Taxability of Employees' Group Trust and Employees' Plan

September 11, 1967 BIR RULING NO. 032-67 Mr. Carlos A. Arellano Far East Bank and Trust Company Muralla, Intramuros S i r : This refers to your letter dated July 28, 1967, a pertinent portion of which is quoted as follows: cdt "Our Bank is presently managing as Trustee, certain qualified plans, like those of Parke-Davis, Abbott Laboratories and others, whose funds are relatively of insufficient size to permit adequate flexibility and a better return on investments. To enable plans of this size to achieve this investments objective, the Bank intends to create a Group Trust for Employees' Benefit Plans, whereby various individual employees benefit trusts may be allowed to pool some and all of their funds solely for investment purposes. This type of arrangement will extend to these plans the following other advantages: 1. Diversification of investments; 2. Adequate liquidity; 3. Sound professional management; and 4. Lower costs "Participation in the group trust will be governed by the following provisions: 1. That the Group Trust will be limited only to employees' benefit plan qualified as tax exempt in accordance with the Revenue Code; 2. That the Group Trust Agreement will prohibit the use or diversion of the funds or any part of its corpus or income to purposes other than for the exclusive benefit of the employees or their beneficiaries; 3. That the Group Trust will prohibit the assignment by a participating plan of any part of its equity or interest in the Group Trust; 4. That the benefit plan authorizes the transfer to the funds to the Group Trust; and 5. The the resulting fund shall be invested and administered as one whole unit." Furthermore, upon oral representations, this Office is informed that the group trust will not under the above-described arrangements, assume a distinct and separate juridical personality. Based on the foregoing facts, you now ask information on the following: 1. That the Group trust itself being composed of qualified plans is exempt from tax. 2. That the various Employees' Benefit Plans which will participate in the Group Trust shall retain their qualified (tax exempt) status. In reply, I have the honor to inform you that a qualified employees' trust, i.e., a trust which has compiled with all the prerequisites and conditions imposed by Section 56(b) of the Tax Code may lose its tax exempt status for two principal reasons, namely; the trust is not being operated and administered for the exclusive benefit of employee or their beneficiaries or it has engaged in an activity which, while ostensively for the exclusive benefit of employees runs afoul of the requirements of Section 56(b) of the Tax Code. It is to be noted that the aforementioned statutory requirements for tax-exemption of an employees' trust are of varying stringency and are all designed to preclude the use of an employees' plan as well as its funds for a purpose other than for the exclusive benefit of the employees or their beneficiaries. The Tax Code does not contain any definition of what is meant by the phrase "for the exclusive benefit of employees or their beneficiaries". Accordingly, in determining whether a plan is for the exclusive benefit of employees or their beneficiaries all the circumstances and details of the plan in operation and administration must be considered. An increasingly important aspect of the administration of an employees' plan is that dealing with the investment powers and policies of the administrators of the plan. Under Section 56 of the Tax Code, a qualified employees' trust may invest some or all of its funds without losing its tax-exempt status provided that in such investment activity said funds are not actually used or diverted for a purpose or purposes other than for the exclusive benefit of the employees or their beneficiaries. In other words, once approved, an employees' benefit plan will lose its tax-exemption only if variations from the approved plan prejudice the employees benefits and improve or increase indirect employer benefits. (Time Oil Co. vs. Comm., 258F (2d) 237) Obviously, an investment policy, if not otherwise checked, might effectively make the plan serve the employer's interest to the point where the plan is no longer for the exclusive benefit of employees or their beneficiaries. An investment policy is for the exclusive benefit of employees or their beneficiaries, even though incidental benefits may inure to others, provided it is carried out as prudent investor would in arms-length dealings in the market. (Vol. 4A Mertens "LFIT Chap. 258.19 pp. 76-77) In the light of the foregoing, this Office believes and so holds that separate tax-exempt employees' trusts, forming part of a qualified pension or profit-sharing plan may poll their funds in a group trust created to provide diversification of investments without losing their tax-exempt status (Rev. Rul. 61-157, CB 1961-2, p. 67, part 2(c); Rev. Rul. 56-267, CB 1956-1, p. 206; see also 1956 CCH. Fed. Tax Rep. par. 10.824; Vol. 4A Mertens LFIT Chap 25 B p. 82) provided that such group trust is itself adopted as a part of each participating tax-exempt employees' pension or profit-sharing plan; that the group trust instrument expressly limits participation to employees' pension plan qualified as tax exempt under Section 56(b) of the National Internal Revenue Code; that the group trust instrument prohibits the use or diversion of the funds or any part of its corpus or income to any purpose other than for the exclusive benefit of the employees or their beneficiaries who are entitled to benefits under such participating trust; and that the group trust instrument prohibits assignment by a participating trust of any part of its equity or interest in the group trust. Likewise, if adopted as a part of each participating employees' pension or profit-sharing plan in pursuance of their investment activity, solely for the purpose of diversifying such investments as heretofore described, the group trust may not also be subject to tax under Section 56 of the Tax Code. aisadc Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue