[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.402(d)-1]

[Page 397-399]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.402(d)-1  Effect of section 402(d).

    (a) If the requirements of section 402(d) are met, a contribution 
made by an employer on behalf of an employee to a trust which is not 
exempt under section 501(a) shall not be included in the income of the 
employee in the year in which the contribution is made. Such 
contribution will be taxable to the employee, when received in later 
years, as provided in section 72 (relating to annuities). For taxable 
years beginning before January 1, 1964, section 72(e)(3) (relating to 
the treatment of certain lump sums), as in effect before such date, 
shall not apply to such contributions. For taxable years beginning after 
December 31, 1963, such contributions, when received, may be taken

[[Page 398]]

into account in computations under sections 1301 through 1305 (relating 
to income averaging). See paragraph (b) of Sec. 1.403(c)-1. The intent 
and purpose of section 402(d) is to give those employees, covered under 
certain non-exempt trusts to which such section applies, essentially the 
same tax treatment as those covered by trusts described in section 
401(a) and exempt under section 501(a), except that the capital gains 
treatment referred to in section 402(a)(2) does not apply.
    (b) Every person claiming the benefit of section 402(d) must be able 
to demonstrate to the satisfaction of the Commissioner that all of the 
provisions of such section are met. The taxpayer must produce sufficient 
evidence to prove:
    (1) That, before October 21, 1942, he was employed by the particular 
employer making the contribution in question and was at such time 
definitely covered by a written agreement, entered into before October 
21, 1942, between himself and the employer, or between the employer and 
the trustee of a trust established by the employer before October 21, 
1942, and that the contribution by the employer was made pursuant to 
such agreement. The fact that an employee may have been potentially 
covered is not sufficient. Evidence that the employment was entered 
into, or the agreement executed, ``as of'' a date before October 21, 
1942, or that the agreement or trust instrument which did not 
theretofore meet the requirements of section 402(d) was modified or 
amended after October 20, 1942, so as to come within the provisions of 
such section, will not satisfy the requirements of section 402(d).
    (2) That such contribution, pursuant to the terms of such agreement, 
was to be applied for the purchase of an annuity contract for the 
taxpayer. In the case of a contribution by the employer of an annuity 
contract purchased by such employer and transferred by him to the 
trustee of the trust, evidence should be presented to prove that such 
contract was purchased for the taxpayer by the employer pursuant to the 
terms of a written agreement between the employer and the employee or 
between the employer and the trustee, entered into before October 21, 
1942.
    (3) That under the written terms of the trust agreement the taxpayer 
is not entitled during his lifetime, except with the consent of the 
trustee, to any payments other than annuity payments under the annuity 
contract or contracts purchased by the trustee or by the employer and 
transferred to the trustee, and that the trustee may grant or withhold 
such consent free from control by the taxpayer, the employer, or any 
other person. However, such control will not be presumed from the fact 
that the trustee is himself an officer or employee of the employer. As 
used in section 402(d) the phrase ``if * * * under the terms of the 
trust agreement the employee is not entitled'' means that the trust 
instrument must make it impossible for the prohibited distribution to 
occur whether by operation or natural termination of the trust, whether 
by power of revocation or amendment, other than with the consent of the 
trustee, whether by the happening of a contingency, by collateral 
arrangement, or any other means. It is not essential that the employer 
relinquish all power to modify or terminate the trust but it must be 
impossible, except with the consent of the trustee, to be received by 
the taxpayer contracts purchased by the trustee, or by the employer and 
transferred to the trustee, to be received by the taxpayer directly or 
indirectly, other than as annuity payments.
    (4) The nature and amount of such contribution and the extent to 
which income taxes have been paid thereon before January 1, 1949, and 
not credited or refunded.
    (5) If it is claimed that section 402(d) applies to amounts 
contributed to a trust after June 1, 1949, the taxpayer must prove to 
the satisfaction of the Commissioner that the trust did not, on June 1, 
1949, qualify for exemption under section 165(a) of the Internal Revenue 
Code of 1939. Where an employer buys an annuity contract which is 
transferred to the trustee, the date of the purchase of the annuity 
contract and not the date of the transfer to the

[[Page 399]]

trustee is the controlling date in determining whether or not the 
contribution was made to the trust after June 1, 1949.

[T.D. 6500, 25 FR 11679, Nov. 26, 1960, as amended by T.D. 6885, 31 FR 
7801, June 2, 1966]