Rev. Rul. 55-424

Advice has been requested whether a participant in a qualified employees' profit-sharing trust will be considered to be in receipt of income when after 10 years of participation in the trust he may elect to withdraw a stated percentage of the amount standing to his credit in the account established for a particular 10 year period only upon the approval of an administrative committee in the case of proved financial necessity.

The M company established an employees' profit-sharing plan and trust which has been held to be qualified under section 165(a) of the Internal Revenue Code of 1939 (sec. 401(a) of the 1954 Code). Administration of the plan is accomplished by an administrative committee appointed from among the participating employees. Company contributions are allocated to each participant's account on the basis of compensation and vest in the employee at the rate of 10 percent for each year of participation. Debits and credits are made to each participant's account for successive periods of 10 years.

After 10 years of participation, an employee may elect to withdraw 10 percent of the full amount standing to his credit in the account established for him for a particular 10 year period only with the express approval of the administrative committee and only after making a written request therefor. Committee approvals for withdrawal of vested amounts can only be made in the case of financial necessity which has been proved by the participant making the application. A similar election, if approved, may be made with respect to each year thereafter until the account has been exhausted. If a request is not made in a particular year, the amount may be paid in a subsequent year if requested by the participant and approved by the committee. Withdrawals may likewise be made from accounts of succeeding 10 year periods.

Section 402(a) of the 1954 Code provides that the amount distributed or made available from a trust described under section 401(a) of the Code shall be taxable to the distributee in the year in which so distributed or made available. Rev. Rul. 55-423, page 41 of this Bulletin, holds that a participant's interest in an employees' trust which meets the qualifications of section 401(a) of the 1954 Code 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 and unless and until such interest is made subject to his withdrawal or disposal. It is considered that in the instant case the requirement that withdrawals can be made only with the approval of the administrative committee and only in the case of proved financial necessity constitutes a substantial restriction upon such withdrawal.

Accordingly, it is held that where an employee after 10 years of participation in an employees' profit-sharing trust, which is qualified under section 401(a) of the 1954 Code, may elect to withdraw a stated percentage of the full amount standing to his credit in an account established for a particular 10 year period only after the approval of an administrative committee in the case of proved financial necessity, such amounts will not be deemed to be made available under section 402(a)(1) of the 1954 Code