Deductibility of the Amount Paid to the Trust in Accordance With Pension Plan

January 27, 1960 BIR RULING NO. 023-60 Messrs. Sycip, Gorres, Velayo & Co. Certified Public Accountants 490 San Luis, Manila Gentlemen: Reference is made to your letter dated December 17, 1959 stating the following: "Our clients, Commonwealth Foods, Inc., Reliance Commercial Enterprises, Inc., Philippine Foods, Inc. and Filipinas Biscuit Corporation, are establishing a joint pension plan for its employees to be known as the Associated Companies Pension Plan. The pension plan was drafted by the Wyatt Company, a well-known pension planning and industrial firm in the United States. We believe the plan is reasonable and actuarially sound. The plan calls for the contributions of the companies to be paid to a pension trust to be managed by trustees for all the companies. We are enclosing a copy of the pension plan for your ready reference." You now pose the question of whether or not the amounts paid to the trust in accordance with the pension plan are deductible by the abovementioned companies for income tax purposes. In reply thereto, I have the honor to inform you that, after a careful perusal of the provisions of the Associated Companies Pension Plan, this Office observed that the plan is reasonable and actuarially sound. Under the circumstances, the contributions of the associated companies to the pension trust are deductible form their gross incomes for purposes of the income tax, pursuant to section 30(j) of the Tax Code, as amplified by section 188 of the Income Tax Regulations. Attention is, however, called to the provisions of subparagraphs (a) and (b) of section 188 of the regulations which are quoted as follows: "(a) If the plan contemplates the payment to the trust, in advance of the time when pension are granted, of amounts to provide for future pension payments, then (1) reasonable amounts paid to the trust during the taxable year representing the pension liability applicable to such year, determined in accordance with the plan, shall be allowed as a deduction for such year as an ordinary and necessary business expense, and in addition (2) one-tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the pension liability applicable to the years prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as deduction for the taxable year and for each of the nine succeeding taxable years. "(b) If the plan does not contemplate the payment to the trust, in advance of the time when pensions are granted, the amounts to provide for future pension payments then (1) reasonable amounts paid to the trust during the taxable year representing the present value of the expected future payments in respect of pensions granted to employees retired during the taxable year shall be allowed as a deduction for such year as an ordinary and necessary business expense, and in addition (2) one-tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the pensions granted to employees retired prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the nine succeeding taxable years." Very truly yours, MELECIO R. DOMINGO Commissioner of Internal Revenue