OCTOBER TERM, 1992
Syllabus
COMMISSIONER OF INTERNAL REVENUE
v. KEYSTONE CONSOLIDATED
INDUSTRIES, INC.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH
CIRCUIT
No. 91-1677. Argued February 22, 1993-Decided May 24, 1993
Respondent company, which maintained several tax-qualified
defined benefit pension plans for its employees during the time at
issue, contributed a number of unencumbered properties to the trust
fund supporting the plans and then credited the properties' fair
market value against its minimum funding obligation under the
Employee Retirement Income Security Act of 1974 (ERISA).
Petitioner, the Commissioner of Internal Revenue, ruled that
respondent owed substantial excise taxes because the transfers to
the trust were "prohibited transactions" under 26 U. S. C. §
4975(c)(1)(A), which bars "any direct or indirect ... sale or
exchange ... of ... property between a plan and a disqualified
person" such as the employer of employees covered by the plan. The
Tax Court disagreed and entered summary judgment for respondent on
its petition for redetermination, and the Court of Appeals
affirmed.
Held: When applied to an employer's funding obligation, the
contribution of unencumbered property to a defined benefit plan is
a prohibited "sale or exchange" under §4975(c)(1)(A). pp.
158-162.
(a) The well-established income tax rule that the transfer of
property in satisfaction of a monetary obligation is a "sale or
exchange," see,
e. g., Helvering v. Hammel,
311 U. S. 504, is
applicable under § 4975(c)(1)(A). That the latter section forbids
the transfer of property in satisfaction of a debt is demonstrated
by its prohibition not merely of a "sale or exchange," but of "any
direct or indirect ... sale or exchange." The contribution of
property in satisfaction of a funding obligation is at least both
an indirect type of sale and a form of exchange, since the property
is exchanged for diminution of the employer's funding obligation.
Pp. 158-159.
(b) The foregoing construction is necessary to accomplish §
4975's goal to bar categorically a transaction likely to injure the
pension plan. A property transfer poses various potential problems
for the planincluding a shortage of funds to pay promised benefits,
assumption of the primary obligation to pay any encumbrance,
overvaluation of the property by the employer, the property's
nonliquidity, the burden and cost of disposing of the property, and
the employer's substitution of
153
its own judgment as to investment policy-that are solved by §
4975. Pp. 160-161.
(c) The Court of Appeals erred in reading § 4975(f)(3)-which
states that a transfer of property "by a disqualified person to a
plan shall be treated as a sale or exchange if the property is
subject to a mortgage or similar lien"-as implying that a transfer
cannot be a "sale or exchange" under § 4975(c)(1)(A) unless the
property is encumbered. The legislative history demonstrates that
Congress intended § 4975(f)(3) to expand, not limit, §
4975(c)(1)(A)'s scope by extending the reach of "sale or exchange"
to include contributions of encumbered property that do not satisfy
funding obligations. The Commissioner's construction of § 4975 is a
sensible one. A transfer of encumbered property, like the transfer
of unencumbered property to satisfy an obligation, has the
potential to burden a plan, while a transfer of property that is
neither encumbered nor satisfies a debt presents far less potential
for causing loss to the plan. Pp. 161-162.
951 F.2d
76, reversed.
BLACKMUN, J., delivered the opinion of the Court, in which
REHNQUIST, C. J., and WHITE, O'CONNOR, KENNEDY, SOUTER, and THOMAS,
JJ., joined, and in which SCALIA, J., joined as to all but Part
Ill-B. STEVENS, J., filed a dissenting opinion,
post, p.
162.
Christopher J.
Wright argued the cause for
petitioner.
With him on the briefs were Solicitor General Starr, Acting
Solicitor General Bryson, Acting Assistant Attorney General Bruton,
Deputy Solicitor General Wallace, and Steven W Parks.
Raymond P. Wexler argued the cause for respondent.
With him on the brief were
Todd F. Maynes and
Ralph
P. End. *
JUSTICE BLACKMUN delivered the opinion of the Court.t In this
case, we are concerned with the legality of an employer's
contributions of unencumbered property to a defined benefit pension
plan. Specifically, we must address the
*Carol Connor Flowe, William G.
Beyer, and
James J.
