High court bars using property as pension funding

May 25, 1993|By New York Times News Service

WASHINGTON -- The Supreme Court ruled yesterday that employers cannot meet their financing obligations to employee pension plans by selling or transferring real property to the plans.

In an 8-1 decision, the court overturned a ruling by a federal appeals court in New Orleans that federal pension regulators had viewed as opening a loophole in the rules governing defined-benefit plans.

Under these plans, employees earn the right to a particular level of retirement benefits, usually based on pay and length of service, with the employer required to maintain the plan at an adequate fund level.

Regulators have voiced concern that the value of real estate can be easily manipulated. For example, corporate insiders could act for their own benefit by overvaluing property they own and using it, rather than cash deposits, to meet pension-plan requirements.

The Internal Revenue Service told the court that in one year -- 1989 -- employers added property valued in excess of $243 million to more than 400 pension plans.

In the IRS' view, many of these transfers were prohibited transactions under a tax-law provision intended to discourage them by assessing an excise tax as high as 100 percent of the property's fair market value.

By contrast, the Internal Revenue Code permits employers to take immediate deductions for qualified contributions to a pension plan.

Writing for the majority, Justice Harry A. Blackmun said the government's view of the question was "a sensible one." He said a central purpose of the Employee Retirement Income Security Act of 1974 was "to bar categorically a transaction that was likely to injure the pension plan" and that Congress intended the tax-code provision to play a role in that effort.

In this case, Justice Blackmun noted that it took more than three years for the Dallas-based Keystone Consolidated Industries pension plan to sell one of the truck terminals the employer had added to the plan.

Justice John Paul Stevens filed the sole dissenting opinion. He said that although the court majority's interpretation was "plausible," he did not think that Congress wanted to restrict pension-plan trustees from making noncash contributions to pension funds when those might be in the funds' best interest.

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