internal_revenue_service department of the treasury significant index no washington dc qo q l s contact person telephone number in heterence to dalep ra t a1 aug in re company b taxpayer's plan company b plans this letter is in response to your request for rulings regarding a proposed merger of restored pension pians previously maintained by the taxpayer you have asked us for a ruling that the taxpayer will not recognize taxable_income or gain for federal tax purposes in connection with i the merger of the company b plans into the taxpayer's plan ii the post-merger purchase of annuities covering the benefits of the company b plans’ participants with the taxpayer's plan's assets including the five percent benefit increase any non- guaranteed benefits that were not paid_by the pension_benefit_guaranty_corporation pbgc’ during the time it was trustee of the company b plans and any additional accruals earned after the plan termination sgd dates and payment of past unpaid non-guaranteed benefits plus interest and post-termination benefit accruals in a lump sum to a consenting company b plans’ participant or beneficiary if the present_value of such amounts does not exceed dollar_figure and iii the taxpayer's plan’s reimbursement to the pbgc of dollar_figure million for the company b plans’ benefits paid_by the pbgc with interest accruing pincite from date none of the transactions described in ruling_request will constitute a deemed or actual reversion of plan assets to the taxpayer that would cause the taxpayer to be subject_to the excise_tax imposed under sec_4980 of the internal_revenue_code the code facts the taxpayer is a manufacturer of substantially overfunded defined_benefit_plan on date the taxpayer executed a purchase and sale agreement with company b pursuant to - which the taxpayer sold to company b a group of were divisions of the taxpayer in an asset-sale transaction in connection with that transaction company b assumed sponsorship of six defined benefit plans the company b plans substantially_all of the participants in the company b plans formerly were employees of the taxpayer the taxpayer's plan is a businesses that the steel-related businesses company b purchased from the taxpayer eventually failed between date and date the pbgc assumed trusteeship of the company b plans and terminated them in anticipation of these events on date the pbgc filed a complaint against the taxpayer seeking a declaration that the taxpayer would be liable for the underfunding of the company b plans in its complaint the pbgc asserted that the taxpayer should be held liable under u s c section as if it remained a contributing sponsor of the company b plans as of their termination_date after protracted litigation in the federal courts the pbgc’s assertion was affirmed and the taxpayer was held liable under u s c section the taxpayer proposes to assume responsibility for the company b plans from the pbgc pursuant to a memorandum of understanding the mou between the pbgc and the taxpayer dated date under the mou upon the taxpayer's written request the pbgc will restore the company b plans to the taxpayer pursuant to section of the employee_retirement_income_security_act_of_1974 erisa the taxpayer will amend the company b plans to increase participants’ benefits by five percent going forward the taxpayer will merge the company b plans into the taxpayer's plan the taxpayer's plan will purchase annuities covering the benefits of the company b plans’ participants including the five percent benefit increase any non-guaranteed benefits that were not paid_by pbgc during the time it was the trustee of the company b plans and any additional accruals earned after the plan termination dates past unpaid non- guaranteed benefits plus interest and post-termination benefit accruals may be paid in a lump sum to a company b plan participant or beneficiary provided that the present_value of such individual lump-sum does not excess dollar_figure the taxpayer's plan or the taxpayer will reimburse the pbgc dollar_figure million for the company b plans’ benefits paid_by the pbgc with interest accruing pincite from date the pbgc will waive all plan termination_insurance premiums due from or on behalf of the company b plans from the date of their termination to the date of the plan merger and the pbgc will release its employer liability claim under sec_4062 of erisa once the taxpayer satisfies its obligations under the mou law sec_61 of the code provides that gross income’ includes all income from whatever source derived except as otherwise provided in subtitle a of the code sec_1_61-1 of the income_tax regulations provides in part that gross_income means all income from whatever source derived unless excluded by law sec_111 of the code provides that gross_income does not include income attributable to the recovery during any taxable_year of any amount deducted in any prior taxable_year to the extent such amount did not reduce the amount of tax imposed by this chapter this section constitutes the codification of the so-called exclusionary portion of the tax_benefit_rule the balance of the tax_benefit_rule known as the inclusionary portion has been clarified in revrul_68_104 cb which requires that when an amount previously deducted from gross_income generates a tax_benefit and is then recaptured in a subsequent year that recaptured amount is includible under sec_61 in gross_income in the year of recapture the tax_benefit_rule was originally fashioned by the judiciary in order to approximate the results produced by a tax system on transactional rather than annual accounting the rule was applied in the united_states supreme court in 460_us_370 the tax_benefit_rule as fe 200leco2s formulated by the supreme court in hillsboro provided that a taxpayer includes income when an event occurs in a subsequent year which is fundamentaily inconsistent with a deduction taken in a prior year unless a nonrecognition_provision of the code prevents inclusion thus under hillsboro an actual recovery_of the amount in question is not necessary the determination that must be made under the hillsboro test is whether the subsequent event would have foreclosed the earlier deduction if the subsequent event and the event giving rise to the deduction had occurred in the same year if the subsequent event would have foreclosed the deduction the event is fundamentally inconsistent and the taxpayer