Rev. Rul. 79-336

The purpose of this Revenue Ruling is to update and restate Rev. Rul. 72-440, 1972-2 C.B. 225, in view of the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 1974-3 C.B. 1.

The issue presented in Rev. Rul. 72-440 is whether a distribution from an exempt employees' trust was made on account of an employee's separation from the service, within the meaning of section 402(e)(4)(A) of the Internal Revenue Code, under the circumstances described below.

X corporation maintained a noncontributory profit-sharing trust that qualified under section 401(a) of the Code and was exempt from tax under section 501(a).

Pursuant to an agreement and plan of reorganization, Y, an unrelated corporation, acquired all of the assets and assumed all of the liabilities of X in exchange for shares of the common stock of Y. As part of the plan of reorganization, Y formed a wholly-owned subsidiary, Z corporation. Z took title to the assets and continued the business of X. Following the transfer of its assets, X, in exchange for all of its own stock, distributed to its shareholders the stock of Y that it received in the exchange with Y.

Incident to the reorganization, the profit-sharing plan of X was amended to provide distributions to certain employees that would represent their entire interest in the plan within one taxable year on a fixed date following the reorganization.

Prior to the reorganization, A, an employee of X, age 45 and not disabled, participated in X's profit-sharing plan. After the reorganization, A became an employee of Z.

A served in the same capacity and under the same supervisors, both before and after the reorganization. Under the terms of the plan, as amended, A received the entire interest to A's credit under the plan within one taxable year.

Section 402(a)(1) of the Code provides, in general, that the amount distributed or made available to any distributee by any employees' trust described in section 401(a), which is exempt from tax under section 501(a), shall be taxable to the distributee in the year in which so distributed or made available, under section 72 (relating to annuities).

However, a lump-sum distribution, within the meaning of section 402(e)(4)(A) of the Code, is accorded special tax treatment. Under section 402(e)(4)(A) a lump-sum distribution is a distribution or payment of the balance to the credit of an employee made within one taxable year of the recipient that becomes payable on account of certain events. One of the events is an employee's separation from the service of the employer.

An employee will be considered separated from the service within the meaning of section 402(e)(4)(A) of the Code, only upon the employee's death, retirement, resignation or discharge, and not when the employee continues on the same job for a different employer as a result of the liquidation, merger or consolidation, etc., of the former employer. See, United States v. Haggart, et ux., 410 F.2d 449 (8th Cir. 1969).

The employee in this case did not die, retire, or resign and was not discharged from employment. On the contrary, the employee remained on the job for the new employer after the reorganization.

Accordingly, the distribution from the exempt employees' trust was not made on account of the employee's separation from the service within the meaning of section 402(e)(4)(A) of the Code.

Although the distribution was not a lump-sum distribution, it may be eligible for tax-free rollover treatment, provided the requirements of sections 402(a)(5) and 402(a)(6)(B) of the Code, to the extent applicable, are met.

Rev. Rul. 72-440 is superseded because the position stated therein is restated under current law in this Revenue Ruling.