Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 66-57

1966-1 C.B. 89

Sec. 402

IRS Headnote

The temporary investment of part of the funds of an exempt employees' profit-sharing trust in short-term United States Government obligations will not prevent the application of section 1.402(a)-1(b)(2)(ii)( c ) of the Income Tax Regulations in computing the cost or other basis to the trust of securities of the employer corporation.

Full Text

Rev. Rul. 66-57

The question has been raised as to whether the method of computing the net unrealized appreciation on stock of an employer corporation as provided by section 1.402(a)-1(b)(2)(ii)( c ) of the Income Tax Regulations will be affected by the temporary investment of part of the funds of an exempt employees' profit-sharing trust in short-term United States Government obligations.

A corporation established an employee's profit-sharing plan and trust which 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. Under the plan, amounts contributed to the trust are split into four separate funds for investment purposes. Each participating employee elects one of the four funds in which his share of the employer's contributions will be invested.

One such fund is invested solely in one particular type of security of the corporation which is purchased quarterly during the year rather than making all such purchases in the early part of the year immediately after receipt of the corporation's annual contribution. As a result of this investment practice a portion of the employer's contributions may not be invested for a large part of the year. The plan provides that such unused sums may be temporarily invested in obligations of the United States until securities of the corporation are subsequently purchased.

Distributions from an exempt employees' trust are taxed in accordance with the provisions of section 402(a) of the Code which provides, among other things, that the net unrealized appreciation in value of securities of the employer is excluded, in certain cases, from the computation of the amount taxable as a result of a distribution.

In the determination of the amount of net unrealized appreciation in securities of the employer corporation, section 1.402(a)-1(b)(2)(ii)( c ) of the regulation provides that if the trust fund, or a specified portion thereof, is invested exclusively in one particular type of security of the employer corporation, and if during the period the distributee participated in the plan none of such securities has been sold except for the purpose of paying benefits under the trust or for the purpose of obtaining funds with which to exercise rights which have accrued to the trust, the cost or other basis to the trust of all securities distributed to such distributee shall be the total amount credited to the account of such distributee (or such portion thereof as was available for investment in such securities) reduced by the amount available for investment but uninvested on the date of distribution.

This method of determining the cost or other basis of the employer securities is a simplified process whereby the cost is merely the total amount credited to a participant's account less any amounts credited but uninvested as the date of distribution. To maintain this simplicity it is necessary that investments be limited to one particular type of employer security. However, this limitation does not mean that uninvested funds may not be used to earn interest, such as is paid on short-term Government obligations, during the period the funds are held pending quarterly purchases of employer securities.

Accordingly, it is held that the temporary investment of part of the funds of an exempt employees' trust in short-term United States Government obligations will not preclude the use of the method provided by section 1.402(a)-1(b)(2)(ii)( c ) of the regulations, for computing the cost basis of employer stock in determining the net unrealized appreciation on such stock distributed by the trust.

Any interest earned on such temporary investments must be credited to the participants' accounts in the trust and must be taken into consideration in determining the amount of funds available for investment.