Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-99

1972-1 C.B. 115

Sec. 116
Sec. 402

IRS Headnote

Dividends paid on common stock allocated to an employee's profit-sharing trust account and included in a total distribution to the employee upon separation from employment do not qualify for the dividend exclusion.

Full Text

Rev. Rul. 72-99

Advice has been requested whether a participant under an exempt employees' profit-sharing trust is entitled to a dividend exclusion, under section 116 of the Internal Revenue Code of 1954, with respect to dividends paid to the trustee and distributed to the participant under the circumstances described below.

Pursuant to the terms of a profit-sharing plan that meets the requirements of section 401(a) of the Code, ten shares of common stock in the employer corporation were allocated to an employee's account.

The employee was separated from the service of his employer in 1969 and, upon his separation, received a total distribution of his entire interest from the exempt trust forming part of the plan. The distribution included the ten shares of stock in the employer corporation and an amount equal to the current cash dividend of $2.00 per share that the corporation paid to the trustee on that stock.

Section 402(a) of the Code provides that amounts distributed or made available to any distributee by an exempt employees' trust are taxable to the distributee in the year in which so distributed or made available, under the provisions of section 72 of the Code (relating to annuities).

Section 116 of the Code provides that, with certain exceptions, gross income does not include amounts received by an individual as dividends from domestic corporations to the extent that the dividends do not exceed $100.

Sections 72 and 402(a) of the Code specify the Federal income tax treatment to be accorded to a distribution from an exempt employees' trust. The fact that part of the distribution is derived from dividends, or any other specific type of income, has no bearing on the treatment of the distribution for purposes of those sections. The cash dividends in this case became part of the trust assets when they were paid to the trustee and as such lost their identity as dividends.

Accordingly, it is held that the cash distribution in this case is a distribution from a trust taxable in accordance with the provisions of section 402 of the Code and does not qualify for the dividend exclusion for purposes of section 116(a).

For a similar result, see Revenue Ruling 55-61, C.B. 1955-1, 40, which holds that although a distribution from an exempt employees' trust is made from funds received by the trust as interest on tax-free securities, such distribution, when received or made available, is taxable income to the distributee in the manner and to the extent provided by section 402(a) of the Code.