Rev. Rul. 55-436

Advice has been requested whether, under the facts indicated below, death payments which may be made to widows of deceased retired employees are deductible under section 23(p) of the Internal Revenue Code of 1939, as pensions paid under a deferred compensation plan and whether such payments are excludable from the gross income of the widow as amounts paid by reason of the death of an employee under section 22(b)(1)(B) of the Code.

The taxpayer entered into a binding obligation with its retired employees under which, in lieu of continuing group insurance after the retirement of an employee, it will be required to pay, through self-insurance, monthly payments to the widow upon the death of a retired employee. Such payments will be equal to the retired employee's monthly pension, subject to a maximum amount per month, for a limited number of months or until the death of the widow, whichever occurs first. The payments will not be paid to any other person nor to the estate of the retired employee. The obligation will be evidenced by a written certificate and the retired employee has no other claim or vested right in the amount which may be distributed.

Section 23(p) of the Code provides, in effect, that if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, then such compensation shall be deductible when paid under this section, but only to a certain limited extent not here applicable.

Section 39.23(p)-1(c) of Regulations 118 provides, in part, that section 23(p) is not confined to formal stock bonus, pension, profit-sharing, and annuity plans, but it includes any method of contribution or compensation having the effect of a stock-bonus, pension, profit-sharing, or annuity plan, or similar plan deferring the receipt of compensation. Thus, where a corporation is under an obligation, whether funded or unfunded, to pay a pension or other deferred compensation to an employee, there is a method having the effect of a plan deferring the receipt of compensation for which deductions are governed by section 23(p). If an employer on the accrual basis defers paying any compensation under such an arrangement, a deduction therefor is not allowable until the year in which the compensation is paid.

Section 22(b)(1)(B) of the Code provides that amounts received under a contract of an employer providing for the payment of such amounts to the beneficiary of an employee, paid by reason of the death of an employee, whether in a lump sum or otherwise, shall be excluded from gross income. The aggregate amount thus excludable by all the beneficiaries of the employee under all such contracts of any one employer may not exceed $5,000.

Section 39.22(b)(1)-2(d) of Regulations 118 provides that the exclusion from gross income provided by section 22(b)(1)(B) of the Code is limited solely to those amounts paid by or on behalf of an employer which, by the terms of the contract with the employee are specifically designated and intended as a death payment, paid only by reason of the death of the employee. The exclusion does not apply to amounts with respect to which the deceased employee possessed, immediately prior to his death, a nonforfeitable right to receive the amounts while living.

In view of the foregoing, it is held that where an employer enters into a binding obligation under which it will be required to pay death benefits, through self-insurance, consisting of monthly payments to the widow of a retired employee, in an amount equal to the retired employee's monthly pension, subject to a maximum amount per month, for a limited number of months, and where the employee had no claim or vested right to such amounts while living, the payments are considered to be pensions paid under a plan deferring the receipt of compensation for which deductions of amounts paid are allowable under section 23 (p) of the Code. See Rev. Rul. 55-212, C. B. 1955-1, 299. Payments, not in excess of $5,000, are excludable from the gross income of the widow as amounts paid by reason of the death of an employee under section 22(b)(1)(B) of the Code