Rev. Rul. 58-98

Two stockholder-employees owned the outstanding shares of stock of the M corporation and participated in the employee's profit-sharing trust established by the corporation. The trust has been held to meet the requirements of section 401(a) of the Internal Revenue Code of 1954 and to be exempt from tax under section 501(a) of the Code. The M corporation was liquidated and dissolved, and a successor partnership was formed to continue the business. The two former stockholder-employees of the M corporation are partners in the successor partnership and, as such, are no longer eligible to participate in the profit-sharing trust, which was continued by the partnership. See I. T. 3350, C. B. 1940-1, 64, and Rev. Rul. 57-163, C. B. 1957-1, 128. A lump sum distribution was made of the total amounts standing to the credit of each of the two former stockholder-employees in the trust. Held, insofar as the two former stockholder-employees of the M corporation are concerned, there was a "separation from the service" of such corporation when they became partners within the purview of section 402(a)(2) of the Code. Accordingly, a single cash payment to each of the two former stockholder-employees of the total amount due them under the trust constitutes a long-term capital gain, to the extent that it exceeds the amount contributed by the employees.