must include the amount as income in the year of the subsequent event sec_401 of the code provides that a_trust shall not constitute a qualified_trust under this section unless the plan of which such trust is a part provides that in the case of any merger or consolidation with or transfer of asset or liabilities to any other plan after date each participant in the plan would if the plan then terminated receive a benefit immediately after the merger consolidation or transfer equal to or greater than the benefit he would have been entitled to receive immediately before the merger consolidation or transfer if the plan had then terminated sec_404 of the code provides if contributions are paid_by an employer to or under a stock bonus pension profit-sharing or annuity plan or if compensation is paid_or_accrued by an employer on account of any employee under a plan deferring the receipt of such compensation such contributions or compensation shall not be deductible under this chapter but if they would otherwise be deductible they shall be deductible under this section subject however to the following limitations as to the amounts deductible in any year sec_411 of the code provides that a plan shall be treated as not satisfying the requirements of this section if the accrued_benefit of a participant is decreased by an amendment of the plan other than an amendment described in sec_412 or sec_4281 of the employment retirement income security act of sec_414 of the code provides that a_trust which forms a part of a plan shall not constitute a qualified_trust under sec_401 and a plan shall be treated as not described in sec_403 unless in the case of any merger or consolidation of the plan with or in the case of any transfer of assets or liabilities of such plan to any other trust plan after date each participant in the plan would if the plan then terminated receive a benefit immediately after the merger consolidation or transfer which is equal to or greater than the benefit he would have been entitled j to receive immediately before the merger consolidation or transfer if the plan had then terminated sec_4980 of the code imposes an excise_tax on the amount of any employer_reversion from a qualified_plan sec_4980 defines the term qualified_plan to include any plan meeting the requirements of sec_401 a such term shall include any plan which at any time has been determined by the secretary to be a qualified_plan sec_4980 provides in general that the term employer_reversion means the amount of cash and the fair_market_value of other_property received directly or indirectly by an employer from the qualified_plan title c f_r section provides for the repayment of pbgc payments of guaranteed benefits upon restoration of a plan pursuant to erisa section these are amounts paid_by the pbgc from its single-employer insurance fund the fund established pursuant to erisa section a to pay guaranteed benefits and related expenses of a plan while it was terminated and are a debt of the restored plan analysis the first issue is whether the taxpayer will recognized taxable_income or gain for federal tax purposes with respect to the proposed merger of the company b plans into the taxpayer's plan in this case the tax_benefit_rule must be applied to determine whether the merger of the company b pians and the taxpayer's plan is fundamentally inconsistent with the premises upon which the original deduction under code sec_404 was based in applying this test hillsboro requires that the facts and circumstances of this case be considered in light of the purpose and function of the provisions granting the deduction hillsboro u s pincite under the facts of this case the company b plans are being merged with the taxpayer's plan that is maintained by the taxpayer thus there is no actual recovery by the taxpayer which wouid require the taxpayer to recognize income for federal tax purposes the assets of the separate plans will be the assets of the merged plan however under the tax_benefit_rule no actual recovery is necessary more relevant in this case is whether the merger is fundamentally inconsistent with the original deductions taken the facts indicate that the company b plans and the taxpayer's plan are all defined benefit plans providing retirement income to participants and beneficiaries the merger of the company b plans with the taxpayer's plan is consistent with the use congress intended under erisa and sec_404 of the code when it granted the earlier deduction under sec_404 to provide for definitely determinable retirement benefits to participants and beneficiaries this finding is consistent with the following jby zoqle s928 statement by congress in connection with the omnibus budget reconciliation act of as under current law there will be no income or excise_tax consequences if excess_assets are transferred or merged between defined benefit plans maintained by an employer or employers within the same controlled_group in addition as under current law a transfer of excess_assets from a defined_benefit_plan to a defined_contribution_plan even if such transfer is between plans of a single employer will give rise to ordinary_income based on tax_benefit principles and such a transfer will subject the employer to the excise_tax on employer reversions h_r rep no i 100th cong 1st sess there has been no change in the applicable law mergers of defined benefit plans of an employer or within a controlled_group do not result in income or excise_tax consequences because the company b plans were originally maintained within the taxpayer's controlled_group and as restored the company b plans will be within the taxpayer's controlled_group this principle applies to the pian mergers at issue in this case the merger of the company b plans and the taxpayer's plan is not fundamentally inconsistent with the premises upon which the original deductions under sec_404 are based the plans as merged will still provide for definitely determinable retirement benefits to participants and beneficiaries of the taxpayer's plan and the company b plans accordingly the merger of the company b plans with the taxpayer's plan will not cause the taxpayer to recognize income for federal_income_tax purposes under sec_61 the second issue is whether the taxpayer will recognize taxable_income or gain for federal tax purposes in connection with the purchase of annuities covering the benefits of company b