Rev. Rul. 56-267

Advice has been requested whether various individual employee benefit trusts, each of which forms a part of an employer's pension or profit-sharing plan for his employees, may, solely for purposes of diversifying their investments, pool some or all of their funds in a group trust without adversely affecting their status under sections 401(a) and 501(a) of the Internal Revenue Code of 1954, and whether such a group trust will itself be entitled to exemption from tax under the 1954 Code.

Many trusts, which individually form a part of an employer's pension of profit-sharing plan for employees, are "qualified" trusts within the meaning of section 401(a) of the 1954 Code, and are exempt from tax under section 501(a) thereof, are insufficient in size to permit a satisfactory diversification in the investment of their funds. In order to provide such diversification, a number of these trusts have been and are interested in pooling some or all of their funds, solely for investment purposes, in a group trust. A group trust or investment trust is to be created which, by incorporation, becomes a part of the pension or profit-sharing plan of each employer whose "qualified" trust invests funds in the group trust. The group trust declaration of trust provides (1) that no trust may become a participant therein without the consent of the trustee of the group trust, (2) that only funds received from a participating trust under an employer's plan which incorporates the group trust as a part thereof may be accepted and invested pursuant to the provisions of the declaration of trust, and (3) that only those trusts, which are "qualified" trusts within the meaning of section 401(a) and are exempt from tax under section 501(a) of the 1954 Code, shall be eligible to participate in the group trust.

The group trust declaration contains a provision prohibiting assignment by a participating trust of all or any part of its interest in the group trust, and also contains an affirmative provision satisfying the requirements of section 401(a)(2) of the 1954 Code. See section 39.165-2 of Regulations 118, made applicable herein by Treasury Decision 6091, C. B. 1954-2, 47.

The trustee of a participating trust may, from time to time, transfer to the group trust all or such part of the funds of the participating trust as such trustee may deem advisable. Such funds shall be commingled, for investment purposes, with the funds received from other participating trusts. Such trustee also may, from time to time, withdraw from the group trust all or such part of its interest in the group trust assets as the trustee may deem advisable.

Section 501(a) of the Code provides, in effect, that a trust described in section 401(a) shall be exempt from tax.

Section 401 of the Code provides, in part, as follows:

"(a) REQUIREMENTS FOR QUALIFICATION.--A trust created or organized in the United States and forming a part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section--

(1) if contributions are made to the trust by such employer, or employees, or both, or by another employer who is entitled to deduct his contributions under section 404(a)(3)(B) (relating to deduction for contributions to profit-sharing and stock bonus plans), for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan;

(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries;

(3) if the trust, or two or more trusts, or the trust or trusts and annuity plan or plans are designated by the employer as constituting parts of a plan intended to qualify under this subsection * * *."

By making contributions to a participating trust, which provides that from time to time amounts so contributed may be transferred to and from a specified group trust, the employer and any participating employees, in effect, make contributions to the group trust for purposes of section 401(a)(1) of the Code. The group trust is declared to be a part of the plan and the trust instruments creating both the participating and group trusts provide that amounts shall be transferred from one trust to the other at the direction of the trustee of the participating trust.

Accordingly, it is held that the status of individual trusts, which form a part of an employer's pension or profit-sharing plan for employees, are "qualified" trusts within the meaning of section 401(a) of the Internal Revenue Code of 1954, and are exempt from tax under section 501(a) of that Code, will not be affected by the pooling of their funds in a group trust created solely for the purpose of providing a satisfactory diversification of investments for the individual participating trusts, provided (1) that such group trust is itself adopted as a part of each employer's pension or profit-sharing plan, (2) that the group trust instrument expressly limits participation to pension and profit-sharing trusts which are exempt under section 501(a) by reason of qualifying under section 401(a) of the 1954 Code, (3) that the group trust instrument prohibits that part of its corpus or income which equitably belongs to any participating trust from being used for or diverted to any purposes other than for the exclusive benefit of the employees or their beneficiaries who are entitled to benefits under such participating trust, (4) that the group trust instrument prohibits assignment by a participating trust of any part of its equity or interest in the group trust, and (5) that the group trust is created or organized in the United States and is maintained at all times as a domestic trust in the United States. Under such circumstances, the group trust will also constitute a qualified trust under section 401(a) of the 1954 Code and will be exempt from tax under section 501(a) of that Code.