Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 71-96

1971-1 C.B. 132

Sec. 404

IRS Headnote

A subsidiary corporation is required to make a contribution determined by the obligation of its parent under a qualified employees' profit-sharing plan; the parent cannot deduct a contribution made on behalf of a subsidiary that has accumulated earnings. Full Text

Rev. Rul. 71-96

Advice has been requested whether, under the circumstances described below, a subsidiary corporation was (1) required under a profit-sharing plan to make a contribution for the purposes of section 1.404(a)-10(a)(2) of the Income Tax Regulations and, (2) if so, whether the parent could deduct a contribution made on the subsidiary's behalf.

A parent and a subsidiary corporation comprised an affiliated group as defined in section 1504 of the Internal Revenue Code of 1954. The two corporations adopted a qualified profit-sharing plan. The plan requires the parent corporation to make such contributions each year out of its current or accumulated earnings or profits, as its board of directors determines at a meeting to be held before the end of the year. The plan also provides that any subsidiary corporation must each year contribute, out of its current or accumulated earnings or profits, the same percentage of the compensation of its employee-participants as the parent is required to contribute for its employee-participants.

In 1969, the board of directors of the parent adopted a resolution before the end of that year setting forth the contribution to be made by the parent for its employees. The employee-participants of both corporations were notified of this action. For the year 1969, the parent made the contribution for its own employees and made the contribution for the employees of the subsidiary since that corporation had no earnings or profits for that year and could not make the contribution because of its poor cash position. However, the subsidiary did have accumulated earnings that exceeded the amount of the contribution made by the parent on its behalf for the year 1969.

Section 404(a)(3)(B) of the Code allows a deduction by a member of an affiliated group for a contribution made on behalf of another member of such group if that member is prevented from making the contribution which it would otherwise have made under the plan by reason of having no current or accumulated earnings or profits. Section 1.404(a)-10(a)(2) provides that the deduction is allowed if certain tests are met. One of these tests is that the member for which the contribution is made is required under the plan to make the contribution. Another is that the corporation for which the contribution is being made has neither current nor accumulated earnings or profits.

In this case the plan provided that the subsidiary's contribution would be determined by the contribution to be made by the parent corporation. Once the board of directors of the parent adopted the resolution that established the parent's obligation under the plan for 1969, the subsidiary was required to make a similar contribution on behalf of its employees for that year.

Accordingly, it is held that, for the purposes of section 1.404(a)-10(a)(2) of the regulations, the subsidiary was required under the plan to make a contribution for the year 1969. It is further held that the parent can not deduct the contribution made on behalf of the subsidiary, since the subsidiary was prevented from making the contribution because of its poor cash position rather than because it had neither current nor accumulated earnings or profits.