Armbrnster filed a brief for the Pension
Benefit Guaranty Corporation as
amicus curiae urging
reversal.
tJUSTICE SCALIA joins all but Part III-B of this opinion.
154
question whether such a contribution, when applied to the
employer's funding obligation, is a prohibited "sale or exchange"
under 26 U. S. C. § 4975 so that the employer thereby incurs the
substantial excise taxes imposed by the statute.
I
A "defined benefit pension plan," as its name implies, is one
where the employee, upon retirement, is entitled to a fixed
periodic payment. The size of that payment usually depends upon
prior salary and years of service. The more common "defined
contribution pension plan," in contrast, is typically one where the
employer contributes a percentage of payroll or profits to
individual employee accounts. Upon retirement, the employee is
entitled to the funds in his account. See 29 U. S. C. §§ 1002(34)
and (35).
If either type of plan qualifies for favorable tax treatment,
the employer, for income tax purposes, may deduct its current
contributions to the plan; the retiree, however, is not taxed until
he receives payment from the plan. See 26 U. S. C. §§ 402(a)(1) and
404(a)(1).
II
The facts that are pertinent for resolving the present
litigation are not in dispute. During its taxable years ended June
30, 1983, through June 30, 1988, inclusive, respondent Keystone
Consolidated Industries, Inc., a Delaware corporation with
principal place of business in Dallas, Tex., maintained several
tax-qualified defined benefit pension plans. These were subject to
the minimum funding requirements prescribed by § 302 of the
Employee Retirement Income Security Act of 1974 (ERISA), Pub. L.
93-406, §302, 88 Stat. 869, as amended, 29 U. S. C. § 1082. See
also 26 U. S. C. § 412. Respondent funded the plans by
contributions to the Keystone Consolidated Master Pension
Trust.
On March 8, 1983, respondent contributed to the Pension Trust
five truck terminals having a stated fair market value
155
of $9,655,454 at that time. Respondent credited that value
against its minimum funding obligation to its defined benefit
pension plans for its fiscal years 1982 and 1983. On March 13,
1984, respondent contributed to the Pension Trust certain Key West,
Fla., real property having a stated fair market value of $5,336,751
at that time. Respondent credited that value against its minimum
funding obligation for its fiscal year 1984. The truck terminals
were not encumbered at the times of their transfers. Neither was
the Key West property. Their respective stated fair market values
are not challenged here.
Respondent claimed deductions on its federal income tax returns
for the fair market values of the five truck terminals and the Key
West property. It also reported as taxable capital gain the
difference between its income tax basis in each property and that
property's stated fair market value. Thus, for income tax purposes,
respondent treated the disposal of each property as a "sale or
exchange" of a capital asset. See 26 U. S. C. § 1222.
Section 4975 of the Internal Revenue Code, 26 U. S. C. § 4975,
was added by § 2003(a) of ERISA. See 88 Stat. 971. It imposes a
two-tier excise tax 1 on specified "prohibited transactions"
between a pension plan and a "disqualified person." Among the
"disqualified persons" listed in the statute is the employer of
employees covered by the pension plan. See § 4975(e)(2)(C). Among
the transactions prohibited is "any direct or indirect ... sale or
exchange ... of any
1 The first-tier tax is "5 percent of the amount involved." 26
U. S. C. § 4975(a). The second-tier tax is "100 percent of the
amount involved." § 4975(b). The "amount involved" is the greater
of the amount of money and the fair market value of the other
property given or the amount of money and the fair market value of
the other property received. § 4975(f)(4). The second-tier tax
usually may be avoided by timely correction of the prohibited
transaction upon completion of the litigation concerning the
taxpayer's liability for the tax. See §§ 4961(a), 4963(b) and (e),
6213(a), and 7481(a).
156
property between a plan and a disqualified person." See §
4975(c)(1)(A).
The Commissioner of Internal Revenue, who is the petitioner
here, ruled that respondent's transfers to the Pension Trust of the
five truck terminals and the Key West property were sales or
exchanges prohibited under § 4975(c)(1)(A). This ruling resulted in
determined deficiencies in respondent's first-tier excise tax
liability of $749,610 for its fiscal year 1984 and of $482,773 for
each of its fiscal years 1983 and 1985-1988, inclusive. The
Commissioner also determined that respondent incurred second-tier
excise tax liability in the amount of $9,655,454 for its fiscal
year 1988.
