No. 91-1677
Argued: February 22, 1993Decided: May 24, 1993
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. 6-9.
- (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.
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- (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 plan – including 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
- its own judgment as to investment policy – that are solved by 4975. P. 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 (CA5 1992), 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 III-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. *
[ Footnote * ] Carol Connor Flowe, William G. Beyer, and James J. Armbruster filed a brief for the Pension Benefit Guaranty Corporation as amicus curiae urging reversal.
JUSTICE BLACKMUN delivered the opinion of the Court.Fn
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 [508 U.S. 152, 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 [508 U.S. 152, 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 [508 U.S. 152, 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 [508 U.S. 152, 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 [508 U.S. 152, 158] property for 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 terminals [508 U.S. 152, 159] 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. [508 U.S. 152, 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. 1106(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 [508 U.S. 152, 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 1/2 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 prohibited transaction 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 [508 U.S. 152, 162]
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.
