In Chief Counsel Advice 201935011, the IRS discusses when a contribution other than cash to a qualified retirement plan has been paid to determine if the contribution is deductible under IRC §404(a).
The term “payment” or “paid” is referenced multiple times in IRC §404(a) regarding what would constitute a deductible contribution to a qualified retirement plan. The memo notes that the U.S. Supreme Court had addressed this matter in the 1977 case of Don E. Williams v. Commissioner, 429 US 569. In that case, the plan sponsor had delivered to the plan an interest-bearing promissory note before the due date for a contribution to be made but did not pay off that note until after that date.
The Supreme Court in that case settled a division among the Circuit Courts of Appeal, finding that the issuance of a promissory note to the plan was not an amount “paid” to the plan and, as such, no deduction was allowed if the balance was not paid before the extended due date, regardless of whether the taxpayer was on the accrual or cash basis.
The IRS seeks in this memo to clarify what types of transactions do and do not meet the standard outlined in the Williams case. Specifically, the ruling provides:
For a contribution by an employer to the trust of a qualified retirement plan maintained by the employer to be deductible under § 404(a) for the employer's taxable year in which the contribution is made, the contribution must be a payment of cash (or its equivalent) or property to the trust.
With regard to whether a payment has been made in the equivalent of cash, the memorandum concludes:
Whether a contribution is paid for purposes of § 404(a) is determined under the objective outlay-of-assets test set forth in Don E. Williams. The employer must experience an outlay of, or reduction in, its assets when the contribution is made. Moreover, the trust must receive the full advantage of the contribution (and thus there must be no retention by the employer of significant control over the contributed asset or imposition of a significant encumbrance on the trustee’s ability to dispose of the asset). Whether these elements are satisfied depends on the facts and circumstances of the particular contribution.
In support of this position, the CCA looks at the Williams case and the later Tax Court case of Reed Smith Shaw & McClay v. Commissioner, T.C.M.1998-64 (1998). The memo states:
The objective outlay-of-assets test includes a requirement that, as a result of the contribution for which it claims a deduction under § 404(a), an employer must experience an outlay of, or reduction in, its assets and the trust must receive the full advantage of the contribution. A promise to pay, even if secured and certificated, is not payment for purposes of § 404(a) if there is no outlay of cash or property by the employer.
The memorandum goes on to note that not only must assets be transferred, but the plan must also have full control of those assets:
In addition, Don E. Williams and later decisions highlight the relevance of control over the asset following its contribution as a factor in determining whether a contribution satisfies the objective outlay-of-assets test. Thus, the degree of control or influence retained by an employer over the contribution is an important element of the objective outlay-of-assets test, as is the degree of encumbrance on the asset restricting the trustee's flexibility to use it to best fit the needs of the plan. These elements of the objective outlay-of-assets test apply in order to determine whether the trust has received the full advantage of the contribution at the time the contribution is made. An employer who retains significant control over the contributed asset has not actually made a payment to the trust, because no amount is “irrevocably set aside” for the plan.
The memo also finds that an encumbrance on the asset also prevents the transfer of the asset from being a payment:
Similarly, the degree of encumbrance on the contributed asset is evidence of the extent to which the trustee has the ability to use the asset in a way that best meets the plan's needs, taking into account the nature of the asset. A trustee's ability to liquidate a trust asset is necessary for a qualified trust to be able to pay benefits; for example, if contributed property cannot be sold on account of restrictions placed by the employer, then the trust may not have the liquidity necessary to pay participant benefits in a timely manner. This danger is avoided if the contributed property is not significantly encumbered. As the Supreme Court has noted, “the apparent policy behind the statutory provision [is to] insure the integrity of the employees' plan and insure the full advantage of any contribution which entitles the employer to a tax benefit.” Don E. Williams, 429 U.S. at 579.
The memo derives a two-factor test to determine if a transfer represents a payment to the plan allowing for a deduction. The memo finds that the outlay-of-assets test from the Williams case requires:
An outlay of, or reduction in, the employer’s assets and
That the trust is entitled to full advantage of such assets.
