Rev. Rul. 69-231

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations the position set forth in Mimeograph 6394, C.B. 1949-1, 118. This ruling relates to whether an oral agreement is sufficient to establish a valid trust for purposes of section 401(a) of the Internal Revenue Code of 1954.

The directors of a corporation had been discussing the creation of a pension plan during the fiscal year ending June 30, 1968. At a special meeting on June 3, 1968, the directors orally agreed to put such a plan into effect as of June 30, 1968. Pursuant to this agreement contributions were deposited in a separate account prior to the end of the fiscal year. On November 19, 1968, the agreement was first reduced to writing and the formal plan and trust were executed.

Section 401(a)(2) of the Code and section 1.401-2(a)(2) of the Income Tax Regulations provide that a trust forming part of a pension, profit-sharing, or stock bonus plan shall constitute a qualified trust only if, in addition to meeting the other requirements of section 401, under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to the employees and their beneficiaries under the trust, for any part of the corpus or income to be used for, or diverted to, purposes other than for the exclusive benefit of the employees or their beneficiaries.

It is recognized that, in many jurisdictions, an oral agreement may be a sufficient basis for the establishment of a valid trust. However, section 1.401-2(a)(2) of the regulations provides that the phrase "under the trust instrument it is impossible" means that the trust instrument must definitely and affirmatively make it impossible for the nonexempt diversion or use to occur. Furthermore, section 1.401-1(c) of the regulations provides that a qualified status must be maintained throughout the entire taxable year of the trust in order for the trust to obtain any exemption for such year. Moreover, contributions are deductible within specified limits under section 404(a)(1) or (3) of the Code for a taxable year only if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 501(a).

Thus, all of the following conditions must be met prior to the end of the taxable year in order that contributions may be deductible under section 404(a)(1), (3), or (7) of the Code for such year: (1) there must be a valid trust recognized as such under the law prevailing in the jurisdiction to which the trust is subject; (2) the trust must be evidenced by an executed "instrument"; and (3) the instrument must definitely and affirmatively preclude the prohibited diversion.

The term "trust instrument," as used in section 401(a)(2) of the Code and section 1.401-2(a)(2) of the regulations, means a document or documents clearly setting forth the terms of the trust. The "instrument" evidencing the trust agreement must be in writing, containing sufficient words to make the prohibited diversion impossible, and signed before the end of the taxable year under consideration by persons competent to bind the parties. The Internal Revenue Service will not follow the decision in the case of Hill York Corporation et al. v. United States, 64-2 U.S.T.C. 9654; 14 A.F.T.R. 2d 5160, which reached a contrary conclusion.

The trust instrument is not required to be in a specified form but must be in such form that the provisions of the trust agreement can be enforced on the basis of such written evidence alone. See, however, Revenue Ruling 57-419, C.B. 1957-2, 264, which holds that a trust complete in all respects under the local law, except that it had no corpus on the last day of the taxable year, will be deemed to have been in existence and in effect on the last day of such year if the accrual basis employer paid the required corpus into the trust within the time prescribed by law for filing the return for such taxable year.

Accordingly, it is held that the oral agreement was not sufficient to establish a valid trust for purposes of section 401(a) of the Code.

Mimeograph 6394 is hereby superseded, since the position stated therein is restated under the current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.