plans’ participants with merged plan assets including the five percent benefit increase any non-guaranteed benefits that were not paid_by the pbgc during the time it was trustee of the company b plans and any additional accruals eamed after the plan termination dates and payment of past unpaid non-guaranteed benefits plus interest and post-termination benefit accruals in a lump sum to consenting company b plans’ participants or beneficiaries if the present_value of such amounts does not exceed dollar_figure ef in applying the tax_benefit_rule hillsboro requires that the facts and circumstances of this case be considered in light of the purpose and function of the provisions granting the deduction hillsboro u s pincite under the facts of this case the underfunded company b plans which were originally maintained by the taxpayer will also be maintained by the taxpayer after restoration and will be merged into the overfunded taxpayer's plan that is maintained by the taxpayer assets of the merged plan will be used to pay the benefits identified in the ruling_request plans providing definitely determinable retirement benefits to participants and beneficiaries the merger of the company b plans with the taxpayer's plan is consistent with the use congress intended under erisa and sec_404 when it granted the earlier deductions under sec_404 a as noted above congress has stated that there will be no income_tax consequences if excess_assets are merged between defined benefit plans maintained by an employer accordingly the payment of benefits from the merged plan will not cause the taxpayer to recognize income for federal tax purposes under sec_61 the company b plans and the taxpayer's plan are both defined benefit the third issue is whether the taxpayer will recognize taxable_income or gain for federal tax purposes in connection with the taxpayer's plan reimbursement after the merger of dollar_figure million to the pbgc for the company b plans’ benefits paid_by the pbgc with interest accruing pincite from date pursuant to title c f_r section and the terms of the mou pbgc may require the merged taxpayer's plan to pay dollar_figure million to the pbgc this amount is debt of the restored company b plans terminated by pbgc section a provides the general_rule that amounts paid_by the pbgc from its insurance fund to pay guaranteed benefits and related expenses under a plan while it was terminated are a debt of the restored pian in applying the tax_benefit_rule hillsboro requires that the facts and circumstances of this case be considered in light of the purpose and function of the provisions granting the deduction hillsboro u s pincite under the hillsboro test the taxpayer's plan would recognize taxable_income if the reimbursement payment to the pbgc for amounts expended to provide plan benefits to company b plans’ participants is fundamentally inconsistent with the deductions provided under sec_404 for employer contributions to the taxpayer's plan the dollar_figure million is essentially reimbursement to the pbgc of amounts used to pay guaranteed benefits and related expenses under the company b plans the use of this amount is not inconsistent with the reason that the original deductions were taken under the same reasoning applicable to the use of assets of the taxpayer's plan to pay benefits under the company b plans as merged accordingly the payment to the pbgc of amounts used to pay guaranteed benefits and related expenses under the company b plans from the merged plan will not cause the taxpayer to recognize income for federal tax purposes under sec_61 of the code the fourth issue is whether any of the transactions described in the ruling requests will constitute a deemed or actual reversion of plan assets to wci that would cause the taxpayer to be subject_to the excise_tax imposed under sec_4980 of the code under the facts of this case no reversion within the meaning of sec_4980 will occur the analysis above of the prior issues under the tax_benefit_rule determined that the proposed merger and payments will not be inconsistent with the deductions previously taken on account of the taxpayer's plan analysis the merger of the company b plans and the taxpayer's plan does not create an employer_reversion within the meaning of sec_4980 accordingly the merger will not cause the taxpayer to be subject_to the excise_tax under sec_4980 under the same conclusions assuming that at all times relevant to these rulings the company b plans and the taxpayer's plan before and after the merger are qualified under sec_401 a and their respective related trusts if any are tax-exempt under sec_501 no amendments to the taxpayer's plan will cause the taxpayer's plan to fail to satisfy sec_411 and the merger of the company b plans and the taxpayer's plan will satisfy the requirements of sec_401 sec_411 and sec_414 it is ruled that the taxpayer will not recognize taxable_income or gain for federal tax purposes in connection with i the merger of the company b plans into the taxpayer's plan ii the post-merger purchase of annuities covering the benefits of the company b plans’ participants with the taxpayer's plan’s assets including the five percent benefit increase any non-guaranteed benefits that were not paid_by pbgc during the time it was trustee of the company plans and any additional accruals earned after the plan termination dates and payment of past unpaid non-guaranteed benefits plus interest and post-termination benefit accruals in a lump sum to a consenting company b plans’ participant or beneficiary if the present_value of such amounts does not exceed dollar_figure and iii the taxpayer's plan’s le reimbursement to the pbgc of dollar_figure million for the company b plans’ benefits paid_by the pbgc with interest accruing pincite from date none of the transactions described in ruling_request will constitute a deemed or actual reversion of plan assets to the taxpayer that would cause the taxpayer to be subject_to the excise_tax imposed under sec_4980 of the code this ruling is directed only to the taxpayer that requested it sec_61 k of the internal_revenue_code provides that it may not be used or cited as precedent a copy of this ruling is being furnished to your authorized representative pursuant to a power_of_attorney form on file sincerely ana t tlnd f- james e holland jr manager employee_plans actuarial group tax_exempt_and_government_entities_division