Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 73-17

1973-1 C.B. 197

IRS Headnote

Distributions from an exempt employees' trust to common-law employees of a partnership terminated under local law do not qualify as distributions on account of separation from service by employees who continued in the same positions for a successor partnership.

Full Text

Rev. Rul. 73-17

Advice has been requested whether, under the circumstances described below, distributions from an exempt employees' trust established by a partnership may be treated as distributions on account of separation from the service within the meaning of section 402(a)(2) of the Internal Revenue Code of 1954.

A owned a 75 percent interest in the capital and profits of a partnership which established an exempt employees' profit-sharing trust for the benefit of its common-law employees. B owned the remaining 25 percent interest.

Upon the death of A, the employees' profit-sharing trust was terminated and a distribution was made of the total amounts standing to the credit of the employee participants. A's successors in interest formed a new partnership with B. The business was continued by the new partnership and the employees who had received a distribution from the profit-sharing trust continued to work in the same positions.

The partnership comprised of A and B was not based upon a written agreement and there was no arrangement concerning the continuation of the business after the death of either partner. Under the law of the state in which the partnership was located, the death of a partner results in the dissolution of the partnership unless the partnership agreement provides otherwise.

Subject to the limitations contained in section 402(a)(5) of the Code, section 402(a)(2) provides that if the total distributions payable to an employee from an exempt employees' trust are paid to him within one taxable year on account of his separation from the service, the distribution shall be treated as a long-term capital gain, to the extent that it exceeds the amounts contributed by the employee. The portion of such a distribution that is denied long-term capital gain treatment by section 402(a)(5) of the Code is entitled to the income averaging treatment provided by section 72(n).

Revenue Ruling 72-440, 1972-2 C.B. 225, states that an employee is separated from the service of his employer, for purposes of section 402(a)(2) of the Code, only on his death, retirement, resignation, or discharge, and not when he continues on the same job for a different employer as a result of the liquidation, merger, consolidation, etc. of his former employer. Although Revenue Ruling 72-440 is concerned primarily with when an employee has separated from the service of a corporate employer, for purposes of section 402(a)(2) of the Code, the reasoning involved is equally applicable to an unincorporated employer.

Therefore, neither the change in control of the partnership nor the fact that this change caused a dissolution of the partnership for purposes of local law resulted in the separation from the service, since the employees continued on the same job for the new partnership.

Accordingly, it is held that the distributions from the exempt employees' trust may not be treated as distributions on account of separation from the service within the meaning of section 402(a)(2) of the Code.