Rev. Rul. 69-494

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in PS No. 49, dated June 16, 1945, relating to the requirements an exempt employees' trust must comply with in order to invest funds in the stock or securities of an employer corporation.

An exempt employees' trust maintained by a corporate employer invests trust funds in the stock and securities of the employer. These investments are permitted under the trust instrument and under local law.

Section 1.401-1(b)(5)(i) of the Income Tax Regulations states that no specific limitations are provided in section 401(a) of the Code with respect to investments that may be made by the trustees of a trust qualifying under section 401(a). Generally, the contributions may be used by the trustees to purchase any investments permitted by the trust agreement to the extent allowed by local law. However, such a trust will be subject to tax under section 511 of the Code with respect to any "unrelated business taxable income" (as defined in section 512) realized by it from its investments. Furthermore, the tax-exempt status of the trust will be forfeited if the investments made by the trustees constitute "prohibited transactions" within the meaning of section 503 of the Code. See also the regulations under those sections.

Section 1.401-1(b)(5)(ii) of the regulations provides that, where trust funds are invested in stock or securities of the employer or other person described in section 503 of the Code, full disclosure must be made of the reasons for such arrangement and the conditions under which such investments are made in order that a determination may be made whether the trust serves any purpose other than constituting part of a plan for the exclusive benefit of employees. The trustee shall report any of such investments on the return that it is required to file and shall with respect to any such investment furnish the information required by such return.

Section 1.6033-1(a)(3) of the regulations provides that every employees' trust described in section 401(a) of the Code and exempt from Federal income taxation under section 501(a) shall file an annual return on Form 990-P, including the information required by section 1.401-1 of the regulations.

The primary purpose of benefiting employees or their beneficiaries must be maintained with respect to investments of the trust funds as well as with respect to other activities of the trust. This requirement, however, does not prevent others from also deriving some benefit from a transaction with the trust. For example, a sale of securities at a profit benefits the seller, but if the purchase price is not in excess of the fair market value of the securities at the time of sale and the applicable investment requisites have been met, the investment is consistent with the exclusive-benefit-of-employees requirement. These requisites are: (1) the cost must not exceed fair market value at time of purchase; (2) a fair return commensurate with the prevailing rate must be provided; (3) sufficient liquidity must be maintained to permit distributions in accordance with the terms of the plan, and (4) the safeguards and diversity that a prudent investor would adhere to must be present. However, the requirement set forth in item (2) with respect to a fair return is not applicable to obligatory investments in employer securities in the case of a stock bonus plan. See Rev. Rul. 69-65, C.B. 1969-1, 114. Upon compliance with these requisites, if the trust instrument and local law permit investments in the stock or securities of the employer, such investments are not deemed to be inconsistent with the purposes of section 401(a) of the Code.

In view of the foregoing, it is concluded that the trustee in this case must notify the District Director of Internal Revenue of the investment of trust funds in the stock and securities of the employer so that a determination may be made whether the trust serves any purpose other than constituting a plan for the exclusive benefit of employees. This notification is to be made as part of the annual information return, Form 990-P, unless an advance determination letter is requested. If an advance determination letter is requested, the notification is to be made as part of the request. The notification is to include the information called for under the appropriate provisions of section 4 of Revenue Procedure 69-4, C.B. 1969-1, 391, and is to be certified by the accounting or other responsible officer.

The filing of the required information does not automatically render the trust part of a plan for the exclusive benefit of employees. It is merely a means of enabling the District Director to make a determination with respect thereto. Neither is such a determination, nor the absence of a disapproval of the contemplated investment, to be construed as an opinion as to whether or not the purchase of the employer's stock or securities constitutes a good investment. In such matters the trustee should be guided by the trust instrument, local law, and his own judgment as a reasonably prudent investor.

PS No. 49 is hereby superseded since the position stated therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.