Rev. Rul. 59-64

Advice has been requested as to the treatment for Federal employment and income tax purposes of the amounts received from a company by the beneficiary of one of its employees under the circumstances described below.

An employee, who was paid on a monthly basis, was absent from work for a period of 15 days prior to his death on June 15, 1957. His absence from work was due to an illness for which he was hospitalized. He had been paid all of his regular earnings through May 31, 1957. Under the established company policy, the employee, while he was absent from work due to illness, continued to receive wages under his employer's wage continuation plan and, when he died, salary or illness benefits were paid to the employee's beneficiary through the current pay period in which death occurred. Accordingly, the beneficiary received the employee's salary of $600 for the month of June and $500 representing vacation allowances earned by the employee prior to his death.

Along with hospitalization and disability plans, the employer grants illness benefits to all regular employees with 24 or more weeks of service. The number of weeks an employee may receive these benefits increases with the length of his continuous service in accordance with a written plan which was furnished to the employees. The employee pays no premiums toward this plan, the employer bearing the entire cost thereof.

Section 3121 of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954) provides, in part, as follows:

(a) Wages.-For purposes of this chapter, the term `wages' means all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash; except that such term shall not include-

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(2) The amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally and their dependents) or for a class or classes of his employees (or for a class or classes of his employees and their dependents), on account of-

(A) retirement, or

(B) sickness or accident disability, or

(C) medical or hospitalization expenses in connection with sickness or accident disability, or

(D) death;

The payments made to the beneficiary of the employee representing his wages during his last illness and his salary for the remainder of the month of June are payments made pursuant to a plan or system of the type described in section 3121(a)(2) of the Federal Insurance Contributions Act. Thus, the taxes imposed by the Federal Insurance Contributions Act are not applicable to the $600 paid to the employee's beneficiary. However, the payments representing vacation pay made to the beneficiary of such employee constitute `wages' subject to such taxes.

I.T. 3737, C.B. 1945, 319, holds that death benefit payments made to the beneficiaries or to the estates of deceased employees and payments made to the beneficiaries or to the estates of deceased employees which represent unpaid compensation for services rendered by the decedent are not wages subject to withholding of income tax at the source under section 1622 of the Internal Revenue Code of 1939, as amended, now section 3402 of the Internal Revenue Code of 1954. Therefore, no withholding of income tax is required to be made by the company from the $600 June salary or from the vacation allowance paid to the beneficiary of the company's former employee.

Under the provisions of section 105(d) of the Code, wages or payments in lieu of wages, received by an employee pursuant to the provisions of a wage continuation plan for a period during which the employee is absent from work on account of personal injuries or sickness, are excludable from gross income, subject to the following limitations: (1) the exclusion does not apply to the extent that the payments received exceed the weekly rate of $100; and (2) if the absence is due to sickness (as distinguished from injury) the exclusion does not apply to amounts attributable to the first seven calendar days of the period of absence unless the employee is hospitalized on account of sickness for at least one day during the period of absence.

That portion of the $600 paid for the period up to the decedent's death would have been excludable from the gross income of the decedent, to the extent provided in section 105(d) of the Code, had he received it prior to his death. Accordingly, that portion is not `income in respect of a decedent,' nor is it taxable income in the hands of the recipient. However, to the extent it would not have been excluded under section 105(d) of the Code, it is income in respect of a decedent and includible in the gross income of the recipient under section 691(a) of the Code.

That portion of the $600 paid for the period from the decedent's death to the end of the month was not an amount to which he possessed a nonforfeitable right while living but was paid solely by reason of the death of the employee. It, therefore, qualifies as a death benefit under section 101(b) of the Code and, since it does not exceed $5,000, it is excludable from the gross income of the recipient to the extent provided therein.

The beneficiary acquiring the right from the decedent to receive the vacation allowances is required to take the amount thereof into account in computing his taxable income for the period in which such amount is received. Under section 691(a)(3) of the Code, such amount is considered to have the same character in the hands of the beneficiary which it would have had in the hands of the decedent had he lived.

The employer in the instant case is required, under section 6041(a) of the Code, to report on Form 1096, U.S. Annual Information Return, accompanied by U.S. Information Return, Form 1099, all payments of $600 or more made to the estate or beneficiary of the employee.