Rev. Rul. 67-301

Advice has been requested whether the exempt status of an employees' trust will be adversely affected where the trustee, a bank, invests the trust funds in a common trust fund it maintains, commingled with other funds it holds in trust.

The common trust fund is not exempt as a trust described in section 401(a) of the Internal Revenue Code of 1954, but is exempt as a common trust fund within the meaning of section 584.

Section 1.401-1(b)(5)(i) of the Income Tax Regulations provides that there are no specific limitations in section 401(a) of the Code with respect to investments which may be made by the trustees of a trust qualifying under section 401(a). Generally, the contributions may be used by the trustees to make any investments permitted by the trust agreement to the extent allowed by local law and must not result in `prohibited transactions' within the meaning of section 503 of the Code. See also Part 2(k) of Revenue Ruling 65-178, C.B. 1965-2, 94.

Revenue Ruling 56-267, C.B. 1956-1, 206, holds that where, under certain specified conditions, separate exempt employees' trusts pool their funds in a group trust to provide diversification of investments, the group trust may qualify as an exempt employees' trust and the exempt status of the separate trusts will not be adversely affected.

Revenue Ruling 56-267 provides that the exemption of the separate employees' trusts will not be affected where the trusts pool their funds in a group trust under the conditions specified in the ruling. Such conditions are merely prerequisites to the qualification of the group trust under section 401(a) of the Code. Therefore, Revenue Ruling 56-267 is distinguished from the facts in this case.

Nothing in Revenue Ruling 56-267 prevents investment of funds of an employees' trust in a common trust fund which is exempt under section 584 of the Code. Such an investment is also consistent with Revenue Ruling 66-297, C.B. 1966-2, 234, which discusses the exemption of a common trust fund maintained by a bank, where the fund consists solely of assets held by the bank in its capacity as trustee of exempt pension and profit-sharing trusts. That ruling distinguishes the exemption of a common trust fund under section 584 of the Code from the exemption, under section 501(a), of a group trust complying with the requirements of Revenue Ruling 56-267.

In view of the foregoing, it is held that the exempt status of the employees' trust in this case will not be adversely affected merely because the trustee, a bank, invests the trust funds in a common trust fund exempt under section 584 of the Code, commingled with other funds it holds in trust.

Although section 584(c) of the Code provides for the inclusion in the taxable income of a participant in a common trust fund of its proportionate share of the income of the fund, section 501(a) of the Code provides, in pertinent part, that an organization described in section 401(a) of the Code is exempt from taxation. Further, section 501(b) of the Code provides that organizations exempt from taxation under section 501(a) are taxable only on their unrelated business taxable income. Since its proportionate share of the income of a common trust fund is not unrelated business taxable income in the hands of the employees' trust, it is further held that such income is not taxable to the trust.