Rev. Rul. 56-102

Advice has been requested whether contributions made to a trust fund, pursuant to a collective bargaining agreement, constitute deductible business expenses.

The corporation, in carrying on its activities throughout the United States, employs a substantial number of people. It employs the accrual method of accounting and files its returns on a calendar year basis.

In connection with a collective bargaining agreement, entered into between the corporation and the exclusive bargaining representatives for all of its employees in the contract unit, covering many phases of the employer-employee relationship, such as rates of pay, wages, hours of employment and other benefits accruing to employees, provision was made for furnishing supplemental unemployment benefits to its hourly-rated employees. The agreement, as far as is pertinent, provides for the payment of supplemental unemployment benefits to such hourly-rated employees, which would be effected by means of a supplemental unemployment benefit plan. Under the plan, a trust fund was established and is administered, independently, by a qualified trust company acting as trustee for the benefit of the eligible hourly-rated employees. The benefits under the plan are paid out of the moneys paid into the trust fund by the corporation, in accordance with the agreement. The moneys paid into the trust fund are held in cash, or invested, in whole or in part, in general obligations of the United States Government. Contributions to the trust fund are in amounts computed at a specified rate per hour for each hour for which pay is received by all hourly-rated eligible employees during each pay period. The trust fund is limited to a specific maximum amount, as provided in the agreement.

The benefits payable under the plan, less taxes withheld, if any, are in varying amounts and for varying periods, depending upon certain specified factors as provided in the agreement, such as, (1) the length of employment after the effective date; (2) employees' seniority; (3) the size of the fund; and (4) the credits accruable to the individual under the plan, and are limited in duration to a specified maximum period. They are payable only to an employee who is on lay-off which is incurred in a reduction in force or temporary lay-off and who has received an unprotested state system unemployment benefit, or is ineligible to receive such benefit for certain specified reasons. Under the plan, provisions is made for situations in which such benefits do, or do not, reduce or cancel state unemployment benefits and such payments are limited to a specified maximum amount. Provision is also made with respect to those eligible beneficiaries who are deceased or incompetent.

Under the plan, the contributions to the trust fund are made irrevocably. Consequently, the corporation does not have any title or interest in or to any of the assets of the trust fund during the ordinary operation of the plan. Instead, the legal title to the contributions and the assets rests in the trustee who uses them solely in the interests of the employees. Upon a termination of the plan, the amounts in the trust fund will be used to pay benefits to employees already or subsequently laid-off.

The facts in the instant case disclose that (1) the corporation is subject to a legally binding and enforceable agreement to pay fixed and determinable annual amounts into the trust fund controlled by an independent trustee; (2) the principal purpose of such agreement is to bestow cash benefits, in the prescribed manner during a particular period to certain qualifying employees and thus would be directly connected with the carrying on of the corporation's business activities; (3) the corporation does not have any reversionary interest in the assets comprising the trust funds nor may any of the payments made by the corporation be diverted by it for any purpose; and (4) upon termination of the plan, the trust fund is to continue to be held by the trustee and paid out until exhausted in order to provide unemployment benefits and administration expenses, in accordance with the terms of the plan.

In view of the above, it is held that the contributions made by the corporation into the trust fund, pursuant to the agreement, constitute business expenses deductible from gross income under section 162(a) of the Internal Revenue Code of 1954, in the taxable year in which paid or incurred. Section 404 of the Code governing the deduction for contributions of an employer under a deferred compensation plan does not apply to deductions for contributions under a plan which is primarily an unemployment benefit plan. Section 39.23(p)-1 of Regulations 118, applicable to the Internal Revenue Code of 1954 by virtue of T.D. 6091, C.B. 1954-2, 47.