Rev. Rul. 71-541

Advice has been requested concerning the effect of the transfer of funds from one employees' profit-sharing trust to another under the circumstances described below. The question has also been raised whether the transfer would be a premature distribution within the meaning of section 401(d) of the Internal Revenue Code of 1954.

A partnership established a profit-sharing plan that met the requirements of section 401 of the Code. The plan covered all employees, including owner-employees, with three years of service. The partnership was subsequently dissolved and a new corporation was established to continue the business of the partnership. The successor corporation established a profit-sharing plan similar to the plan operated by the partnership. The partnership's profit-sharing plan was terminated and the funds in the related exempt trust were transferred to the trust forming part of the plan established by the corporation.

The corporation's profit-sharing plan and the related trust instrument provide that (1) the trustee shall always be a bank, (2) separate accounts shall be maintained for funds transferred on behalf of each former owner-employee, (3) no payment of benefits may be made from such an account before the former owner-employee attains age 591/2 or becomes disabled, and (4) the distribution of a former owner-employee's interest in such an account must begin prior to the end of the taxable year in which he attains the age of 701/2 years. The plan and trust satisfy all other requirements of section 401 of the Code.

Section 401(d) of the Code and section 1.401-12 of the Income Tax Regulations provide that a trust forming part of a pension or profit-sharing plan that provides contributions or benefits for employees, some or all of whom are owner-employees, shall constitute a qualified trust only if, among other conditions, it provides (1) that the trustee must be a bank as defined in section 581 of the Code, (2) that distributions may not be made on behalf of any owner-employee before he attains age 591/2 or becomes disabled, and (3) that the distribution of an owner-employee's entire interest under the plan must begin prior to the end of the taxable year in which he attains the age of 701/2.

Section 1.401-10(a)(2) provides that a self-employed individual is covered under a qualified plan during the period beginning with the date a contribution is first made by or for him under the qualified plan and ending when there are no longer funds under the plan which can be used to provide him or his beneficiaries with benefits. Thus, the corporation's plan is considered as covering owner-employees in this case as long as the funds contributed by or for owner-employees are held by the trust. See also section 72(m) of the Code which provides different tax treatment for amounts contributed for an individual while he is an owner-employee than is provided, for the same individual, for contributions made while he is not an owner-employee. It follows that funds contributed on behalf of owner-employee must remain subject to the same restrictions they would have had if they had remained in the trust established by the partnership.

Accordingly, it is held that the qualification of the corporation's plan was not adversely affected by the transfer of funds from the trust established by the predecessor partnership since the corporation's plan contains the restrictions required by section 401(d) of the Code and section 1.401-12 of the regulations.

Revenue Ruling 68-160, C.B. 1968-1, 167, holds that the transfer of an annuity contract from a qualified trust to a qualified custodial account was not a premature distribution for purposes of section 401(d) of the Code. The reasoning in Revenue Ruling 68-160 with respect to the transfer of an annuity contract is equally applicable to a transfer of funds from one qualified trust to another qualified trust even though the first was established by a partnership and the second trust was established by the partnership's corporate successor.

Accordingly, it is further held that the transfer of funds in this case was not a premature distribution within the meaning of section 401(d) of the Code.