Rev. Rul. 66-174

Advice has been requested whether a plan may qualify as an employees' profit-sharing plan under section 401 of the Internal Revenue Code of 1954 although it provides that employer contributions shall be made from current profits and accumulated earned surplus, as determined under generally accepted accounting principles, without regard to whether there are current or accumulated earnings and profits for dividend purposes as defined in section 316(a) of the Code.

A corporation is engaged in the processing and transmission of natural gas. It has no accumulated earnings and profits from which a distribution would be deemed a dividend within the meaning of section 316(a) of the Code and, for a number of years, its distributions to shareholders have exceeded its current earnings and profits. It had no taxable income, for Federal income tax purposes, for its most recent taxable year and it does not expect to have any taxable income for several years.

Under the method of accounting prescribed by the Federal Power Commission (under whose regulatory jurisdiction the corporation operates) and under general accounting principles, the corporation has a substantial amount of current profits and accumulated earned surplus. This difference is caused by the fact that the corporation annually incurs large amounts of intangible drilling and development costs which it is required, by the rules of the Federal Power Commission, to capitalize but which, for Federal income tax purposes, it has elected to deduct annually under the provisions of sections 263(c) and 611 of the Code. The corporation uses its books of account maintained under the rules of the Federal Power Commission for purposes of its annual reports to its stockholders.

The corporation established a profit-sharing plan for the benefit of its employees. The plan, which otherwise qualifies under section 401 of the Code, provides that contributions are to be made from current profits and accumulated earned surplus, as shown on the books used in preparing its annual report, without regard to whether there are any current or accumulated earnings and profits for Federal income tax purposes.

A profit-sharing plan within the meaning of section 401 of the Code is a plan established and maintained by an employer to provide for the participation in his profits by his employees or their beneficiaries. See section 1.401-1(b)(1)(ii) of the Income Tax Regulations. The term `profits' as used in the regulations is not limited to taxable profits or to earnings and profits within the scope of section 316(a) of the Code. `Profit-sharing' refers to sharing in the fruits of the enterprise which are determined by law to be distributable to the shareholders or other owners. Thus, the fact that the corporation has no taxable income because certain items are specifically deductible for Federal income tax purposes which it is required to capitalize under a method of accounting prescribed by a Federal regulatory agency does not necessarily mean there are no profits to be shared within the meaning of section 401 of the Code.

Accordingly, it is held that the profit-sharing plan will not fail to qualify under section 401 of the Code merely because it provides that contributions shall be made from current profits and accumulated earned surplus determined without regard to whether there are current or accumulated earnings and profits for dividend purposes as defined in section 316(a) of the Code.