Respondent timely filed a petition for redetermination with the
United States Tax Court. That court, with an unreviewed opinion on
cross-motions for summary judgment, ruled in respondent's favor. 60
TCM 1423 (1990), , 90,628 P-H Memo TC.
The Tax Court acknowledged that "there is a potential for abuse
by allowing unencumbered property transfers to plans in
satisfaction of minimum funding requirements."
Id., at 1424,
, 90,628 P-H Memo TC, p. 90-3071. Nonetheless, it did not agree
that the transfers in this case constituted sales or exchanges
under § 4975. It rejected the Commissioner's attempt to analogize
the property transfers to the recognition of income for income tax
purposes, for it considered the issue whether a transfer is a
prohibited transaction under § 4975 to be "separate and distinct
from income tax recognition."
Id., at 1425, , 90,628 P-H
Memo TC, p. 90-3071.
In drawing this distinction, the Tax Court cited 26 U. S. C. §
4975(f)(3). That section specifically states that a transfer of
property "by a disqualified person to a plan shall be treated as a
sale or exchange if the property is subject to a mortgage or
similar lien." The court observed: "Since section 4975(f)(3)
specifically describes certain transfers of real or personal
property to a plan by a disqualified person as a sale or exchange
for purposes of section 4975, the definitional
157
concerns of 'sale or exchange' are removed from the general
definitions found in other areas of the tax law." 60 TCM, at 1425,
, 90,628 P-H Memo TC, p. 90-3071. The Tax Court thus seemed to say
that § 4975(f)(3) limits the reach of § 4975(c)(1)(A), so that only
transfers of
encumbered property are prohibited.
The Tax Court also rejected the Commissioner's argument that by
contributing noncash property to its plan, the employer was in a
position to exert unwarranted influence over the Pension Trust's
investment policy. The court's answer was that the trustee "can
dispose of" the property.
Id., at 1425, , 90,628 P-H Memo
TC, p. 90-3072. The court noted that it earlier had rejected the
Commissioner's distinction between transfers of property that
satisfy a funding obligation and transfers of
encumbered
property, whether or not the latter transfers fulfill a funding
obligation, in
Wood v.
Commissioner, 95 T. C. 364
(1990) (unreviewed), rev'd,
955 F.2d
908 (CA4), cert. granted, 504 U. S. 972, dism'd, 505 U. S. 1231
(1992). See 60 TCM, at 1425, , 90,628 P-H Memo TC, p.90-3072.
The United States Court of Appeals for the Fifth Circuit
affirmed.
951 F.2d
76 (1992). It read § 4975(f)(3) as "implying that unless it is
encumbered by a mortgage or lien, a transfer of property is not to
be treated as if it were a sale or exchange."
Id., at 78. It
rejected the Commissioner's argument that § 4975(f)(3) was intended
to expand the definition of "sale or exchange" to include transfers
of encumbered property that do not fulfill funding obligations; in
the court's view, "there is no basis for this distinction between
involuntary and voluntary transfers anywhere in the Code."
Ibid. The court reasoned: "If all transfers of property to a
plan were to be treated as a sale or exchange" under §
4975(c)(1)(A), then § 4975(f)(3) "would be superfluous."
Ibid. That a transfer of property in satisfaction of an
obligation is treated as a "sale or exchange" of property for
158
income tax purposes is "irrelevant," because "[s]ection 4975 was
not enacted to measure economic income."
Id., at 79.
The Court of Appeals ruled that the Commissioner's views were
not entitled to deference, despite the fact that both the Internal
Revenue Service and the Department of Labor administer ERISA's
prohibited-transaction provisions. This was because the
Commissioner's views had not been set out in a formal regulation,
and because the Department of Labor's views were set out in an
advisory opinion that was binding only "on the parties thereto, and
has no precedential effect."
Ibid.
In view of the acknowledged conflict between the Fourth
Circuit's decision in Wood, see 955 F. 2d, at 913, and the Fifth
Circuit's decision in the present litigation, cases decided within
two weeks of each other, we granted certiorari. 506 U. S. 813
(1992).