The memo concludes with a number of illustrations of the application of each of the tests. The memo provides the following illustrations related to the outlay-of-assets first test, which is based on facts and circumstances:
Employer’s promissory note. An employer contributes its own promissory note to the plan obligating the employer to pay cash (or its equivalent) or property to the trust at a later date. The contribution is not deductible as an actual payment under § 404(a) regardless of whether the note is secured or transferable, because the note’s contribution is not an outlay of, or reduction in, the employer’s assets.10
Employer debt. An employer contributes its own publicly traded debt to the plan. The contribution of the debt instrument is essentially the same as the contribution of a promissory note because the debt instrument reflects the employer’s promise to make payments to the instrument’s owner at a later date and thus is not an outlay of, or reduction in, the employer’s assets. Similarly, the contribution by the employer of debt of a member of its controlled group (within the meaning of § 414(b), (c) or (m)) is not an outlay of, or reduction in, the employer’s assets.
Book entry. An employer’s designation of its liability for a plan contribution as a debit on its books and an accrual on the books of the plan, without a corresponding transfer of assets to the plan, is not an actual payment of the contribution, because the book entry, by itself, is not an outlay of, or reduction in, the employer’s assets.
Treatment of contributed asset as an asset of the employer for accounting purposes. An employer's continued treatment for purposes of its financial statements of an asset contributed to the qualified trust as an asset of the employer, or its inability otherwise to treat the asset solely as an asset of the plan, is a factor to be taken into account in determining whether there is an outlay of, or reduction in, the employer's assets.
The memo continues with the following illustrations of issues to be considered when determining if the trust is entitled to take full advantage of the assets:
Asset inaccessible. A trustee’s inability to access a contributed asset (including an asset that is cash or otherwise unencumbered) indicates the trust has not received the full advantage of the contribution, because the trustee’s use of the asset is significantly encumbered for as long as the asset continues to be inaccessible following its contribution. The asset may be inaccessible, for example, if the cash or property is placed in escrow; the asset is available first to other creditors of the employer; or the property is not transferrable for a number of years or without the prior approval of the employer.
Employer option to repurchase property (call option). A contribution of property (such as shares of employer stock, whether or not publicly traded) that includes an employer option to repurchase the property at the employer’s discretion, or for a set number of years following the contribution, is a factor to be taken into account in determining whether the employer has retained significant control over the asset, even if the repurchase price is to be determined by an independent fiduciary or is set to be equal to or exceed the asset’s fair market value.
Option to require employer to repurchase contributed property (put option). A contribution of property (such as shares of employer stock, whether or not publicly traded) subject to a put option requiring the employer to repurchase the contributed property is a factor to be taken into account in determining whether the trust has received the full advantage of the contribution (for example, if the asset is significantly encumbered because the trustee cannot exercise the put option without the employer’s consent or for a set number of years following the contribution). This may be true even if the asset subject to the put option is to be sold at a price equal to or exceeding its fair market value. Similarly, a put option that includes a right for the employer to delay the settlement date for a significant period of time is a factor to be taken into account in determining whether the trust has received the full advantage of the contribution on account of the employer’s retaining significant control over the asset.
Other restrictions on trustee’s ability to transfer the asset. Other restrictions on the trustee’s ability to transfer or optimize the use of the contributed asset are also factors to be taken into account in determining whether the trust has received the full advantage of the contribution (because the employer has retained significant control over the asset or the trustee’s use of the asset is significantly encumbered). Examples of other restrictions include a prohibition on the trustee’s transferring the contributed asset to a third party or the trustee’s pledging the asset as security for a loan.
 https://supreme.justia.com/cases/federal/us/429/569/, retrieved September 1, 2019
 Williams, 429 U.S. at 582-583
 CCA 201935011, p. 2
 Ibid, p. 6
 Ibid. p. 7
 Ibid, pp. 7-8
 Ibid, pp. 8-9