Rev. Rul. 55-212

The Internal Revenue Service has reconsidered the position expressed in Revenue Ruling 54-625, C.B. 1954-2, 85, relating to the time when an employer may take a deduction for pension payments made to the widow of a deceased employee. Revenue Ruling 54-625, supra , states in part:

`Where a corporation on the accrual basis of accounting obliges itself to pay to the widow of a deceased employee, in periodic installments over a period of years, an additional amount to cover compensation for past services rendered by such employee, such amount is generally deductible under the provisions of section 23(a)(1)(A) of the Internal Revenue Code of 1939 as a business expense for the year in which such liability is incurred.'

While this is a correct statement of the general principles underlying deductions by an accrual basis taxpayer under section 23(a) of the Code, it does not properly take into account the over-riding provisions of section 23(p) of the Code, which governs the deductibility of contributions of an employer to or under a stock bonus, pension, profit-sharing, or annuity plan and compensation paid or accrued on account of an employee under a plan or method of deferring the receipt of such compensation. Section 23(p)(1) of the Code provides that 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 shall not be deductible under section 23(a), but if they satisfy the conditions of section 23(a) they will be deductible to the extent provided in section 23(p). In addition to other limitations, section 23(p) requires that in order for a contribution or compensation to be deductible thereunder, it must be paid in the taxable year, with certain exceptions not pertinent here.

Section 23(p) of the Code, as well as Section 39.23(p)-1(c) of Regulations 118, provides in part that Section 23(p) of the Code is not confined to formal stock bonus, pension, profit-sharing, and annuity plans, or deferred compensation plans, but it includes any method of contributions 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 pays pensions to such of its retired employees and in such amounts as may be determined from time to time by the board of directors or responsible officers of the company, or 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 to an employee until a later year or years under a method having the effect of a stock bonus, pension, profit-sharing, or annuity plan, or similar plan deferring the receipt of compensation, he shall not be allowed a deduction until the year in which the compensation is paid.

The above-stated provisions of the regulations carry out the statutory purpose of not allowing deductions for deferred compensation payments until such compensation is actually paid. While the provisions of the regulations referred to do not specifically mention widows' pensions, the same considerations which govern the deductibility of pensions to retired employees would also apply in the case of widows' pensions, since the basis of the deduction for a widow's pension is that it represents additional compensation of the employee, which has been deferred.

Accordingly, it is the position of the Internal Revenue Service that, regardless of whether an employer obligates himself to pay a pension to the widow of a deceased employee over a period of years or whether such payments are contingent upon some future happening, the employer may deduct in each taxable year under section 23(p) of the Code only those amounts which are actually paid during the year, subject to the general tests of reasonableness. Revenue Ruling 54-625, C.B. 1954-2, 85, is modified to the extent it is inconsistent herewith