Rev. Rul. 55-748

Advice has been requested relative to the treatment for Federal income tax purposes of contributions paid by an employer to an employees' pension trust qualified under section 401(a) of the Internal Revenue Code of 1954 which are attributable to the life insurance part of retirement income contracts purchased for employees by the trust, the proceeds of which, upon the death of an employee, are payable to the trustee and are held by him for application to payment of subsequent premiums on similar contracts on behalf of other employees.

Under the terms of the plan, the trustee purchases retirement income contracts which provide insurance on the lives of employees covered by the plan. On the death of a covered employee, so much of the proceeds of the contract as is in excess of the cash surrender value of the contract is not paid to the employee's beneficiary, but remains in the trust to pay premiums next becoming due on contracts purchased on behalf of other employees. It is stated that under no circumstances may any of the proceeds of the contract payable on death ever be diverted from the trust to the employer.

Section 404(a) of the Code provides in part as follows:

(a) GENERAL RULE.-If contributions are paid by an employer to or under a stock-bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under section 162 (relating to trade or business expenses) or section 212 (relating to expenses for the production of income ) but if they satisfy the condition of either of such sections, they shall be deductible under this section, subject, however, to the following limitations as to the amounts deductible in any year:

(1) PENSION TRUSTS.-In the taxable year when paid, if the contributions are paid into a pension trust, and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 501(a), in an amount determined as follows:

(A) an amount not in excess of 5 per cent of the compensation otherwise paid or accrued during the taxable year to all the employees under the trust, but such amount may be reduced for future years if found by the Secretary or his delegate upon periodical examinations at not less than 5-year intervals to be more than the amount reasonably necessary to provide the remaining unfunded cost of past and current service credits of all employees under the plan, plus

(B) any excess over the amount allowable under subparagraph (A) necessary to provide with respect to all of the employees under the trust the remaining unfunded cost of their past and current service credits distributed as a level amount, of a level percentage of compensation, over the remaining future service of each such employee, as determined under regulations prescribed by the Secretary or his delegate, but if such remaining unfunded cost with respect to any 3 individuals is more than 50 per cent of such remaining unfunded cost, the amount of such unfunded cost attributable to such individuals shall be distributed over a period of at least 5 taxable years, or

(C) in lieu of the amounts allowable under subparagraphs (A) and (B) above, an amount equal to the normal cost of the plan, as determined under regulations prescribed by the Secretary or his delegate, plus, if past service or other supplementary pension or annuity credits are provided by the plan, an amount not in excess of 10 per cent of the cost which would be required to completely fund or purchase such pension or annuity credits as of the date when they are included in the plan, as determined under regulations prescribed by the Secretary or his delegate, except that in no case shall a deduction be allowed for any amount (other than the normal cost) paid in after such pension or annuity credits are completely funded or purchased.

(D) Any amount paid in a taxable year in excess of the amount deductible in such year under the foregoing limitations shall be deductible in the succeeding taxable years in order of time to the extent of the difference between the amount paid and deductible in each such succeeding year and the maximum amount deductible for such year in accordance with the foregoing limitations.

That part of the employer's contributions attributable to the purchasing of life insurance benefits under retirement income contracts which, when they become payable, are applicable to the reduction of subsequent employer contributions to the plan may not be considered as a cost of the pension plan for the purpose of determining the limitation on deductions under section 404(a)(1)(A), (B), and (C) of the Code, for the year in which such contributions are paid, and may not be deducted as such. Contributions attributable to such insurance benefits, and otherwise determined, may be determined by applying the rates provided in Revenue Ruling 55-747, page 228, this Bulletin, to the amounts of insurance which would revert to the trust in the event of death of the insured employee in the year for which the premiums are paid.

Contributions paid to cover the cost of such insurance benefits are, however, contributions to the pension trust which may be deductible in a later year to the extent provided by section 404(a)(1)(D) of the Code, subject to the conditions and limitations applicable to such later year.

In later years, if an employer for any reason, such as the receipt by the trustee of life insurance proceeds under a retirement income contract because of the death of an employee, which proceeds were applied to the payment of premiums on similar contracts for the benefit of other employees, contributes to the trust a sum less than the maximum deduction permitted for that year under section 404(a)(1)(A), (B), or (C), he may deduct in that year, in addition to his current contribution, the contributions made in prior years and not then deductible because they were attributable to that part of the income contracts which would provide life insurance payable to the trustee, to the extent of the difference between his current contribution and his maximum deduction permitted under section 404(a)(1)(A), (B), or (C).

In the case of a contributory pension plan, a separation between employer and employee contributions will be necessary before the previously described carry-over may be computed.

P.S. No. 6, dated July 29, 1944, which reached a contrary conclusion in a similar situation, is hereby revoked. However, under the authority of section 7805(b) of the Code, this ruling shall not be applied retroactively with respect to any tax advantage granted under any method of computing the amount attributable to life insurance heretofore approved by the Internal Revenue Service