Rev. Rul. 81-141

The purpose of this revenue ruling is to restate the position in Rev. Rul. 58-99, 1958-1 C.B. 202, in view of enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.

The issue in Rev. Rul. 58-99 is whether a separation from service occurred under the circumstances described below.

The employees of S Corporation, a subsidiary of P Corporation, were participants in a noncontributory profit-sharing plan established by the two corporations. The plan was qualified under section 401(a) of the Internal Revenue Code. Control of S Corporation was obtained by other interests under which it continued to operate as a separate taxable entity. The plan was at that time discontinued as to employees of the S Corporation. The total amount standing to the credit of each S Corporation employee was distributed in a single cash payment to those employees. B remained an employee of S Corporation subsequent to the separation of the two companies and throughout the taxable year during which the plan distribution took place.

Section 402(a)(1) of the Code provides that the amount distributed or made available to any distributee by an 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. A distribution may be treated as a lump sum distribution within the meaning of section 402(e)(4)(A) of the Code only if the balance to the credit of an employee is paid or distributed from the plan within one taxable year of the recipient upon the occurrence of certain requisite events. One of the events triggering lump sum distribution tax treatment is an employee's separation from the service of an employer.

Rev. Rul. 79-336, 1979-2 C.B. 187, provides that an employee will be considered separated from the service within the meaning of section 402(e)(4)(A)(iii) of the Code only upon the employee's death, retirement, resignation, or discharge. Merely changing the form or transferring ownership of an employer will not give rise to a separation from the service.

Employee B did not retire or resign, and was not discharged from employment. Rather, B remained an employee of Corporation S after the change in ownership.

Accordingly, the distribution from the plan in this case was not on account of separation from the service of the employer, within the meaning of section 402(e)(4)(A)(iii) of the Code.

However, the distribution may be eligible for tax-free rollover treatment provided the specific requirements of sections 402(a)(5) and (6) of the Code are met.

Rev. Rul. 58-99 is superseded because the position therein is restated under current law in this revenue ruling.