Rev. Rul. 60-330

Advice has been requested regarding the Federal Tax consequences resulting from payments made by an employer direct to certain former employees under a supplemental unemployment benefit plan, which plan does not involve the use of a trust.

An employer, in accordance with a collective bargaining agreement between the employer and representatives of the employees' union, adopted an unemployment benefit plan solely for the purpose of paying supplemental unemployment benefits to employees who qualify under the plan.

The terms of the plan, as far as here pertinent, provide for the establishment on the books of the corporation of a separate account to be known as the `Supplemental Unemployment Benefit Account.' The supplemental unemployment benefits provided under the plan arise from accruals to be made by the corporation to such account and are payable only to the extent accrued therein. No employee has any interest in or right to any supplemental unemployment benefits except to the extent to which he qualifies for them as expressly provided in the plan. The plan further provides the requirements for eligibility to receive benefits under the plan, as well as for the duration and amount of such benefits. Under the terms of the agreement, the employer is obligated to make such payments direct to the former employees entitled to benefits.

Section 162(a) of the Internal Revenue Code of 1954 provides, `There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *.'

Revenue Ruling 56-102, C.B. 1956-1, 90, 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 and are deductible from gross income.

It is evident that the purpose of the supplemental unemployment benefit plan in the instant case is to promote the welfare of employees laid off and to make clear that the obligations of the employer involved thereunder arise directly in connection with, and relate proximately to, the carrying on of its trade or business.

Therefore, in the instant case, the supplemental unemployment benefit payments made by the employer direct to qualifying former employees constitute ordinary and necessary business expenses of the employer and are deductible from gross income under section 162(a) of the Code in the year paid or in the year in which liability to particular employees becomes fixed, depending upon the method of accounting employed. No deduction will be allowed on the accrual method solely by reason of the setting aside of funds in a special account or the making of a book entry.

Revenue Ruling 56-249, C.B. 1956-1, 488, holds that, under certain circumstances, benefits paid to individuals by the trustees of a trust created pursuant to the provisions of a supplemental unemployment benefit plan established as a result of a collective bargaining agreement do not constitute `wages' for purposes of the taxes imposed by the Federal Unemployment Tax Act, the Federal Insurance Contributions Act, or for purposes of the Collection of Income Tax at Source on Wages (chapters 23, 21, and 24, respectively, subtitle C, Internal Revenue Code of 1954). However, that ruling also holds that such benefits are includible in the gross incomes of the recipients for the taxable year in which received.

The main difference in the provisions of the supplemental unemployment benefit plan in the instant case from that considered in Revenue Ruling 56-249 is that, in the instant case, the plan does not provide for the accumulation and distribution of the benefits from a trust as was the case in that Revenue Ruling. However, since the basic or fundamental purposes and conditions of the plan are substantially the same as the purposes and conditions of the plans which formed the basis for Revenue Ruling 56-249, the failure to provide for the accumulation of funds in a trusteed account, from which the supplemental unemployment benefits contemplated by the plan are to be paid, is not a material or controlling factor. Thus, the plan in the instant case is not sufficiently different from that which formed the basis for Revenue Ruling 56-249 to warrant different conclusions.

Accordingly, under the facts in this case, it is held that supplemental unemployment benefit payments received by the former employees do not constitute `wages' for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, or the Collection of Income Tax at Source on Wages. However, such benefits are includible in the gross incomes of the recipients for the year in which received.

The principles stated above are equally applicable to supplemental unemployment benefit plans which are similar in all material details except for having been unilaterally instituted by an employer and are not union negotiated, as in Revenue Ruling 58-128, C.B. 1958-1, 89.

Revenue Rulings 56-102, supra, and 56-249, supra, are hereby amplified.