Rev. Rul. 81-17

ISSUE

Is Rev. Rul. 59-256, 1959-2 C.B. 59 correct in holding that lump-sum separation benefits to employees who are retired at or after age 60 but are not eligible for retirement benefits may be paid by the trust fund under an amendment to the Supplemental Unemployment Benefit Plan considered in Rev. Rul. 56-102, 1956-1 C.B. 90, without adversely affecting the deductibility of employer contributions to the fund under section 162(a) of the Internal Revenue Code?

FACTS AND ANALYSIS

Rev. Rul. 56-102 holds that contributions made by an employer into an independently controlled trust fund created solely for the purpose of furnishing supplemental unemployment benefits to certain of its employees qualifying under a supplemental unemployment benefit plan as part of a collective bargaining agreement, constitute ordinary and necessary business expenses under section 162(a) of the Code.

Rev. Rul. 59-256 supplemented Rev. Rul. 56-102 concerning the deductibility, as ordinary and necessary business expenses, of employer contributions to a trust fund created to provide unemployment benefits to certain employees when the plan has subsequently been amended to provide among other benefits, for payment of lump-sum separation payments to employees who are retired at or after age 60 but are not eligible for a retirement pension.

Rev. Rul. 59-256 holds that the separation benefits referred to therein may be paid by the trust fund under an amendment to the supplemental unemployment benefit plan considered in Rev. Rul. 56-102, without adversely affecting the deductibility of employer contributions to the fund under section 162(a) of the Code.

Section 1.162-10 of the Income Tax Regulations provides, in part, that amounts paid or accrued within the taxable year for dismissal wages, unemployment benefits, guaranteed annual wages, or a sickness, accident, hospitalization, medical expense, recreational, welfare, or similar benefit plan are deductible under section 162(a) of the Code if they are ordinary and necessary expenses of the trade or business. However, except for certain negotiated plans not pertinent here, such amounts shall not be deductible under section 162(a) if, under any circumstances, they may be used to provide benefits under a stock bonus, pension, annuity, profit-sharing, or other deferred compensation plan of the type referred to in section 404(a).

Section 404(a) of the Code allows, subject to certain limitations, a deduction for employer contributions paid under a stock bonus, pension, profit-sharing or annuity plan, or for compensation paid or accrued under a plan of deferred compensation, provided that such contributions or compensation satisfy the conditions of section 162, such as, compensation payments being reasonable and, in fact, payments solely for services actually rendered. Section 404(a)(5) provides that amounts paid or accrued under a plan that defers the receipt of compensation but is not a qualified stock bonus, pension, profit-sharing or annuity plan are deductible only in the taxable year in which such amounts are includible in the gross income of participating employees, but in the case of a plan in which more than one employee participates, only if separate accounts are maintained for each employee.

Section 1.404(b)-1 of the regulations provides that section 404(a) of the Code is not confined to formal stock bonus, pension, profit-sharing, and annuity plans or deferred compensation plans, but includes any method of contributions or compensation having the effect of a plan deferring the receipt of compensation.

Section 1.404(a)-1(a)(3) of the regulations provides that if the contributions to a pension, profit-sharing, stock bonus, or other plan for deferred compensation can be used to provide dismissal wages or unemployment benefits, or sickness, accident, hospitalization, medical expense, welfare, recreation, or similar benefits, then (with certain exceptions not pertinent here) section 404(a) of the Code applies to the entire contribution to the plan.

In the instant case the amounts paid as lump-sum separation payments from the trust fund providing unemployment benefits to employees who are retired at or after age 60 but are ineligible for retirement pensions represent a form of deferred compensation to those employees for past services because their employment has been permanently terminated by reason of age. See section 1.404(b)-1 of the regulations. Also see New York Post Corporation v. Commissioner, 40 T.C. 882 (1963), involving a multi-purpose benefit plan providing for payments to employees upon voluntary termination of employment after becoming age 65 or completing 25 years of service. There, the Tax Court of the United States sustained the Commissioner's position in holding that such payments upon voluntary termination of service constituted deferred compensation under section 404 of the Code.

HOLDING

The amendment to the supplemental unemployment benefit plan considered in Rev. Rul. 56-102, which provides for the payment of separation benefits to employees who are retired at or after age 60 but who are ineligible for a retirement pension, will result in the disallowance as a deduction under section 162(a) of the Code of the contribution made to the trust under such amended plan. The deduction of the entire contribution under the plan is subject to section 404(a) as provided in section 1.404(a)-1(a)(3) of the regulations.

Pursuant to the authority contained in section 7805(b) of the Code this revenue ruling will be applicable to the first taxable year beginning after January 19, 1981. If the supplemental unemployment benefit plan is part of a negotiated agreement between employers and employees, this revenue ruling will not be applicable until the first taxable year beginning after the expiration of the negotiated agreement that is in effect on the date that this revenue ruling is published in the Internal Revenue Bulletin.

A change in the supplemental benefits plan to eliminate separation payments to employees, who are retired at or after age 60 but are ineligible for retirement pensions, is not a change in method of accounting. Such a change is a change in treatment resulting from a change in underlying facts. See section 1.446-1(e)(2)(ii)(b) of the regulations. Thus, where such a change is made to the supplemental unemployment benefit plan, employer contributions under the plan would continue to be deductible for federal income tax purposes under section 162(a) of the Code in the taxable year in which paid or incurred.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 59-256, supplementing Rev. Rul. 56-102, is modified.