NONQUALIFIED RETIREMENT BENEFITS TAXED WHEN PAID.

Index Nos: 83.01-00, 404.02-00, 671.02-00, 402.02-00, 451.14-00,

[1] This is in response to your request for a ruling dated September 30, 1999, on behalf of X concerning the income tax consequences of the nonqualified deferred compensation agreement (the "Plan") and a trust agreement (the "Trust") established by X.

[2] The Plan was established in 1999 for the purpose of providing compensation benefits to a key employee (the "Participant") for some definite period of time from and after his retirement from X. The Plan also provides for distributions to alleviate an unforeseeable emergency of the Participant.

[3] No account payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, or pledge by the Participant or his beneficiary, nor shall such account be subject to encumbrance, attachment, or garnishment by creditors of the Participant or his beneficiary.

[4] X established a trust to hold assets to provide X with a source of funds to pay its obligations to the Participant under the Plan. The Trust conforms to the model trust contained in Revenue Procedure 92-64, 1992-2 C.B. 422, including the order in which the sections of the model trust language appear. The Trust does not contain any language that is inconsistent with, or conflicts with, the language of the model trust agreement.

[5] Under the Plan and the Trust, the interest of a Participant (or beneficiary) in the trust estate shall be no greater than the interest of any general unsecured creditor of X.

[6] Section 83(a) of the Internal Revenue Code provides that the excess (if any) of the fair market value of property transferred in connection with the performance of services over the amount paid (if any) for the property is includible in the gross income of the person who performed the services for the first taxable year in which the property becomes transferable or is not subject to a substantial risk of forfeiture.

[7] Section 1.83-3(e) of the Income Tax Regulations provides that for purposes of section 83 the term "property" includes real and personal property other than money or an unfunded and unsecured promise to pay money or property in the future. Property also includes a beneficial interest in assets (including money) transferred or set aside from claims of the transferors creditors, for example, in a trust or escrow account.

[8] Section 402(b) of the Code provides that contributions made by an employer to an employees' trust that is not exempt from tax under section 501(a) are included in the employee's gross income in accordance with section 83, except that the value of the employee's interest in the trust will be substituted for the fair market value of the property in applying section 83. Section 1.402(b)-1(a)(1) of the regulations provides that employer contributions to a nonexempt employees' trust are included as compensation in an employee's gross income for the taxable year in which the contribution is made, but only to the extent that the employee's interest in such contribution is substantially vested, as defined in the regulations under section 83.

[9] Section 404(a)(5) of the Code provides the general deduction timing rules applicable to any plan or arrangement for the deferral of compensation, regardless of the Code section under which the amount might otherwise be deductible. Pursuant to section 404(a)(5) of the Code and section 1.404(a)-12(b)(2) of the regulations, and provided that they otherwise meet the requirements for deductibility, amounts of contributions or compensation deferred under a non-qualified plan or arrangement are deductible in the taxable year in which they are paid or made available, whichever is earlier.

[10] Section 451(a) of the Code provides that the amount of any item of gross income shall be included in gross income for the taxable year in which the taxpayer receives it, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for in a different period. Section 1.451- 1(a) of the regulations provides that under the cash receipts and disbursements method of accounting, amounts are included in gross income when actually or constructively received.

[11] Section 1.451-2(a) of the regulations provides that income is constructively received in the taxable year during which it is credited to the taxpayers account or set apart for him or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayers control of its receipt is subject to substantial limitations or restrictions.

[12] Under the economic benefit doctrine, an employee has currently includible income from an economic or financial benefit received as compensation, though not in cash form. Economic benefit applies when assets are unconditionally and irrevocably paid into a fund or trust to be used for the employee's sole benefit. Sproull v. Commissioner, 16 T.C. 244 (1951), aff'd per curiam, 194 F.2d 541 (6th Cir. 1952); Rev. Rul. 60-31, Situation 4. In Rev. Rul. 72-25,1972-1 C.B. 127, and Rev. Rul. 68-99, 1968-1 C.B. 193, an employee does not receive income as a result of the employee's purchase of an insurance contract to provide a source of funds for deferred compensation because the insurance contract is the employer's asset, subject to claims of the employees creditors.

[13] Various revenue rulings have considered the tax consequences of nonqualified deferred compensation arrangements. Rev. Rul. 60-31, Situation 1-3, 1960-1 C.B. 174, holds that a mere promise to pay, not represented by notes or secured in any way, does not constitute receipt of income within the meaning of the cash receipts and disbursements method of accounting. See also, Rev. Rul. 69-650, 1969-2 C.B. 106, and Rev. Rul. 69-649,1969-2 C.B. 106.

[14] Under the terms of the Trust, assets will be placed in trust to be used to provide deferred compensation benefits to the Participant. However, the trustee has the obligation to hold the trust assets and income for the benefit of X's general creditors in the event of X's insolvency. The Trust further provides that the Participant receives no beneficial ownership in or preferred claim on the trust assets. Therefore, although the assets are held in trust, in the event of X's insolvency they are fully within reach of X's general creditors, as are any other assets of X.

[15] Section 301.7701-4(a) of the Procedure and Administration Regulations provides that, generally, an arrangement will be treated as a trust if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.

[16] Section 671 of the Code provides that where a grantor shall be treated as the owner of any portion of a trust under subpart E, part 1, subchapter J, chapter 1 of the Code, there shall then be included in computing the taxable income and credits of the grantor those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter 1 in computing taxable income or credits against tax of an individual.

[17] Section 677(a)(2) of the Code provides that the grantor shall be treated as the owner of any portion of a trust whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be held or accumulated for future distribution to the grantor.

[18] Section 1.677(a)-i(d) of the regulations provides that under section 677 of the Code, a grantor is, in general, treated as the owner of a portion of a trust whose income is, or in the discretion of the grantor or a nonadverse party, or both, may be applied in discharge of a legal obligation of the grantor.

[19] Provided (i) that creation of the Trust does not cause the Plan to be other than "unfunded" for purposes of Title I of the Employee Retirement Income Security Act of 1974 and (ii) that the provision of the Trust requiring use of trust assets to satisfy claims of X's general creditors in the event of X's insolvency is enforceable by such creditors under federal and state law, we conclude that:

     1. The Trust will be classified as a trust within the meaning of

                                   Sincerely yours,