Rev. Rul. 83-57

1983-1 C.B. 92.

                       Internal Revenue Service
                                 Revenue Ruling

     LUMP SUM DISTRIBUTION;  TRUST FUNDS IMPOUNDED;  RELEASED IN SUBSEQUENT
                                      YEAR

                            Published: April 4, 1983

26 CFR 1.402(a)-1: Taxability of beneficiary under a trust which meets the requirements of section 401(a)

  Lump sum distribution;  trust funds impounded;  released in subsequent year.  Distribution from a profit-sharing plan of the total amount credited to an employee's account upon the employee's separation from service is a lump sum distribution within the meaning of section 402(e)(4)(A) of the Code even though an additional distribution representing the employee's portion of released court-impounded funds may be made in a subsequent year. Rev. Rul. 67-164 superseded.

  The purpose of this revenue ruling is to restate, under current law, the position in Rev. Rul. 67-164, 1967-1 C.B. 88.

  The issue presented is whether a distribution to a participant in a qualified employees' trust which does not include certain amounts withheld under court order may constitute a lump sum distribution within the meaning of section 402(e)(4)(A) of the Internal Revenue Code of 1954.

  A corporation established a trust forming part of a profit-sharing plan for its salaried employees.  The plan meets the requirements of section 401(a) of the Code, and the trust is exempt from tax under section 501(a).  The corporation found it necessary to terminate the employment of some of its employees.  A number of these employees had not been participants in the plan for a sufficient number of years to qualify for distributions under the plan upon termination of employment.  Before any distributions were made, a group of the latter employees brought suit against the corporation and the trustee seeking adjudication of their accounts. The court issued a restraining order requiring that the trustee retain a sufficient sum to pay the claims of the plaintiffs in the event that the court should rule in their favor.  The order also provided that the trustee could make distributions out of the balance of the fund, over and above the amount impounded, to persons other than the plaintiffs who might be entitled thereto under the provisions of the plan. Several of these persons, upon separation from the service of their employer, did request that the balance to their credit, at the date of separation, be distributed to them.

  Except for the court order, the funds comprising the sum impounded would have been forfeited by the plaintiffs and reallocated to the accounts of the other participants in the plan. An eventual court determination adverse to the plaintiffs, freeing the impounded funds, would require an allocation and a second distribution of such funds to employees who had previously received a distribution due to separation from service.

  Section 402(a)(1) of the Code provides generally that the amount actually distributed 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 the distributee in the year in which so distributed, under section 72 (relating to annuities).

  A lump-sum distribution within the meaning of section 402(e)(4)(A) of the Code is given special tax treatment.  A distribution will be a lump sum distribution within the meaning of section 402(e)(4)(A) if the balance to the credit of an employee becomes payable upon the occurrence of certain events and is distributed or paid within one taxable year of the recipient.  One of the events is an employee's separation from service.

  In this example, the balance to the credit of the employee which becomes payable to him or her is the total amount credited to the employee's account and does not include any portion of the impounded funds prevented by the court from being payable to the employee at the time of his or her separation from the service of the employer.

  Accordingly, distribution of such balance upon the employee's separation from the service, provided it is paid within one taxable year of the recipient, constitutes a lump sum distribution within the meaning of section 402(e)(4)(A) of the Code.

  Any additional distributions representing the employee's portion of court- impounded funds released in a subsequent year do not constitute a lump sum distribution within the meaning of section 402(e)(4)(A) of the Code, because the portion would not be payable within the same taxable year as the employee's original distribution.  If these additional distributions were paid in the same taxable year as the original distribution, however, they would constitute a part of the lump sum distribution.

  Rev. Rul. 67-164 is superseded because the position set forth therein is restated under current law in this revenue ruling.

Rev. Rul. 83-57, 1983-1 C.B. 92.