Internal Revenue Service
Revenue Ruling
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smRev. Rul. 63-10
1963-1 C.B. 90
Sec. 402
Sec. 404
IRS Headnote
A qualified employees' profit-sharing trust was denied exemption for the taxable year 1961 but the exemption was restored for 1962 and subsequent years. The employer, using the accrual method of accounting, made a contribution to the trust for the year 1960 on January 15, 1961. A contribution was also made on January 15, 1962, purportedly for the year 1961. The participants possessed a 50-percent nonforfeitable interest in the contributions at the time made. Held , the employer is entitled to deductions with respect to the contributions made on January 15, 1961, and January 15, 1962, within the limits of section 404(a)(3) of the Internal Revenue Code of 1954 for the years 1960 and 1962, respectively, Held further , no part of the contributions is taxable to the employee-participants until actually distributed or made available to them.
Full Text
Rev. Rul. 63-10
Advice has been requested concerning the deductibility of contributions to a profit-sharing trust and the taxability of such contributions to employee-participants under the circumstances described below.
A qualified profit-sharing trust (a trust meeting the requirements of section 401(a) of the Internal Revenue Code of 1954 and exempt under section 501(a)) was denied exemption from income tax for years beginning January 1, 1961, because it had engaged in a `prohibited transaction,' as defined in section 503(c) of the Code. The trust made application for restoration of its exempt status pursuant to the provisions of section 503(d) of the Code and exemption was restored for years beginning January 1, 1962. The profit-sharing plan contained a definite predetermined formula for computing the amount of the profits to be shared with the employees.
On January 15, 1961, the employer made a contribution to the trust for the year 1960. Fifty percent of this contribution was nonforfeitable to the employee-participants under the provisions of the plan. On January 15, 1962, the employer made a contribution to the trust purportedly for the year 1961. Under the provisions of the plan, 50 percent of this contribution was also nonforfeitable to the employee-participants. The employer files its income tax returns using the accrual method of accounting.
The specific questions presented are (1) for what years and in what amounts the contributions are deductible by the employer and (2) for what years and in what amounts the contributions are taxable to employee-participants.
Section 404(a)(3) of the Code allows an employer to deduct, in the taxable year when paid and within specified limitations, the amount of contributions made to a stock bonus or profit-sharing trust if such taxable year ends within or with a taxable year of the trust with respect to which the trust is exempt under section 501(a).
Section 404(a)(5) of the Code applies to employee plans which fail to meet the requirements of section 401(a) and provides for a deduction of contributions under such plans in the taxable year when paid if the employees' rights to such contribution are nonforfeitable at the time the contribution is paid.
Section 404(a)(6) of the Code provides, in part, that a taxpayer on the accrual basis will be considered to have made a payment of a contribution to a qualified stock bonus or profit-sharing trust within the taxable year of accrual, if the payment is made not later than the time prescribed by law for filing the return for that taxable year, including any extension of the filing date.
Section 402(a) of the Code provides, insofar as material here, that the amount actually distributed or made available to any distributee by any 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.
Section 402(b) of the Code provides that contributions to an employees' trust by an employer during a taxable year for which the trust does not qualify as an exempt trust will be taxable to the employee in that year if the employee's rights are nonforfeitable at the time the contributions are made.
In the instant case, the profit-sharing trust was in an exempt status during the year 1960. Under the provisions of section 404(a)(6) of the Code, the contribution made by the employer for that year is deemed to have been made on the last day of the year 1960, since it was paid to the trust on January 15, 1961, which was not later than the time prescribed by law for filing income tax returns for 1960.
Accordingly, it is held that the contribution is allowable as a deduction to the employer for the year 1960 to the extent and in the manner provided by section 404(a)(3) of the Code. Under the provisions of section 402(a) of the Code, such contribution will not be taxable to the distributees until actually distributed or made available to them.
For the year 1961, however, the trust had lost its exempt status. Consequently, the provisions of section 404(a)(6) of the Code are not applicable to contributions on account of such year. Instead, section 404(a)(5) of the Code governs the deductibility of contributions to the trust for that year. In accordance with the provisions of that section, contributions are deductible in the taxable year when paid if the employees' rights are nonforfeitable at the time the contribution is paid. Since a payment was not made by the employer in the taxable year 1961 , no portion of the contribution paid on January 15, 1962, is deductible for the year 1961. It follows that no portion of such payment is taxable to the employee-participants in 1961 under section 402(b) of the Code.
Inasmuch as the trust regained its exempt status in 1962, the contribution made on January 15, 1962, is deductible by the employer for that year, within the limits of section 404(a)(3) of the Code, to the extent that such payment is made from accumulated or current profits. Also, under section 402(a) of the Code, no part of the contribution is taxable to the distributees until actually distributed or made available to them.