III
The statute with which we are concerned is a complicated one.
But when much of its language, not applicable to the present case,
is set to one side, the issue before us comes into better focus.
Respondent acknowledges that it is a "disqualified person" with
respect to the Pension Trust. It also acknowledges that the trust
qualifies as a plan under § 4975. Our task, then, is only to
determine whether the transfers of the terminals and of the Key
West property were sales or exchanges within the reach of §
4975(c)(1)(A) and therefore were prohibited transactions.
A
It is well established for income tax purposes that the transfer
of property in satisfaction of a monetary obligation is usually a
"sale or exchange" of the property. See,
e. g., Helvering v.
Hammel,
311 U. S.
504 (1941). See also 2 B. Bittker & L. Lokken, Federal
Taxation of Income, Estates and Gifts , 40.4, p. 40-11 (2d ed.
1990). It seems clear, therefore, that respondent's contribution of
the truck termi-
159
nals and the Key West property constituted, under the income tax
laws, sales of those properties to the Pension Trust. The Fourth
Circuit, in
Wood, supra, observed: "[W]e are aware of no
instance when the term 'sale or exchange' has been used or
interpreted not to include transfers of property in satisfaction of
indebtedness." 955 F. 2d, at 913.
This logic applied in income tax cases is equally applicable
under § 4975(c)(1)(A). The phrase "sale or exchange" had acquired a
settled judicial and administrative interpretation over the course
of a half century before Congress enacted in § 4975 the even
broader statutory language of "any direct or indirect ... sale or
exchange." Congress presumptively was aware when it enacted § 4975
that the phrase "sale or exchange" consistently had been construed
to include the transfer of property in satisfaction of a monetary
obligation. See
Albernaz v.
United States, 450 U. S. 333, 340-343
(1981). It is a "normal rule of statutory construction,"
Sorenson v.
Secretary of Treasury, 475 U. S. 851, 860
(1986), that "identical words used in different parts of the same
act are intended to have the same meaning,"
Atlantic
Cleaners &
Dyers, Inc. v.
United States,
286 U. S. 427,
433 (1932). Further, "the Code must be given 'as great an internal
symmetry and consistency as its words permit.'"
Commissioner
v.
Lester, 366 U. S. 299, 304 (1961). Accordingly, when we
construe § 4975(c)(1)(A), it is proper to accept the already
settled meaning of the phrase "sale or exchange."
Even if this phrase had not possessed a settled meaning, it
still would be clear that § 4975(c)(1)(A) prohibits the transfer of
property in satisfaction of a debt. Congress barred not merely a
"sale or exchange." It prohibited something more, namely, "any
direct or indirect ... sale or exchange." The contribution of
property in satisfaction of a funding obligation is at least both
an indirect type of sale and a form of exchange, since the property
is exchanged for diminution of the employer's funding
obligation.
160
B
We note, too, that this construction of the statute's broad
language is necessary to accomplish Congress' goal. Before ERISA's
enactment in 1974, the measure that governed a transaction between
a pension plan and its sponsor was the customary arm's-length
standard of conduct. This provided an open door for abuses such as
the sponsor's sale of property to the plan at an inflated price or
the sponsor's satisfaction of a funding obligation by contribution
of property that was overvalued or nonliquid. Congress' response to
these abuses included the enactment of ERISA's § 406(a)(1)(A), 29
U. S. C. § l106(a)(1)(A), and the addition of § 4975 to the
Internal Revenue Code.
Congress' goal was to bar categorically a transaction that was
likely to injure the pension plan. S. Rep. No. 93-383, pp. 95-96
(1973). The transfer of encumbered property may jeopardize the
ability of the plan to pay promised benefits. See
Wood v.
Commissioner, supra. Such a transfer imposes upon the trust
the primary obligation to pay the encumbrance, and thus frees cash
for the employer by restricting the use of cash by the trust.
Overvaluation, the burden of disposing of the property, and the
employer's substitution of its own judgment as to investment
policy, are other obvious considerations. Although the burden of an
encumbrance is unique to the contribution of encumbered property,
concerns about overvaluation, disposal of property, and the need to
maintain an independent investment policy animate any contribution
of property that satisfies a funding obligation, regardless of
whether or not the property is encumbered. This is because as long
as a pension fund is giving up an account receivable in exchange
for property, the fund runs the risk of giving up more than it is
getting in return if the property is either less valuable or more
burdensome than a cash contribution would have been.
