Deductibility of Overfunded Contributions

No date supplied BIR RULING NO. 370-60 Victorias Milling Co., Inc. Victorias, Occidental Negros Gentlemen : I have the honor to acknowledge receipt of your letter dated June 16, 1960 requesting the opinion of this Office on the question propounded therein. cd It appears that on November 1, 1957, you adopted a pension plan and established and maintained an irrevocable pension trust for the exclusive benefit of your employees. To put the trust in a sound financial basis you intend to contribute from time to time such amounts as your financial conditions may warrant over and above the pension liability for the taxable year which will result in the overfunding of the pension trust. Considering that amounts paid to the trust fund in excess of pension liabilities applicable to the taxable year and years prior to the taxable year, are not deductible in the year contributed, you want to know how whether or not these overfunded contributions are deductible in subsequent years. To illustrate, you gave the following concrete examples: Your pension liabilities up to October 31, 1959 were P3,000,000.00 which have all been funded. The pension liabilities for 1960, 1961 and 1962 will amount to P200,000.00, P220,000.00 and P250,000.00, respectively. You propose to contribute to the trust P350,000.00 in 1960, P200,000.00 in 1961 and P150,000.00 in 1962. What will be the allowable deductions for 1960, 1961 and 1962 excluding the contributions to the trust prior to 1960? In reply, I have the honor to quote hereunder the provisions of section 30(j) of the National Internal Revenue Code which reads as follows: "SEC. 30(j) Pension trusts . General rule . An employee establishing or maintaining a pension trust to provide for payment of a reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trusts during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under subsection (a) of this section) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1) has not therefore been allowable as a deduction, and (2) is apportioned in equal parts a period of ten consecutive years beginning with the year in which the transfer or payment is made." cdll The abovequoted provision of the Tax Code authorized the deduction in full as an ordinary and necessary business expense, only of the amounts paid to the trust during the taxable year to cover the pension liability accruing during the same taxable year. Reasonable amounts paid to the trust during the taxable year in excess of the pension liability are allowed as deductions provided that the said amount (1) has not therefore been allowed as a deduction and (2) that the same is apportioned in equal parts over a period of ten consecutive years beginning with the year in which the transfer or payment is made. Accordingly, the amounts that can be allowed as deduction in the example given in your letter are the following: P215,000.00 for 1960; P215,000.00 for 1961 and P165,000.00 for 1962. Very truly yours, (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue