Rev. Rul. 57-378

Advice has been requested concerning the deductibility of contributions made by an employer to a qualified employees' profit- sharing plan when the payment required for a particular taxable year is made subsequent to the time prescribed by section 404(a)(6) of the Internal Revenue Code of 1954.

Under the provisions of a certain qualified employees' profit- sharing plan, the employer corporation is committed to make an annual contribution equal to the lesser of ten percent of corporate profits or fifteen percent of compensation of participating employees. For the year 1954, ten percent of corporate profits equaled $10,000 while fifteen percent of compensation of participating employees equaled $20,000. The contribution of $10,000 thus required for the year 1954, however, was not made until a few days after the expiration of the time within which an accrual basis taxpayer may make a contribution to an employees' trust which will be allowable as a deduction for the prior taxable year.

For the taxable year 1955, a contribution of $15,000 was required of the employer since ten percent of corporate profits equaled $15,000 while fifteen percent of compensation of participating employees equaled $20,000. The $15,000 contribution for 1955 was timely made. Thus, a total of $25,000 was paid into the profit-sharing trust by the employer within the taxable year 1955. No carryovers of any kind exist from years prior to 1954.

Section 404(a) of the Code provides in part that, if contributions are paid by an employer to or under a profit-sharing plan, such contributions, in order to be deductible, must be expenses which would be deductible under section 162 of the Code, relating to trade or business expenses, or section 212, relating to expenses for production of income, if it were not for the provision in section 404(a) that they are deductible, if at all, only under section 404(a) of the Code. Section 404(a)(3)(A) sets forth the limitations on deductible contributions to profit-sharing trusts. That section provides that contributions shall be deductible in the taxable year when paid, in an amount not in excess of fifteen percent of the compensation otherwise paid or accrued during the taxable year to all employees under the profit-sharing plan. If in any taxable year there is paid into the trust amounts less than fifteen percent of compensation of participating employees, the excess, or if no amount is paid, the amounts deductible, shall be carried forward and be deductible when paid in the succeeding taxable years in order of time, but the amount so deductible under this limitation in any such succeeding taxable year shall not exceed fifteen percent of the compensation otherwise paid or accrued during such succeeding taxable year to the beneficiaries under the plan.

Pertinent parts of section 1.404(a)-9 of the Income Tax Regulations state that the primary limitation on deductions for a taxable year is fifteen percent of the compensation otherwise paid or accrued during such taxable year to the employees who, in such year, are beneficiaries of the trust funds accumulated under the plan. So long as the contributions do not in any year exceed the primary limitation, this is the only limitation under section 404(a)(3)(A) which has any effect. In order that the deductions may average fifteen percent of compensation otherwise paid or accrued over a period of years, where contributions in some taxable year are less than the primary limitation but contributions in some succeeding taxable year exceed the primary limitation, deductions in each succeeding year are subject to a secondary limitation instead of to the primary limitation. The secondary limitation for any year is equal to the lesser of (1) twice the primary limitation for the year or (2) any excess of (a) the aggregate of the primary limitations for the year and for all prior years over (b) the aggregate of the deductions allowed or allowable under the limitations provided in section 404(a)(3)(A) for all prior years.

Under the provisions of section 404(a)(6) of the Code, a taxpayer on the accrual basis is deemed to have made a payment, to a profit-sharing trust created or organized within the United States, 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.

To the extent an employer commits itself to make contributions to a profit-sharing plan in effect on the last day of a particular taxable year, the amount of the contribution required accrues as at the end of such year. But for the requirement of section 404(a) of the Code that the contribution be paid in order to be allowed as a deduction, the entire amount of the contribution would be deductible for the year of accrual to the extent it represents an ordinary and necessary business expense and constitutes reasonable compensation for services rendered. This is true whether the contribution is paid in the year of accrual or some subsequent year.

The requirements of section 404(a) have the effect of (1) deferring a deduction of the accrued contribution until the taxable year when paid and (2) limiting the amount of the deduction to the percentage set forth therein for a particular taxable year. In applying the limitations, contributions not in excess of the plan's commitments, for the current or any prior year, need not be identified. Thus, if contributions required for the year 1954 are paid with in the taxable year 1954, including the period provided by section 404(a)(6), they represent amounts deductible, subject to the limitations of section 404(a)(3)(A) of the Code. If the contributions do not exceed the fifteen percent primary limitation provided therein, then the so-called "credit carryover" is not applicable. On the other hand, if such contributions do exceed such primary limitation, then, to the extent that they do not exceed the lesser of (a) thirty percent of compensation of participating employees for such year, or (b) the primary limitation of fifteen percent plus the "credit carryover" from prior years, they are deductible. The "credit carryover" referred to in the secondary limitation in the preceding sentence is the term generally used to refer to the excess of the aggregate of the primary limitations for the year and for all prior years over the aggregate of the deductions allowed or allowable under the limitations provided in section 404(a)(3)(A) for all prior years, referred to in section 1.404(a)-9(d) of the Income Tax Regulations. See Mimeograph 6131, C.B. 1945-1, 21.

The application of the principles set forth above, as applied to the facts stated herein, is illustrated in the following tabulation (figures represent thousands of dollars):

                 Commitment                     Primary limitation