These potential harmful effects are illustrated by the facts of
the present case, even though the properties at issue
161
were unencumbered and not overvalued at the times of their
respective transfers. There were exclusive sales-listing agreements
respondent had made with respect to two of the truck terminals;
these agreements called for sales commissions. The presence of this
requirement demonstrates that it is neither easy nor costless to
dispose of such properties. The Chicago truck terminal, for
example, was not sold for 3% years after it was listed for sale by
the Pension Trust.
These problems are not solved, as the Court of Appeals
suggested, by the mere imposition of excise taxes by § 4971. It is
§ 4975 that prevents the abuses.
C
We do not agree with the Court of Appeals' conclusion that §
4975(f)(3) limits the meaning of "sale or exchange," as that phrase
appears in § 4975(c)(1)(A). Section 4975(f)(3) states that a
transfer of property "by a disqualified person to a plan shall be
treated as a sale or exchange if the property is subject to a
mortgage or similar lien." The Court of Appeals read this language
as implying that unless property "is encumbered by a mortgage or
lien, a transfer of property is not to be treated as if it were a
sale or exchange." 951 F. 2d, at 78. We feel that by this language
Congress intended § 4975(f)(3) to expand, not limit, the scope of
the prohibitedtransaction provision. It extends the reach of "sale
or exchange" in § 4975(c)(1)(A) to include contributions of
encumbered property that do not satisfy funding obligations. See H.
R. Conf. Rep. No. 93-1280, p. 307 (1974). Congress intended by §
4975(f)(3) to provide additional protection, not to limit the
protection already provided by §4975(c)(1)(A).2
2 Such expanded coverage is illustrated by the following
example. An employer with no outstanding funding obligations wishes
to contribute property to a pension fund to reward its employees
for an especially productive year of service. Under our analysis,
the property contribution is permissible if the property is
unencumbered, because it will not be "exchanged" for a diminution
in funding obligations and therefore does not
162
STEVENS, J., dissenting
We feel that the Commissioner's construction of § 4975 is a
sensible one. A transfer of encumbered property, like the transfer
of unencumbered property to satisfy an obligation, has the
potential to burden a plan, while a transfer of property that is
neither encumbered nor satisfies a debt presents far less potential
for causing loss to the plan.3
IV
The judgment of the Court of Appeals is reversed.
It is so ordered.
JUSTICE STEVENS, dissenting.
For the reasons stated in the opinions of the Tax Court, 60 TCM
1423 (1990), , 90,628 P-H Memo TC, and the Court of Appeals,
951 F.2d
76 (CA5 1992), I am persuaded that the transfer of unencumbered
property to a pension trust is not a "sale or exchange" prohibited
by 26 U. S. C. § 4975(c)(1)(A) of the Internal Revenue Code. I
would merely add these two observations.
fall within the prohibition of § 4975(c)(1)(A). On the other
hand, the property contribution is impermissible if the property is
encumbered, because § 4975(f)(3) specifically prohibits all
contributions of encumbered property.
3We note, in passing, that the parties and the
amicus
have argued strenuously the issue whether we should afford
deference to the interpretation of the statute by the two agencies
charged with administering it. See Brief for Petitioner 29-32;
Brief for Respondent 39-42; Reply Brief for Petitioner 18-20; Brief
for Pension Benefit Guaranty Corporation as
Amicus Curiae
10-13.
It does appear that the Department of Labor and the Internal
Revenue Service consistently have taken the position that a
sponsoring employer's transfer of unencumbered property to a
pension plan to satisfy its funding obligation is a prohibited sale
or exchange. See Department of Labor Advisory Opinion 81-69A,
issued July 28,1981; Department of Labor Advisory Opinion 90-05A,
issued March 29,1990; Rev. Rule 81-40,1981-1 Cum. Bull. 508; Rev.
Rule 77-379, 1977-2 Cum. Bull. 387.
We reach our result in this case without reliance on any rule of
deference. Because of the nature and limitations of these rulings,
we express no view as to whether they are or are not entitled to
deference. The resolution of that issue is deferred to another
day.
