Rev. Rul. 63-180

Advice has been requested as to the effect of the decision in Byron A. Hicks v. United States, 205 Fed. Supp. 343 (1962), affirmed 314 Fed. (2d) 180 (1963), on the taxability of employee-participants in cash-and-trusteed profit-sharing plans such as the plan of the M company, described in Revenue Ruling 56-497, C.B. 1956-2, 284.

In the Hicks case, the First National Bank of Roanoke, the employer, had been paying year-end cash bonuses to its employees for some years prior to the adoption of a profit-sharing plan in 1957. The payment of bonuses was discontinued upon the adoption of the plan.

The plan provided that the Bank would make available for contributions up to six percent of its net profits before taxes. Forty percent of the contribution was required to be paid into a profit-sharing trust, prorated in proportion to eligible employees' salaries, and held for the future benefit of employees who had two or more years of service. The remaining 60 percent of the contributions was divided among all employees, with more than one month's service, in proportion to their salaries. As for those with less than two years of service, the plan required payment in cash in January of the year following that for which the profits were being shared. An employee with two of more years of service, however, and eligible to participate in the 40 percent paid into the trust, was privileged to elect on or before December first of the year for which profits were to be computed, whether to receive payment in cash of his share of the 60 percent of the profits or to authorize the Bank to pay his share directly into the Trust, when and if it became payable to such employee.

The plan, which was made part of the record both in the trial court and on appeal, provides as to the 60 percent that it "* * * shall, for the purpose of this Profit-Sharing Plan, be treated as if it had been paid by such employee." Further, both the plan and trust agreement refer to and provide for separate accounts reflecting employee contributions and trust earnings thereon. The plan not only characterizes the 60 percent portion as employee contributions but also provides that the employees' rights with respect to this portion, when in trust, differ substantially from their rights with respect to the 40 percent portion. That part of the profits with respect to which the employee could elect could be withdrawn by him at any time upon payment of a modest penalty of five percent. The 40 percent portion, on the other hand, could not be withdrawn for a period of five years and then also subject to a five percent penalty. In the event of resignation or discharge other than for cause an employee would be entitled to receive his share of the 60 percent portion subject again only to the five percent penalty. But as to the 40 percent portion of the profits the employee could receive prior to retirement only five percent after two years of service and up to 95 percent after eleven years' service. In the event of discharge for cause the employee would still be entitled to his share of the 60 percent portion less the five percent penalty, but only so much of his share of the 40 percent portion as the Advisory Committee should determine, and not exceeding the amount he could have received had the discharge been other than for cause.

Thus, both in form and in substance, this is clearly an employee-contributory plan as to the 60 percent portion and a distinction exists, therefore, between the plan involved in Hicks and cash-and-trusteed profit-sharing plans of the type dealt with in Revenue Ruling 56-497, supra. In Hicks the payment into trust of the 60 percent portion is the employee's contribution, while payment in the M company case in Revenue Ruling 56-497, supra, is the employer's contribution, all of which is distributable only after a period of deferment of the type described in the second sentence of section 1.401-1(b)(1)(ii) of the Income Tax Regulations. Where an employer makes a contribution for the benefit of an employee to a trust described in section 401(a) of the Internal Revenue Code of 1954, for the taxable year of the employee which ends within or with a taxable year of the trust for which it is exempt under section 501(a) of the Code, the employee is not required to include such contribution in his income except for the years in which such contribution is distributed to or made available to him.

Accordingly, the decision in Hicks will be confined to its facts and followed in similar cases. In other cases, of the type discussed in Revenue Ruling 56-497, the employer's contribution on behalf of an employee is not includible in the employee's gross income at the time the contribution is made, but the employee must include in gross income the amount distributed or made available to him as provided for in section 402(a) of the Code.

¹ Also released as Technical Information Release 500, dated Aug. 8, 1963.