Rev. Rul. 71-93

Advice has been requested whether, under the circumstances described below, the operation of a profit-sharing plan resulted in the discrimination prohibited by section 401(a)(4) of the Internal Revenue Code of 1954.

A corporation established a profit-sharing plan that permits each participant to direct the trustee to invest the amount vested in his account in stock of the employer-corporation. The plan requires the trustee to comply with such a request if the stock is available.

At the time the plan was established, all the stock of the employer corporation was owned by one individual. Since the plan was established, that individual has made the stock available to the trustee only when the stock was being acquired for the accounts of officers of the corporation. No stock of the employer corporation has ever been traded on the open market or otherwise made available for purchase by the trustee on behalf of participants who are not officers, even though on several occasions such participants have requested the trustee to make purchases for their accounts.

The employer corporation has enjoyed a steady earnings growth over a period of several years.

Section 401(a)(4) of the Code provides that a plan will not qualify if contributions or benefits discriminate in favor of employees who are officers, shareholders, supervisors, or highly compensated.

Revenue Ruling 70-370, C.B. 1970-2, 84, states that where amounts to be distributed to participants under a profit-sharing trust are measured by investments that have been earmarked for their respective accounts, the trustee must invest each participant's interest proportionately unless additional provisions are included in the plan to prevent the prohibited discrimination. One acceptable provision would give all participants the right to direct the trustee to select the type of investments with respect to their individual shares.

Section 1.401-1(b)(3) of the Income Tax Regulations provides that the law is concerned not only with the form of a plan but also with its effects in operation. For example, section 1.401-4(a)(2) of the regulations provides that certain provisions will not in and of themselves be discriminatory within the meaning of section 401(a)(4) of the Code. However, this does not mean that a plan containing these provisions may not be discriminatory in actual operation.

The plan in this case is not discriminatory on its face. However, the facts show that the right to have funds invested in stock of the employer corporation has benefited only officer-participants, since the stock has been made available for their accounts only.

Accordingly, it is held that the operation of this profit-sharing plan resulted in the discrimination prohibited by section 401(a)(4) of the Code.