Rev. Rul. 56-108

Advice has been requested whether a lump sum payment made up of severance pay, two-weeks' notice pay, and accrued vacation pay, received by an employee upon discontinuance of the business of the corporation by which he was employed constitutes back pay.

The taxpayer was an employee of a corporation which discontinued business. An agreement between his employer and a union of which he was a member provided that if an employee was discharged for any reason other than wilful neglect of duty or gross misconduct he would be entitled to severance pay, two-weeks' notice pay, and accrued vacation pay. In accordance with such agreement the person who became unemployed because of discontinuance of the business received a lump sum payment.

Section 1303(b) of the Internal Revenue Code of 1954 provides in parts as follows:

(b) DEFINITION OF BACK PAY.-For purposes of this section, the term `back pay' means amounts includible in gross income under this subtitle which are one of the following-

(1) Remuneration, including wages, salaries, retirement pay, and other similar compensation, which is received or accrued during the taxable year by an employee for services performed before the taxable year for his employer and which would have been paid before the taxable year except for the intervention of one of the following events:

(A) bankruptcy or receivership of the employer;

(B) dispute as to the liability of the employer to pay such remuneration, which is determined after the commencement of court proceedings;

(C) if the employer is the United States, a State, a Territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any of the foregoing, lack of funds appropriated to pay such remuneration; or

(D) any other event determined to be similar in nature under regulations prescribed by the Secretary or his delegate.

*

None of the events enumerated in section 1303(b)(1)(A), (B) and (C) of the Code have occurred in the instant case. For the purpose of (D) thereof an event will be considered similar in nature to events enumerated in (A), (B) and (C) only if the circumstances are unusual, if they are the type specified therein, if they operate to defer payment of the remuneration for the services performed and if the payment, except for such circumstances, would have been made prior to the taxable year in which received or accrued. See section 39.107-3(b) of Regulations 118, applicable under section 1303 of the 1954 Code by virtue of Treasury Decision 6091, C.B. 1954-2, 47.

The payment to the taxpayer was not compensation which would have been paid in a prior period except for the intervention of an event similar in nature to a dispute as to the liability of the employer to pay such remuneration.

Accordingly, it is held that the lump sum payment received by an employee upon discontinuance of his employer's business, which was made in accordance with a union agreement, representing severance pay, two-weeks' notice pay and accrued vacation pay is not back pay and does not qualify for treatment under section 1303 of the Internal Revenue Code of 1954.