Rev. Proc. 61-11

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to set forth the procedure for processing requests for determination letters as to the qualification under section 401(a) of the Internal Revenue Code of 1954 of pension, annuity, profit-sharing, and stock bonus plans established by organizations which may be taxable as corporations and which include as participants therein associates who have a proprietary interest in the organization.

SEC. 2. BACKGROUND.

.01 Revenue Procedure 56-12, C.B. 1956-1, 1029, sets forth the general procedures applicable to the issuance of determination letters as to the qualification under section 401(a) of the Internal Revenue Code of 1954 of pension, annuity, profit-sharing, and stock bonus plans. One of the requirements for qualification is that the plan be established by an employer for the exclusive benefit of his employees or their beneficiaries. Thus, an employer-employee relationship must exist between the one establishing the plan and those who are participants thereunder.

.02 Partners are not employees and are, therefore, not eligible to participate in a qualified plan. See Rev. Rul. 57-163, Part 2(i)(1), C.B. 1957-1, 128, 134; I.T. 3350, C.B. 1940-1, 64; and P.S. No. 23, dated September 2, 1944. Neither are they to be credited for services as partners prior to becoming employees in a successor corporation, or association taxable as a corporation, with respect to meeting the eligibility requirements or qualifying for prior service benefits.

.03 As announced in Revenue Ruling 57-546, C.B. 1957-2, 886, it is the position of the Service that the fact that an organization establishes a plan under section 401(a) of the Code is not determinative of whether such organization will be classified as a partnership or an association taxable as a corporation. Rules for determining whether an organization is a trust, a partnership, or an association taxable as a corporation are set forth in the regulations under section 7701 of the Code, relating to definitions, published as T.D. 6503 in the Federal Register of November 17, 1960, in Volume 25, No. 224, at page 10928. See also C.B. 1960-2, 409. These regulations pertain to taxable years beginning after December 31, 1960. Where, in accordance with such rules, an organization is classified as an association taxable as a corporation, and an employer-employee relationship exists between the association and persons who are associates therein, such associates, if otherwise eligible, may be included in a plan of the association which is intended to qualify under section 401(a) of the Code.

SEC. 3. PRELIMINARY DETERMINATION.

Before a determination letter is issued as to the qualification of a plan which includes associates, it must be established that the organization is an association taxable as a corporation in accordance with the rules set forth in the regulations under section 7701 of the Code, and that an employer-employee relationship exists between such associates and the organization. Rulings and determination letters issued under the provisions of section 39.3797 of Regulations 118 applicable to taxable years beginning before January 1, 1961, holding that an organization is an association taxable as a corporation are not applicable for this purpose. The rules under T.D. 6503 are applicable to taxable years beginning after December 31, 1960. However, for any taxable year beginning after December 31, 1960, but before October 1, 1961, any amendment of the agreement establishing the organization will, in the case of an organization in existence on November 17, 1960, be treated for purposes of determining the classification of the organization as being in effect as of the beginning of such taxable year if the amendment of the agreement is made before October 1, 1961, and if the amendment results in the classification of the organization under the rules set forth in the regulations in the same manner as the organization was classified for tax purposes on November 17, 1960. See section 301.7701-2(a)(4) of such regulations.

SEC. 4. PROCEDURE.

.01 Where, in connection with a request for a determination as to the qualification of a plan under section 401(a) of the Code, it is necessary that a determination be made that the organization is an association taxable as a corporation, and that an employer-employee relationship exists between it and its associates, such request shall be filed with the District Director of Internal Revenue with whom the organization is required to file its tax returns. The request shall be accompanied by copies of the articles of association or agreement establishing the organization, by-laws, and all other data relevant to the formation and operation of the organization, and should show all pertinent dates. The organization should also support its request by furnishing copies of the applicable local laws relating to its status, copies of contracts of employment with associates, and a brief of its position with respect to the status for taxation of the organization and its relationship with associates.

.02 The District Director will consider the data submitted, and reach a conclusion as to the status of the organization and the existence or nonexistence of an employer-employee relationship. If his conclusion is that the organization is not an association taxable as a corporation or that an employer-employee relationship with the associates does not exist, he will so advise the organization by issuing a determination letter to that effect and setting forth that a plan of the organization which includes associates or others who are not bona fide employees does not qualify under section 401(a) of the Internal Revenue Code. The appeals procedure contained in section 5 of Revenue Procedure 56-12, C.B. 1956-1, 1029, is not available with respect to such determination since the primary issue is separate from qualification which follows only if such issue is decided as requested, and since such appeals procedure is applicable only to qualification issues.

.03 Where the District Director is of the opinion that the organization is an association taxable as a corporation, and that the requisite employer-employee relationship exists, or should he wish to have the National Office views on these matters, he will refer the case file to the National Office together with his recommendations supported by findings of facts and conclusions of law. The National Office will determine the status of the organization and of the associates. A taxpayer who desires an oral discussion on these issues in the National Office during the processing of the case should so indicate when he submits his request for a determination letter as to the qualification of his plan. See section 7.04 of Rev. Rul. 54-172, C.B. 1954-1, page 399. Upon reaching a decision the National Office will return the file with its conclusions to the District Director for consideration of the qualification of the plan and the issuance of the applicable determination letter as provided for in Revenue Procedure 56-12.

SEC. 5. EFFECT ON OTHER DOCUMENTS.

Revenue Procedure 56-12, C.B. 1956-1, 1029, is hereby amplified.