163
In holding that an employer's transfer of unencumbered property
to a pension fund in satisfaction of a funding obligation is a
"sale or exchange" barred by § 4975(c)(1)(A), the Court draws upon
the well-established rule that
for income tax purposes the
transfer of property to satisfy an indebtedness is a "sale or
exchange."
Ante, at 158. It is equally well established,
however, or at least was so at the time Congress enacted §
4975(c)(1)(A), that
any contribution of property by an
employer to an employee pension fund, whether done so voluntarily
or pursuant to a funding obligation, is, for income tax purposes, a
"sale or exchange" of that property. See
Tasty Baking Co. v.
United States, 393 F.2d
992 (Ct. Cl. 1968);
A. P. Smith Manufacturing Co. v.
United States, 364 F.2d
831 (Ct. Cl. 1966);
United States v.
General Shoe
Corp., 282 F.2d
9 (CA6 1960); see also Rev. Rul. 75-498, 1975-2 Cum. Bull. 29.
If indeed our focus in answering the question presented in this
case is to be congressional understanding of the term "sale or
exchange" as it relates to the determination of gain or loss, it
would seem to follow that Congress, in enacting § 4975(c)(1)(A),
rejected the very distinction between voluntary and mandatory
contributions that the Commissioner advocates and that the Court
today embraces. The alternative, of course, is to recognize, as did
the Tax Court and the Court of Appeals, that Congress did not
intend to import into § 4975(c)(1)(A) the meaning of "sale or
exchange" that has developed and been applied in the very different
context of measuring a taxpayer's gain or loss upon the disposition
of property. See 951 F. 2d, at 79; 60 TCM, at 1425, , 90,628 P-H
Memo TC, p. 90-3071. I would so hold.*
*In defense of his position, the Commissioner argues that there
is no inconsistency in relying on the well-established meaning of
"sale or exchange," and holding that a voluntary contribution to a
pension plan is not barred by § 4975(c)(1)(A). The latter, the
Commissioner argues, bars the "sale or exchange" of property
"between a plan" and an employer, whereas the relevant provisions
of the Internal Revenue Code refer more generally to the "sale or
exchange" of property. See,
e. g., 26 U. S. C. §§ 1001(c),
1222. By this reasoning, a voluntary transfer of property to a
pension plan is a "sale or exchange" for purposes of determining
gain or loss, but
164
STEVENS, J., dissenting
The Court is properly concerned about the potential for abuse
associated with an employer's transfer of property to a pension
plan. See
ante, at 160. It is worth noting, however, that
the risk of abuse is mitigated by the fact that the trustees of a
pension plan have the right-indeed, the dutyto refuse to accept
property transfers that are disadvantageous to the trust. See
generally 29 U. S. C. § 1104. Indeed, there may well be situations
in which a rule that disables the trustees from accepting any
consideration other than cash may be contrary to the best interests
of the trust. For example, one can easily imagine a situation in
which the trustees, acting prudently and in the best interests of
the plan beneficiaries, would prefer that an employer transfer an
undervalued piece of property to the plan, as opposed to selling
the property to a third party at a discount and satisfying its
funding obligation in cash. Though the majority's reading of the
statute is plausible, I am not persuaded that Congress intended to
so restrict employers and pension plan trustees.
I respectfully dissent.
is not a "sale or exchange" between the employer and the plan
within the meaning of § 4975(c)(1)(A) because it was not made in
satisfaction of a mandatory funding obligation.
The Commissioner's argument, in my view, places more weight on
the words "between a plan" in § 4975(c)(1)(A) than they can
reasonably bear. The Commissioner asks that we accept the
hypothesis that Congress drew upon a settled body of law regarding
the terms "sale or exchange" in the income tax context, but then,
by the use of these three words, departed from that settled usage
and drew a distinction between voluntary and involuntary
contributions that had been roundly rejected in the case law and by
the Internal Revenue Service itself. Again, as did the Court of
Appeals and the Tax Court, I find it more likely that Congress
intended that we construe § 4975(c)(1)(A) in its context, and
independent of the meaning attributed to the term "sale or
exchange" in other parts of the Internal Revenue Code.
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