Rev. Rul. 69-65

Advice has been requested whether the investment requisite of a "fair return commensurate with the prevailing rate," set forth in Part 2(k)(1) of Revenue Ruling 65-178, C.B. 1965-2, 94, is applicable to employer's stock acquired by an employees' stock bonus trust under the circumstances described below.

An employer established a stock bonus plan and trust intended to meet the requirements for qualification under section 401(a) of the Internal Revenue Code of 1954. Employees are permitted to make voluntary contributions in amounts up to ten percent of their compensation. Employer contributions are made only in shares of stock of the employer and the amount of the employer's contribution is not dependent upon the profits of the business. The plan requires that all contributions and dividends be invested in employer stock and all distributions be made in shares of stock of the employer.

Section 401(a) of the Code provides that a trust forming part of a stock bonus plan of an employer will be considered a qualified trust if, in addition to meeting the other requirements of that section, it is maintained for the exclusive benefit of the employees and their beneficiaries.

Section 1.401-1(b)(iii) of the Income Tax Regulations provides that a stock bonus plan is a plan established and maintained by an employer to provide benefits similar to those of a profit-sharing plan, except that the contributions by the employer are not necessarily dependent upon profits and the benefits are distributable in stock of the employer company.

Part 2(k)(1) of Revenue Ruling 65-178, holds that the primary purpose of benefiting employees or their beneficiaries must be maintained with respect to the investment of trust funds as well as with respect to other activities of the trust. This requirement, however, does not prevent others from also deriving some benefit from a transaction with the trust. For example, a sale of securities at a profit benefits the seller, but if the purchase price is not in excess of the fair market value of the securities at the time of the sale and the applicable investment requisites have also been met, the investment is consistent with the exclusive benefit requirement. One of these requisites is that a fair return commensurate with the prevailing rate must be obtained.

Revenue Ruling 57-372, C.B. 1957-2, 256, indicates that there must be a fair return on investments under a qualified stock bonus plan. Since an obligatory investment in the stock of the employer corporation meets the purpose of a stock bonus plan, to give the employee-participants an interest in the ownership and growth of the employer's business, it is held that this requirement is not applicable to an obligatory investment in the stock of the employer corporation.

Since the plan in the instant case requires that all trust investments and all trust distributions will be in employer stock, the investment requisite of a "fair return commensurate with the prevailing rate" is not applicable to the employer's stock held by the trust in this case.

Revenue Ruling 57-372 is hereby modified to provide that the investment requisite of a "fair return" is not applicable to an obligatory investment made in the stock of the employer by the trustee of a stock bonus trust. Revenue Ruling 65-178 is clarified to remove therefrom the inference that the requisite of a "fair return commensurate with the prevailing rate" referred to in Part 2(k)(1) thereof is applicable to obligatory investments in stock of the employer under a stock bonus plan.