Rev. Rul. 54-270

Advice is requested with respect to the extent to which a contribution carryover, under a qualified employees' profit-sharing plan, may be allowed as a deduction for Federal income tax purposes after a termination of such plan and the liquidation of the employees' trust.

A corporate employer files its Federal income tax returns on a fiscal year basis ending January 31. The employees' profit-sharing plan, which was established and became effective on January 31, 1947, was held to qualify under section 165(a) of the Internal Revenue Code. Under the plan's contribution formula, an annual contribution of 50 percent of net income after certain deductions was required. Contributions were made as specified for the taxable years ended January 31, 1948, 1949, and 1950, which amounts exceeded the 15 percent limitation of compensation paid or accrued to its employees for each year as provided by section 23(p)(1)(C) of the Code. The plan was discontinued as of February 1, 1949, and the trust was liquidated during the taxable year ended January 31, 1950.

Section 23 of the Internal Revenue Code provides in part as follows:

SEC. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be allowed as deductions:

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(p) CONTRIBUTIONS OF AN EMPLOYER TO AN EMPLOYEES' TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A DEFERRED-PAYMENT PLAN.-

(1) GENERAL RULE.-If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensations shall not be deductible under subsection (a) but shall be deductible, if deductible under subsection (a) without regard to this subsection, under this subsection but only to the following extent:

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(C) In the taxable year when paid, if the contributions are paid into a stock bonus or profit-sharing trust, and if such taxable year ends within or with a taxable year of the trust with respect to which the trust is exempt under section 165(a), in an amount not in excess of 15 per centum of the compensation otherwise paid or accrued during the taxable year to all employees under the stock bonus or profit-sharing plan. * * * In addition, any amount paid into the trust in a taxable year beginning after December 31, 1941, in excess of the amount allowable with respect to such year under the preceding provisions of this subparagraph shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any one such succeeding taxable year together with the amount allowable under the first sentence of this subparagraph shall not exceed 15 per centum of the compensation otherwise paid or accrued during such taxable year to the beneficiaries under the plan. * * *

Section 39.23(p)-10 of Regulations 118, promulgated with respect to section 23(p)(1)(C) of the Internal Revenue Code, provides that, in order that contributions carried over may be deducted in a succeeding taxable year of the employer in accordance with the third sentence of section 23(p)(1)(C) of the Code (the last sentence quoted above), the succeeding year also must end with or within a taxable year of the trust for which it is exempt under Code section 165(a). The amount deductible under such third sentence, when added to the amount allowable, (if any) under the first sentence, may not exceed 15 per cent of the compensation otherwise paid or accrued during such taxable year to the employees who, in such year, are beneficiaries of the trust funds accumulated under the plan. Inasmuch as the trust in the instant case was liquidated during the taxable year ended January 31, 1950, aside from the fact that it had no taxable year after that date, there was no plan in existence during the succeeding taxable years which can be said to have participants in those succeeding taxable years. Therefore, there can be no compensation otherwise paid or accrued under the plan to persons who qualify as participants in those succeeding taxable years to form the basis for applying the 15-percent limitation.

In view of the foregoing, it is held that the taxpayer's contribution carryover, under qualified employees' profit-sharing trust, may not be allowed as a deduction for Federal income tax purposes in any taxable year subsequent to the year in which the employees' trust was liquidated. The amount of such contribution carryover allowable as a deduction for the taxable year in which the trust was liquidated is limited to 15 percent of the compensation otherwise paid or accrued during such year to those employees who were participants of the plan at the beginning or during the taxable year of the trust's liquidation.