[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1240-1]

[Page 332]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1240-1  Capital gains treatment of certain termination payments.

    Any amounts received by an employee for the assignment or release of 
all his rights to receive, after termination of his employment and for a 
period of not less than five years or for a period ending with his 
death, a percentage of the profits or receipts of his employer 
attributable to a time subsequent to such termination, are considered 
received from the sale or exchange of a capital asset held for more than 
six months if the following requirements are met:
    (a) The employee was employed by the employer, in whose future 
profits or receipts the employee had an interest, for a period of more 
than 20 years before the assignment or release by the employee of his 
rights in such future profits or receipts,
    (b) The full rights of the employee to the percentage of the future 
profits or receipts on such employer, which rights are the subject of 
the assignment or release, were incorporated in the terms of the 
contract of employment between the employee and the employer for a 
period of at least 12 years, and were so incorporated before August 16, 
1954,
    (c) The assignment or release was made after the termination of the 
employee's employment with such employer,
    (d) The assignment or release conveyed all the rights of the 
employee in the future profits or receipts of such employer and conveyed 
no other rights of the employee, and
    (e) The total amount to which the employee became entitled pursuant 
to the assignment or release was received by the employee after the 
termination of his employment with such employer and in one taxable year 
of the employee.

The requirement that the assignment or release be made after the 
termination of the employee's employment contemplates a complete and 
bona fide termination of the relationship of employer and employee. This 
requires more than a mere termination of such relationship under the 
particular contract or contracts of employment pursuant to which the 
employee acquired his rights in the future profits or receipts of the 
employer. The contract need not expressly provide that the employee 
shall share in the future profits or receipts of the employer for a 
minimum period of five years. However, if the contract does not 
expressly so provide and the assignment or release is made before the 
expiration of five years following the termination of employment, the 
terms of the contract considered in conjunction with the facts in the 
particular situation must establish that the rights of the employee to a 
percentage of future profits or receipts, in all probability, will 
extend to a period of not less than five years from the date of 
termination of employment or for a period ending with his death. Section 
1240 has application only to an assignment or release made by the 
employee who acquired the right to a percentage of future profits or 
receipts of the employer, and has no application to amounts received 
other than as payment for assignment or release of such right. Section 
1240 has no effect upon the determination of the income tax of the 
employer making the payment to the employee.

[T.D. 6500, 25 FR 12021, Nov. 26, 1960]