Rev. Rul. 58-97

Advice has been requested whether a distribution from a trust forming part of a qualified employees' profit-sharing plan may be considered as a distribution on account of separation from service within the meaning of section 402(a)(2) of the Internal Revenue Code of 1954 where, incident to a plan of complete liquidation, the assets used in carrying on the business of one of two divisions of a corporation are sold to another corporation, the profit-sharing plan and trust are continued in operation by the seller but a total distribution is made to those employees who go over to the purchasing corporation.

A corporation conducted two businesses by means of separate divisions. Incident to a plan of complete liquidation, the corporation sold the property and assets of one division to a separate company. Practically all of the employees of the division, the property and assets of which were sold, were taken over by the purchasing corporation. A total distribution was made of the amounts standing to the credit of the former employees of said division under the employees' profit-sharing trust established by the corporation. The trust has been held as qualifying under section 401(a) of the Code and to be exempt under section 501(a).

The selling corporation did not control, nor was it controlled by, the purchasing corporation. None of the persons who were stockholders of the selling corporation are officers or directors of the purchasing corporation and none of the stockholders of the latter are officers or directors of the selling corporation. The selling corporation will continue to exist under State law for the period required to pay its debt, wind up its affairs, and distribute the remaining assets. The profit-sharing trust will not be terminated but is intended to be continued by the successor to the selling corporation, when its liquidation has been completed.

Section 402(a)(2) of the Code provides, in part, that in the case of an employees' trust described in section 401(a), which is exempt from tax under section 501(a) of the Code, if the total distributions payable with respect to any employee are paid to the distributee within one taxable year of the distributee on account of the employee's death or other separation from service, the amount of such distribution, to the extent exceeding the amounts contributed by the employee, shall be considered a long-term capital gain.

Accordingly, in line with the position of the Service as stated in Revenue Rulings 58-94 and 58-95, pp. 194 and 197, it is held that where, incident to a plan of complete liquidation, the assets used in carrying on the business of one of two divisions of a corporation are sold to another corporation and the employees' qualified profit-sharing plan and trust are continued in effect by the seller, a total distribution of the amount standing to the credit of those employees who go over to the purchasing corporation may be considered as having been made on account of separation from the service and, therefore, taxable as a long-term capital gain under section 402(a)(2) of the Code, to the extent that it exceeds the amount contributed by the employee.