Rev. Rul. 55-425

Advice has been requested whether the trust funds of an employees' profit-sharing trust, which has been held to meet the requirements of section 165(a) of the Internal Revenue Code of 1939 (section 401(a) of the 1954 Code), will be considered to have been `made available' within the meaning of section 402(a) of the 1954 Code, merely by reason of a participant's right to elect, within a specified time, to receive distribution of trust funds upon completion of 15 years of service.

An employer established an employees' profit-sharing plan which was held to be qualified under section 165(a) of the 1939 Code (section 401(a) of the 1954 Code). Under the terms of the trust agreement which forms a part of the profit-sharing plan each employee had a severable and personal trust which terminated at the end of a period of 15 years of participation. The individual employee's trust could also be terminated upon his death or other termination of his services. Upon termination of a particular employee's trust for any reason the funds held thereunder (or such part with respect to which he had a nonforfeitable right) would be distributed to him in a lump sum.

An amendment to the plan and trust has been executed whereby a participant may receive a distribution from the trust only upon the termination of his services except in a case where he may elect to file a written declaration prior to his completion of 14 years of continuous employment to have his trust terminated at the completion of 15 years of service. The written declaration is irrevocable and no further election may be made after the completion of the 14th year.

If he should fail to file such an election, within the time specified, then he may not receive any of the trust funds except upon his death or other termination of his services.

Section 402(a) of the 1954 Code provides that the amount actually distributed or made available to any distributee by an employees' trust, described in section 401(a) which is exempt under section 501(a), shall be taxable to him in the year in which so distributed or made available. Where total distributions payable with respect to any employee are paid to the distributee within 1 taxable year of the distributee on account of the employee's death or other separation from the service, or on account of the death of the employee after separation from service, the amount of such distribution, to the extent exceeding the amounts contributed by the employee shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months.

Revenue Ruling 55-423, page 41 of this Bulletin, holds that a participant's interest in an employees' trust which meets the qualifications of section 401(a) of the 1954 Code is not made available to him within the purview of section 402(a) of the Code where there are substantial conditions or restrictions on his right of withdrawal.

On the basis of the above, it is held that where a participant in a qualified employees' profit-sharing trust may elect at any time prior to the completion of 14 years of continuous service to file a written declaration for distribution of his trust funds upon completion of 15 years of continuous service and where he may otherwise receive a distribution of the trust funds only upon the termination of his services, the trust funds are not `made available' within the purview of section 402(a) of the 1954 Code, by reason of the right to make such an election. Compare Rev. Rul. 54-265, C.B. 1954-2, 239. Where total distributions payable with respect to an employee are paid to the distributee within 1 taxable year of the distributee on account of the employee's death or other termination of service or death after termination of service, long-term capital gain treatment will be accorded such a distribution