Rev. Rul. 58-230

Advice has been requested whether a participant in an employees' profit-sharing plan is held to be in receipt of the total amount he could withdraw from the trust under the plan, in those cases where he actually withdraws only a portion of such amounts, whereupon the balance thereof is available only by incurring an additional suspension from the plan.

An employees' profit-sharing plan provides for employer contributions out of current or accumulated earnings or profits, pursuant to a definite formula, which are contributed monthly. The accumulated earnings and profits are substantial and, even if a loss were sustained for any year in any amount which can reasonably be anticipated, contributions could still be made out of such accumulated earnings or profits. The plan also provides that employees who have been participants for a stated length of time may make a withdrawal of the employer's contributions to the plan and earnings thereon, which have been credited to their accounts in the trust under the plan for at least two years as of the close of the preceding calendar year. When such a withdrawal is made, the participant incurs a six-months' suspension from participation under the plan, during which time no contributions are made by the employer on behalf of such employee. Withdrawals are permitted only once in every six months. A participant making a partial withdrawal of the total amount available for withdrawal is suspended for a period of six months after each such withdrawal and such suspension will not run concurrently with any other suspension incurred or required. The plan and trust have been held to meet the requirements of section 401(a) of the Internal Revenue Code of 1954 and the trust to be exempt under section 501(a) of the Code.

Section 402(a) of the Code provides that the amount actually 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 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 an employees' trust described in section 401(a) of the Code and exempt under section 501(a) 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.

Section 1.451-2 of the Income Tax Regulations states that income, although not actually reduced to a taxpayer's possession, is constructively received by him in the taxable year during which it is credited to his account or set apart for him so that he may draw upon it at any them. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.

Accordingly, it is held that, under an employees' profit-sharing plan and trust, where participants of a stated length of time are permitted to make a withdrawal of employer contributions to the trust and earnings thereon, which have been credited to their accounts for at least two years, thereby incurring a suspension of participation for a specified period during which no contributions are made by the employer on behalf of such employees, such suspension represents a substantial restriction or limitation, the amounts which are permitted to be withdrawn are not `made available' to the employees, and such employees will not be taxable until a withdrwal is actually made.

It is further held, however, that the act of withdrawing a portion of the trust funds constitutes an exercise of dominion and control over the entire amount which could have been withdrawn at the same time without any additional penalty. Thus, as to the difference between the maximum amount permitted as a withdrawal and the amount actually withdrawn, there is no substantial restriction or limitation on the participant's right to receive the amount representing such difference, even though the balance may be later withdrawn only by incurring another similar suspension of participation. Accordingly, such difference is considered to be made available at the time of any withdrawal.