Rev. Rul. 58-96

Advice has been requested whether a distribution from an employees' trust, described under section 401(a) of the Internal Revenue Code of 1954 and exempt from tax under section 501(a) of the Code, may be treated as a distribution on account of separation from the service within the meaning of section 402(a)(2) of the Code, where incident to a plan of complete liquidation the assets of the employing corporation are sold for cash and most of the employees go over to the purchasing corporation.

Incident to a plan of complete liquidation, a corporation sold all its corporate assets to another corporation for cash and ceased its business operations. Most of the employees of the liquidated corporation became employees of the purchasing corporation. None of the officers or directors of either corporation were officers or directors of the other corporation. Incident to the sale and by reason of the cessation of business, the qualified employees' pension and profit-sharing plans and trusts were terminated and a distribution made of the total amounts standing to the credit of the employee participants.

Section 402(a)(2) of the Code provides, in part that in the case of an employees' trust described in section 401(a) of the Code, which is exempt from tax under section 501(a) of the Code, if the total distributions payable with respect to any employee are paid to the distributee within one taxable year of the distributee on account of the employee's separation from the 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 six months.

Accordingly, in line with the position of the Service as stated in Revenue Rulings 58-94 and 58-95, pp. 194 and 197, it is held that where, incident to a plan of complete liquidation, all the assets of a corporation are sold with resulting recognition of gain or loss under section 1002 of the Code, and the trust forming part of the qualified employees' pension, profit-sharing or stock bonus plan is terminated, distributions under such trust may be considered to be made on account of the employees' "separation from the service," within the meaning of section 402(a)(2) of the Code, as to all separated employees, including those employees who, incident to the sale of assets, go over to the purchaser. If the distributions represent the total distributions payable and are made in one taxable year of the distributees, the amount of such distributions, to the extent exceeding the amounts contributed by the employees, shall be considered gains from the sale or exchange of capital assets held for more than six months.