Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-15

1972-1 C.B. 114

Sec. 72
Sec. 165
Sec. 402
Sec. 1211

IRS Headnote

No deductible loss is sustained at the time an employee receives a total distribution under a qualified plan consisting of non-employer stock having a fair market value less than the employees' contributions; Revenue Ruling 71-251 amplified.

Full Text

Rev. Rul. 72-15

Advice has been requested whether the distribution described below resulted in a loss deductible under section 165 of the Internal Revenue Code of 1954.

The funds of an exempt, contributory employees' profit-sharing trust were invested in stock of corporations other than the employer corporation. The employer went out of business and the trustee distributed each employee-participant's share of the stock investments held by the trust. The stock distributed to each participant had a fair market value that was less than the aggregate contributions of the employee. No distributions were made to the employees prior to this time.

Section 402(a)(1) of the Code provides that the amounts actually distributed or made available to any distributee by any qualified employees' trust described in section 401(a) shall be taxable to him in the year in which such amounts are actually distributed or made available, under section 72 of the Code (relating to annuities).

Subject to the limitations of section 402(a)(5), section 402(a)(2) of the Code provides that, in the case of a qualified employees' trust, 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 it exceeds the amount contributed by the employee (determined by applying section 72(f) of the Code), which employee contributions shall be reduced by any amounts theretofore distributed to him which were not includible in gross income, shall be considered a gain from the sale or exchange of a capital asset held for more than six months.

Section 165(c)(2) of the Code provides for the deduction of any loss sustained by an individual during the taxable year, not compensated for by insurance or otherwise, where such loss is incurred in any transaction entered into for profit, though not connected with a trade or business. The loss must be evidenced by closed and completed transactions, fixed by identifiable events, and actually sustained during the taxable year. See section 1.165-1(b) of the Income Tax Regulations.

Revenue Ruling 71-251, C.B. 1971-1, 129, holds that no deductible loss is sustained when an employee receives a total distribution, from an exempt employees' trust, of the employer's stock having a fair market value less than the employee's contributions. The Revenue Ruling points out that the transaction with respect to the stock is not closed and completed within the meaning of section 165 of the Code until the distributee disposes of the stock in a subsequent sale or exchange. Furthermore, since the distributee had no more than a contingent equitable title in the stock while it was held by the trustee, he did not sustain a deductible loss upon distribution of the depreciated stock. Revenue Ruling 71-251 goes on to hold that the employee's contributions should be allocated to the stock to determine his basis for purposes of determining gain or loss when the stock is subsequently sold or exchanged.

The reasoning in Revenue Ruling 71-251 is equally applicable to a distribution that consists of stock in corporations other than the employer corporation.

Accordingly, it is held that the participants in this case did not sustain a deductible loss upon the distribution of the stock by the exempt employees' trust. Gain or loss will be recognized only upon the subsequent sale or exchange of the stock.

Revenue Ruling 71-251 is hereby amplified.