Rev. Rul. 59-256

Reconsideration has been given to Revenue Ruling 56-102, C.B. 1956-1, 90, which deals with deductibility, as ordinary and necessary business expenses, of employer contributions to a trust fund created to provide unemployment benefits to certain employees, in view of the fact that subsequent to the issuance of such ruling the employer referred to therein amended the fund distribution plan to provide for the payment of `lump-sum separation payments' to certain employees under the circumstances described below.

Revenue Ruling 56-102, supra , holds that contributions made by an employer, employing the accrual method of accounting, 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 and, under section 162(a) of the Internal Revenue Code of 1954, are deductible from gross income in the taxable year in which paid or incurred.

Subsequent to the publication of Revenue Ruling 56-102, the employer referred to therein amended the unemployment benefit plan to provide for the payment from the fund of certain `lump-sum separation payments.' These payments vary in amount depending upon the same factors as the other benefits payable under the plan and are paid to employees who (1) are laid off for a continuous period of at least 12 months, or (2) are retired on or after age 60 but are not eligible for a retirement pension, or (3) become disabled but do not have sufficient years of service to qualify for a disability pension. Eligibility for the separation payments is contingent upon a specified length of service prior to layoff and upon the eligible employee's application for such payment within a specified period. The separation payments are paid by the same trust fund referred to in Revenue Ruling 56-102 and are paid from the same employer contributions. However, the separation payment to which an eligible employee is entitled is reduced by the amount of any unemployment benefit paid or payable to him under the plan.

It is the position of the Internal Revenue Service that the above-described amendment to the supplemental unemployment benefit plan considered in Revenue Ruling 56-102 does not adversely affect the deductibility of employer contributions to the fund. Accordingly, employer contributions under the plan, as amended, continue to be deductible for Federal income tax purposes under section 162(a) of the Internal Revenue Code of 1954 in the taxable year in which paid or incurred.

Revenue Ruling 56-102, C.B. 1956-1, 90, supplemented.