Rev. Rul. 70-125

Advice has been requested concerning the requirements for the allocation and valuation of trust funds under a qualified profit-sharing plan.

An employer established a profit-sharing plan intended to qualify under section 401(a) of the Internal Revenue Code of 1954. The plan contains a definite formula for crediting the employer's contributions to the accounts of the employee-participants. However, there is no specific provision for allocating trust earnings to participants' accounts or for the periodic valuation of trust investments.

Section 1.401-1(b)(1)(ii) of the Income Tax Regulations states that a profit-sharing plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan. Section 1.401-1(b)(1)(iii) of the regulations states that, for purposes of allocating and distributing the stock of the employer, a stock bonus plan is subject to the same requirements as a profit-sharing plan. A pension plan of the money purchase type provides for fixed contributions that are not geared to profits. See section 1.401-1(b)(1)(i) of the regulations. Contributions under such a pension plan are accumulated under the plan and, along with the earnings thereon, distributed to participants in accordance with the terms of the plan.

Since qualified profit-sharing, stock bonus, and trusteed pension plans of the money purchase type are required to provide for distributions in accordance with amounts stated or ascertainable and credited to participants, all funds under such a trust must be allocated to participants in accordance with a definite formula. Thus, no reserves are to be established by withholding allocations from participants. If suspense accounts are maintained, provision is to be made for ascertaining the respective shares of participants in such accounts and such shares are to be included in the distribution.

Furthermore, if the amounts to be allocated or distributed to a particular participant are to be ascertainable, such plans must provide for a valuation of investments held by the trust, at least once a year, on a specified inventory date, in accordance with a method consistently followed and uniformly applied. The fair market value on the inventory date is to be used for this purpose. The respective accounts of participants are to be adjusted in accordance with the valuation. If, for example, as a result of a valuation on the inventory date, a participant's account is to be increased by one-tenth of one percent of the increase in the value of the total trust assets, and such increase is $50,000, his account is to be increased by $50.

Under the plan in this case, trust earnings, unrealized changes in the value of trust investments, and losses realized on the sale of trust assets, may be allocated to participants accounts at infrequent or irregular intervals and different valuation methods may be used for different participants or for different trust investments. Therefore, the plan does not provide a definite formula for allocating and distributing the funds, as required by the regulations.

Accordingly, it is held that this plan does not qualify under section 401(a) of the Code.