Rev. Rul. 63-46

Advice has been requested (1) whether a pension plan established for the benefit of employees, but funded by the transfer to the plan of the corpus of a trust fund established by a third party, rather than by the employer, or employees, or both, will constitute a qualified plan under section 401(a) of the Internal Revenue Code of 1954, and (2) as to the method to be used in determining the basis in the hands of the pension trust of the shares of stock constituting the corpus transferred to it by the fund.

A former director of a bank created a trust fund (hereinafter referred to as the fund) to which he transferred certain shares of stock (other than stock of the employer bank), naming the bank as trustee. The instrument creating the fund provided that the transfer of stock was inspired by the donor's desire to provide a fund, both as to principal and income, which would be available for use by the bank's board of directors for vacation and pension purposes for employees of the bank. From the inception of the fund, the bank used the income for such benefits as vacations, recreation, banking instruction, and various types of insurance for the employees.

When the fund had grown considerably, the trustees decided that the best possible use for the fund would be to dedicate both corpus and income to providing pension benefits for the bank's employees. For this purpose, it created a pension plan which was intended to meet the requirements of section 401(a) of the Code.

The prior service liability of the pension plan is funded, in whole or in part, by the transfer to the plan of a portion of the corpus of the fund. The current service liability is funded by earnings of the balance of the corpus of the fund, supplemented, when necessary, by contributions from the bank.

Section 401(a)(1) of the Code provides that a trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust if contributions are made to the trust by such employer, or employees, or both, or by another employer who is entitled to deduct his contributions under section 404(a)(3)(B) (relating to deduction for contributions to profit-sharing and stock bonus plans), for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust, in accordance with the plan.

The instant pension plan is funded largely by the transfer to the trust of the shares of stock constituting the corpus of the fund created by a third party, rather than by the `employer, or employees, or both,' as provided in section 401(a)(1) of the Code. This section of the Code does not require, however, that contributions be made only by the employer or by the employees.

The pension plan established in the instant case for the benefit of the employees will qualify under section 401(a) of the Code, if it otherwise meets all requirements for such qualification. This conclusion will not be altered by the fact that the past service liability is funded in whole or in part by the transfer to the pension trust of a portion of the corpus of the fund and that the current service cost is funded by the earnings of the balance of the corpus of the fund, supplemented by contributions from the employer when necessary, provided such funding to the trust is done on a uniform basis on behalf of all participants. However, if funding is made on behalf of certain individual participants, as distinguished from `on a uniform basis on behalf of all participants,' the trust which forms a part of the plan would not meet the requirements of section 401(a) of the Code.

In determining the basis of the stock in the hands of the pension trust, for the purpose of determining gain or loss on the sale or exchange of such assets by the pension trust, section 1015(a) of the Code is controlling. That section provides that the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that, if such basis is greater than the fair market value of the property at the time of the gift, then, for purposes of determining loss, the basis shall be such fair market value. However, the basis in the hands of the trust for gain or loss on the sale or exchange of pension trust assets will have no tax significance unless the plan fails to meet the requirements of section 401(a) of the Code; and consequently, in such a case, the trust is not entitled to exemption under section 501(a) of the Code.

The basis of the assets prescribed by section 1015(a) of the Code may not be used in determining the amount of future contributions which may be required under the pension plan. In making this determination, the fair market value of the assets, at the time of the transfer to the pension trust, may be considered to be `cost' or `book value.'

Finally, in determining the income tax consequences to the distributees under section 402 of the Code, in the event such assets are included in a distribution by the pension trust, the basis to be used will be the fair market value of the assets upon the date of receipt thereof by the distributees.