Academic journal article Journal of Accountancy

Deducting Retirement Plan Expenses

Academic journal article Journal of Accountancy

Deducting Retirement Plan Expenses

Article excerpt

IRC section 404 limits the amount of retirement plan contributions an employer can deduct. It is unclear, however, whether IRC section 404 also limits deductions for plan-related expenses.

Sklar, Greensteen & Scheer, PC, a professional services corporation, established a retirement plan, hiring a representative of Prudential-Bache Securities to manage some of the investments. The corporation became dissatisfied with the investment results and filed a complaint with the American Arbitration Association. Over the four years the complaint was litigated, Sklar, Greensteen & Scheer paid and deducted the related expenses. The IRS denied the deduction on the grounds that only recurring expenses are deductible, based on revenue ruling 86-142. The company appealed the decision.

Result. For the taxpayer. The Tax Court first determined whether the expense payments were contributions under section 404. The plan document said the corporation could pay plan expenses, but if it did not, the plan would pay them. Since the plan made payment by the corporation an option, the court concluded that the payment was not an actual or constructive contribution under section 404 and, therefore, IRC section 162 governed deductibility of the expenses. Since nonrecurring expenses are deductible under section 162 if they are ordinary and necessary, Sklar, Greensteen & Scheer could deduct the litigation expenses. …

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