Rev. Rul. 72-25

A taxpayer and his employer executed a deferred compensation agreement that provides that the employer will credit a stated sum to an account on the first day of each calendar month during the term of the agreement. The account will further be increased or decreased with the gain or loss, if any, realized from the employer's investment, at its option, of all or any portion of the amount in the account. The agreement is to run until the taxpayer attains age 65 unless employment is terminated.

The employer purchased an annuity contract to fund its deferred compensation liability. The employer is the applicant, owner and beneficiary of the annuity contract, and the annuity contract is subject to the general creditors of the employer.

Under the agreement, neither the taxpayer nor his beneficiary has any interest in the account nor in any other assets of the employer, including the annuity contract. The taxpayer and his beneficiary have only the right to receive the benefits under the deferred compensation agreement. The deferred compensation agreement does not create an escrow account or trust fund or any other form of asset segregation by the employer for the benefit of the employee. The benefits under the deferred compensation agreement are to be paid to the taxpayer in equal monthly installments for a stated number of months upon termination of his services, or if he dies, to his beneficiary.

The benefits under this deferred compensation agreement are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or liable for the debts, contracts, liabilities, engagements or torts of the taxpayer or his beneficiary.

Section 1.451-2(a) of the Income Tax Regulations provides that income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year in which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given.

In Revenue Ruling 68-99, C.B. 1968-1, 193, it is held under circumstances similar to those in the instant case that an employee is not in receipt of income as a result of his employer's purchase of an insurance contract where the employee does not receive a present economic benefit therefrom.

Held, since the employee has no present interest in the account, or in the annuity contract, compensation payable under the agreement described herein is includible in the gross income of the instant taxpayer in the taxable year in which it is actually received or otherwise made available, whichever is earlier.