Rev. Rul. 71-332

Advice has been requested concerning the amount a participant in an exempt employees' profit-sharing trust must include in his gross income where he elects to withdraw part of his vested account balance under the circumstances described below.

The plan, of which the trust is a part, provides that a participant may withdraw any part of his vested account balance, prior to termination of employment, in the case of financial need but only to the extent approved by the plan's administrative committee. Any participant who desires to make such a withdrawal must make a written application to the committee. The committee has sole discretion to determine whether financial necessity exists and, if so, what portion of the participant's vested account balance may be withdrawn. The plan also provides that, in approving withdrawals, the committee is to follow a uniform and nondiscriminatory policy. All contributions made under the plan are by the employer.

An employee whose vested account balance was $3,000 made application for the withdrawal of $500 for reason of financial need. The committee subsequently approved the application for withdrawal both as to need and as to amount. However, the employee later found that he could relieve his financial need by withdrawing only $400 and only that amount was actually withdrawn.

Section 402(a) of the Code provides that the amount actually distributed or made available to any distributee by an exempt employees' trust shall be taxable to him in the year in which so distributed or made available. Revenue Ruling 55-423, C.B. 1955-1, 41, holds that a participant's interest in a qualified employees' trust is not made available to him within the purview of section 402(a) of the Code where there are substantial conditions or restrictions on his right of withdrawal.

Revenue Ruling 55-424, C.B. 1955-1, 42, holds that the amount standing to a participant's credit under an exempt employee's profit-sharing trust is not made available to him where such amount may be withdrawn only after the approval of an administrative committee in the case of proved financial necessity. However, Revenue Ruling 58-230, C.B. 1958-1, 204, holds that where a plan provides that a suspension of participation for six months will be incurred upon each withdrawal, the amount representing the difference between the amount actually withdrawn and the maximum amount permitted as a withdrawal is made available to the participant making a partial withdrawal. This is so even though the balance may later be withdrawn only by incurring another similar suspension of participation.

Although the employee in this case could have applied for withdrawal of the entire vested account balance of $3,000, he is not considered to be in constructive receipt of that amount since the requirement in the plan for substantiating financial need, obtaining approval of the administrative committee, and the acceptance of whatever terms and conditions such committee might impose, constitutes substantial restrictions or conditions on the employee's right of withdrawal. However, the $500 amount approved for withdrawal by the committee was actually the maximum amount permitted as a withdrawal in this case and, therefore, was made available to the employee.

Accordingly, it is held that the employee in this case must include $500 in gross income for the year the committee's approval was granted for the withdrawal of such amount rather than the $400 actually withdrawn by him.