Rev. Rul. 59-29

Advice has been requested whether deposits of trust funds of a bank's employees' profit-sharing trust, in a checking account with the employer-grantor, will constitute a "prohibited transaction" within the meaning of section 503(c) of the Internal Revenue Code of 1954.

A bank established a profit-sharing trust for the benefit of its employees which has been held to meet the requirements of section 401(a) of the Code for exemption from Federal income tax under section 501(a). Funds of the trust have been placed on deposit, in an amount in excess of the amount for which insurance is provided by the Federal Deposit Insurance Corporation, in a checking account with the employer-grantor bank.

Under the provisions of section 503(a)(1) of the Code, a trust described in section 401(a) shall not be exempt from taxation under section 501(a) "if it has engaged in a prohibited transaction after March 1, 1954." "Prohibited transaction" is defined, in subparagraphs (1) and (6), respectively, of sections 503(c) of the Code, as a transaction in which such a trust lends any part of its income or corpus to its creator without the receipt of adequate security and a reasonable rate of interest, or which results in a substantial diversion of its income or corpus to the creator of the trust. In addition, an employees' trust is not exempt under section 401(a) unless "it is impossible * * * for any part of the corpus or income to be * * * used for, or diverted to, purposes other than for the exclusive benefit of his [the employer's] employees or their beneficiaries."

However, section 503, as made applicable to pension, profit-sharing, and stock bonus trusts which are qualified under section 401(a), was not directed against the maintenance of funds on deposit in an ordinary checking account, in the bank creating the trust, during the interim period period to reasonably prompt disbursement for investment or other purposes which are themselves consistent with exemption of the trust concerned.

Accordingly, it is held that the deposit of funds of an exempt employees' trust, in a checking account with the employer-grantor bank, will not constitute a "prohibited transaction" within the purview of section 503(c)(1) of the Code. Nor will the deposit of funds in such a checking account, during the interim described above, be held to violate the provisions of section 401(a) or section 503(c)(6) of the Code.