Rev. Rul. 55-640

Advice has been requested whether a contribution to a trust may, under the circumstances set forth below, be considered a payment to a valid existing trust under local law within the meaning of section 404 of the Internal Revenue Code of 1954.

The company in the instant case, a taxpayer on the accrual method, executed a trust agreement under seal as a part of its profit-sharing plan for employees which has been held to meet the requirements of section 401(a) for tax exemption under section 501(a) of the Code. The trust agreement provides that the company shall make a contribution to the trustees during each fiscal year of the company according to a prescribed formula based on a graduated percentage of profits, subject to a limitation of 15 percent of the total compensation otherwise paid to all the participants in the trust.

For the first fiscal year of the plan, the profits of the company were such that no contribution was required under the profit-sharing formula and none was made. For the second fiscal year, the profits were such that a contribution of 60 x dollars was required which was made after the close of the year but within the time prescribed for the filing of the company's return for that year. This was the first contribution of any kind received by the trustees. Previous to this contribution, the trust had no corpus unless the company's promise, executed under seal, to pay as prescribed by the profit-sharing formula may itself be treated as the corpus. Under the local law in the instant case, however, a seal imports consideration so that a trust executed under seal would be binding without other consideration.

The question presented is whether, for the taxable year to which the contribution applies, the trust had a corpus and was a valid existing trust so that the payment made after the close of the taxable year may be deducted from gross income under section 404 of the Code.

Section 404(a)(3) of the 1954 Code provides for deductions of contributions paid to a profit-sharing trust which is exempt under section 501(a) of the Code. In Mim. 5985, C.B. 1946-1, 72, it is stated that a plan must be in effect before the trust is entitled to exemption under Section 165(a) of the 1939 Code (corresponding to section 501(a) of the 1954 Code); that there must be a valid and existing trust to which the contribution is made; that if an essential element of a trust is lacking, there is, in effect, no trust; and that, thus, if the trust corpus is lacking, it cannot be said that a trust is in existence. The corollary, therefore, is that exemption under section 501(a) applies to an existing trust, complete in all respects, inclusive of possession of corpus.

Section 404(a)(6) of the Code provides that a taxpayer on the accrual method shall be deemed to have made a payment, for the purpose of paragraph (3), on the last day of the year of accrual if the payment is on account of such taxable year and is made within the time prescribed by law for filing the return for such taxable year (including extensions thereof). However, paragraph (6) does not create a trust or relate a trust back to a period when in fact it had no existence. Thus, contributions to an employees' trust, to constitute allowable deductions, must be made pursuant to a plan in effect and to a valid existing trust which is recognized as such under the law prevailing in the jurisdiction to which the trust is subject.

Under the local law in the instant case, a seal imports consideration so that a promise under seal is binding without other consideration. Also, under the local law, a trust established by an instrument executed under seal, under the terms of which the settler promises unqualifiedly to pay to the trustees a certain percentage of its profits for each taxable year, is not without a corpus at the end of the first year for which the employer has sufficient profits to require a contribution to the trust because the trustees are then in possession of an enforceable promise which may be the subject matter of a trust.

Accordingly, it is held that where, under local law, a promise executed under seal is binding without other consideration, such a promise of an employer to make contributions to the trustees of a profit-sharing trust may constitute the corpus of a valid trust; therefore, the first contribution of an employer on an accrual method to such a trust, forming a part of a qualified employees' profit-sharing plan, which is made after the close of its taxable year to which the payment applies but within the time prescribed by law for filing the return for such taxable year (including extensions thereof), may be considered as a payment to a valid trust in existence on the last day of the taxable year to which the payment applies, so as to be deductible under section 404 of the Code, notwithstanding the fact that the trust, prior to the payment of the contribution, had no corpus other than the employer's enforceable promise to pay