Rev. Rul. 55-691

Advice has been requested relative to the taxability to an employee of an annuity purchased or an irrevocable trust formed by guarantors of the employee's corporate salary for the purpose of relieving the guarantors of their individual personal obligation for payment of the salary to such employee.

A , in 1952, entered into an employment agreement with the M corporation which agreement was to constitute for a period of years and provided for a salary of 50 x dollars per year payable semimonthly. The contract was guaranteed by B and C as individuals.

Due to financial difficulties during the current year (1955), the corporation is unable to pay the full amount of the compensation and the actual salary being paid is about 3 x dollars less per month than the amount payable under the contract. B and C are desirous of being relieved of their personal guaranty and are willing to pay 75 x dollars therefor payable through an irrevocable trust in which A will be the beneficiary. The amount to be paid out of the trust will be 3 x dollars per month which is the difference between what A receives from the corporation and what the contract calls for. As an alternative, B and C are considering purchasing a single premium annuity, with A as the beneficiary and which will pay A an amount not in excess of 3 x dollars per month. It is not proposed that A's right to receive distribution from the trust or payments under the annuity contract be contingent upon his continued performance of services under the employment agreement with the M corporation.

The specific question presented is, depending on whether the trust was formed or an annuity was purchased, whether A must include in his gross income the amount transferred to the trust or the consideration paid for the annuity in the year such amount is transferred or paid.

In this case the amount to be transferred to the trust or paid for the annuity, as the case may be, constitutes compensation paid for services within the meaning of section 61(a) of the Internal Revenue Code of 1954. Whether the amount is transferred to the irrevocable trust or paid for the purchase of an annuity with A as beneficiary, A will be deemed to have received an economic and financial benefit in the year of such transfer or payment and the total amount thereof will be taxable to A in such year. See Regulations 118, section 39.22(b)(2)-5, applicable under the 1954 Code by virtue of T.D. 6091, C.B. 1954-2, 47, and I.T. 4041, C.B. 1951-1, 5; also Robert P. Hackett et al. v. Commissioner , 159 Fed.(2) 121; Elliott C. Morse v. Commissioner , 202 Fed.(2d) 69; J. Carlton Ward, Jr. v. Commissioner , 159 Fed.(2d) 502; J. Ferd Oberwinder et al. v. Commissioner , 147 Fed.(2d) 255; E. T. Sproull v. Commissioner , 16 T.C. 244; J. H. McEwen v. Commissioner , 6 T.C. 1018; and Renton K. Brodie et al. v. Commissioner , 1 T.C. 275.

Accordingly, it is held that the contemplated transfer of 75 x dollars to a trustee for the benefit of A or the purchase of an annuity contract in which A is the beneficiary will constitute taxable income to A in the year in which such transfer or purchase is made