annuity plan provisions in existence on March 12, 1962, which were applicable to the services performed before January 1, 1963, the amount of employer contributions so identified shall be considered paid or contributed by the employee.

For the purposes of determining the employee's investment under the plan, within the meaning of section 72(f) of the Code, the employer's contributions made to provide the original one percent pension benefit for the 23 years the employee worked prior to January 1, 1963, are to be included. The contributions made to fund the additional one percent pension benefit for such years, as added by the 1965 amendment, are not included since they were not made prior to January 1, 1963, or to fund benefits provided under the plan as it existed on March 12, 1962.

Accordingly, it is held that $23,000 of the employer's contributions under the plan is considered to be the employee's contribution for the purposes of section 72 of the Code.

Revenue Ruling 59-278 is hereby superseded since the position stated therein is restated, to the extent applicable under current provisions of the law, in this Revenue Ruling.