Rev. Rul. 58-247

The Internal Revenue Service has reconsidered its treatment in Revenue Ruling 56-446, C.B. 1956-2, 1065, of an amount constituting, with respect to an employee, the `total distributions payable' by an employees' trust qualified under section 401(a), and exempt under section 501(a), of the Internal Revenue Code of 1954 when paid in one taxable year of the distributee, to a nonresident alien individual residing in Canada, on account of the employee's death or other separation from the service.

Revenue Ruling 56-446, supra , holds that where the `total distributions payable' with respect to an employee by a resident trust qualified under section 401(a), and exempt under section 501(a), of the Code are paid in one lump-sum to a nonresident alien residing in Canada on account of the employee's death or other separation from the service, the distribution is exempt from Federal income tax under Article VI A or Article VIII of the United States-Canada Tax Convention as supplemented, C.B. 1955-1, 624, at page 626. For the purposes of the particular case it was not necessary to decide which of these provisions of the convention should apply.

Article VI A of the Tax Convention and Protocol between the United States and Canada relates only to pensions and life annuities derived from within one of the contracting States by a resident of the other contracting State and provides that they shall be exempt from taxation in the former State.

Article VIII of the United States-Canada Tax Convention relates only to gains derived in one of the contracting States from the sale or exchange of capital assets by a resident or a corporation or other entity of the other contracting State and provides that such gains shall be exempt from taxation in the former State, provided such resident or corporation or other entity has no permanent establishment in the former State.

Section 402(a)(2) of the Code provides that, in the case of a trust described in section 401(a) and exempt under section 501(a) of the Code, if the `total distributions payable,' as defined in section 402(a)(3)(C) of the Code, with respect to any employee are paid to the distributee within one taxable year of the distributee on account of the employee's death or other separation from the service, or on account of the employee's death after his separation from the service, the amount of the distribution, to the extent exceeding the amount 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, such a distribution, when made to an alien resident in Canada, is exempt from taxation in the United States under Article VIII of the United States-Canada Tax Convention, supra , and not under Article VIA.

Revenue Ruling 56-446, supra , is modified to accord with the foregoing.