## Facts

- Keystone Consolidated Industries, Inc. maintained tax-qualified defined benefit pension plans subject to ERISA minimum funding requirements.
- In 1983–84, Keystone transferred multiple unencumbered real properties (e.g., terminals and land) to the pension trust.
- Keystone credited the properties’ fair market value against its ERISA minimum funding obligation.
- The IRS treated Keystone as a “disqualified person” and assessed excise taxes, asserting the transfers were prohibited transactions under 26 U.S.C. § 4975(c)(1)(A) (barring any direct or indirect sale or exchange of property between a plan and a disqualified person).
- Keystone argued the transfers were plan contributions, not “sales or exchanges,” emphasizing that 26 U.S.C. § 4975(f)(3) expressly treats transfers of encumbered property to a plan as sales or exchanges.
- The Tax Court granted summary judgment for Keystone, and the Fifth Circuit affirmed.

## Issues

1. Whether an employer’s transfer of unencumbered property to a defined benefit plan, when credited toward the employer’s minimum funding obligation, is a prohibited “sale or exchange” under 26 U.S.C. § 4975(c)(1)(A).
2. Whether 26 U.S.C. § 4975(f)(3) implies that only transfers of encumbered property can be treated as a “sale or exchange” for purposes of § 4975(c)(1)(A).

## Decision

- The Supreme Court reversed the Fifth Circuit.
- The Court held that, when applied to reduce an employer’s funding obligation, a contribution of unencumbered property to a defined benefit plan is a prohibited “sale or exchange” under § 4975(c)(1)(A).
- The Court applied the income-tax rule that transferring property in satisfaction of a monetary obligation constitutes a “sale or exchange,” and concluded the transaction is at least an indirect sale and a form of exchange (property for diminution of the funding obligation).
- The Court rejected the inference that § 4975(f)(3) limits “sale or exchange” to encumbered-property transfers; it treated (f)(3) as an additional specification, not an exclusion for unencumbered transfers.
- The Court emphasized § 4975’s protective purpose to bar categorically transactions that pose common risks to plans, including valuation, liquidity, and cash-flow concerns, even if particular transferred assets are unencumbered.

## Legal Principles

- A transfer of property in satisfaction of a monetary obligation is treated as a “sale or exchange” for federal tax purposes, and that rule applies when interpreting “sale or exchange” in 26 U.S.C. § 4975(c)(1)(A).
- Section 4975(c)(1)(A) reaches “any direct or indirect” sale or exchange; exchanging property for a reduction of an employer’s plan-funding liability falls within that prohibition.
- Section 4975 is construed as a prophylactic bar on categories of transactions likely to harm pension plans, not solely a case-by-case inquiry into actual harm.
- Section 4975(f)(3), which deems certain encumbered-property transfers to be sales or exchanges, does not imply that unencumbered-property transfers cannot qualify as sales or exchanges under § 4975(c)(1)(A).

## Conclusion

An employer’s transfer of unencumbered property to a defined benefit plan, when credited against the employer’s minimum funding obligation, is a prohibited “sale or exchange” between a plan and a disqualified person under 26 U.S.C. § 4975(c)(1)(A), triggering excise tax liability.


Comm'r v. Keystone Consol. Indus., Inc., 508 U.S. 152 (1993)