Rev. Rul. 54-556

Advice has been requested as to whether the Consolidated Nonappropriated Welfare Fund, established and operated pursuant to United States Army and Air Force Regulations, is considered a wholly owned instrumentality of the United States for Federal employment tax purposes, and whether services performed by civilian employees of such Fund are included within the definition of `employment' under the Federal Unemployment Tax Act (subchapter C, chapter 9, Internal Revenue Code of 1939) by reason of the provisions of the Act of June 19, 1952, 66 Stat. 138.

Under section 1426(b)(7)(B)(iv) of the Federal Insurance Contributions Act (subchapter A, chapter 9, Internal Revenue Code of 1939), as amended by the Social Security Act Amendments of 1950, the term `employment' includes service performed by a civilian employee, not compensated from funds appropriated by the Congress, in the Army and Air Force Exchange Service or other activities conducted by an instrumentality of the United States subject to the jurisdiction of the Secretary of Defense, at installation of the Department of Defense, for the comfort, pleasure, contentment, and mental and physical improvement of personnel of such Department. Section 1607(c)(6) of the Federal Unemployment Tax Act excepts from the term `employment' service performed in the employ of the United States Government or of an instrumentality of the United States which is wholly-owned by it or exempt from the tax imposed by section 1600 by virtue of any other provision of law.

The Act of June 19, 1952, supra , provides, in part, that civilian employees, compensated from nonappropriated funds, of the Army and Air Force Exchange Service, Army and Air Force Motion Picture Service, Navy Ship's Stores Ashore, Navy exchanges, Marine Corps exchanges, Coast Guard exchanges, and other instrumentalities of the United States under the jurisdiction of the Armed Forces conducted for the comfort, pleasure, contentment, and mental and physical improvement of personnel of the Armed Forces, shall not be held and considered as employees of the United States for the purpose of any laws administered by the Civil Service Commission or the provisions of the Federal Employees' Compensation Act, provided that the status of these nonappropriated fund activities as Federal instrumentalities shall not be affected.

Nonappropriated fund activities established and operated pursuant to Air Force Regulations 176-1 Army Regulations 210-50 dated November 4, 1953, are considered wholly-owned instrumentalities of the United States for Federal employment tax purposes. Such regulations provide that a nonappropriated fund activity prescribed thereunder is an entity established by authority of the Secretary of the Army or the Secretary of the Air Force for the purpose of administering moneys not appropriated by the Congress for the benefit of military personnel or civilian employees of the Army and the Air Force, and not incorporated under the laws of any State or the District of Columbia. The regulations also provide that such nonappropriated fund activities are instrumentalities of the United States and as such are entitled to all the immunities and privileges which are available under the Federal Constitution and statutes to the departments and agencies of the Federal Government. The Consolidated Nonappropriated Welfare Fund is included in the welfare activities and funds authorized by such regulations. Therefore, services performed after December 31, 1950, by civilian employees of the Fund constitute `employment' as that term is defined in the Federal Insurance Contributions Act, and the remuneration therefor is subject to the taxes imposed by such Act by reason of section 1426(b)(7)(B)(iv) of the Act, as amended by the Social Security Act Amendments of 1950. However, such services are excepted from `employment,' as that term is defined in the Federal Unemployment Tax Act, by reason of section 1607(c)(6) of that Act, which section was not amended by the Social Security Act Amendments of 1950.

The Act of June 19, 1952, relates to the status, for purposes of any laws administered by the Civil Service Commission or the provisions of the Federal Employees' Compensation Act, of civilian employees of the organizations mentioned in such former Act. It expressly provides that the status of the nonappropriated fund activities as Federal instrumentalities shall not be affected. It is held that the Act does not affect the status, for purposes of the tax imposed by the Federal Unemployment Tax Act, of the activities mentioned in the Act or their employees. The provisions of the Act do not operate to include within the definition of `employment,' as defined in such Act, service performed by civilian employees of nonappropriated fund activities which are wholly owned instrumentalities within the meaning of section 1607(c)(6) of the Act.