Rev. Rul. 75-48

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 3970, 1949-2 C.B. 28.

The question presented is whether contributions made by employers and employees to the New Jersey unemployment compensation fund and to the New Jersey temporary disability benefits fund pursuant to chapter 21, title 43 of the Revised Statutes of New Jersey, as amended and supplemented, are deductible as taxes under section 164 of the Internal Revenue Code of 1954. The question is also presented as to the deductibility of contributions made by employees to private plans as substitutes for coverage under the same provisions of New Jersey law.

The New Jersey statute provides for unemployment benefits to be paid to unemployed eligible individuals if the individual is able to work and is available for work, and has demonstrated that he is actively seeking work. New Jersey Statutes Annotated, Title 43, Chapter 21, Section 4(c) (1962).

The New Jersey statute also provides weekly disability benefits based upon average weekly wages where the eligible individual becomes unemployed as a result of suffering an accident or sickness not compensable under the workmen's compensation law, and resulting in his total disability to perform any work for remuneration. In addition, eligible unemployed individuals who become totally disabled and, thus, unable to obtain unemployment benefits are eligible for a weekly disability benefit. New Jersey Statutes Annotated, Title 43, Chapter 21, Section 4(f)(1) (1962). The purpose of this section of the New Jersey law is to protect against the hazard of earnings loss caused by nonoccupational sickness or accident. New Jersey Statutes Annotated, Title 43, Chapter 21, Section 26 (1962).

Both employers and employees are required to make contributions to the fund providing unemployment benefits and the fund providing disability benefits. With respect to employee contributions, an employer is required to withhold the amount of such contributions from the employees' wages at the time the wages are paid. New Jersey Statutes Annotated, Title 43, Chapter 21, Section 7 (1962).

In lieu of the State fund providing disability benefits, an employer may establish a private plan for the payment of disability benefits. The benefits under such a private plan may be provided through an insurance contract issued by an authorized insurer or through a plan of self-insurance. An employee can not be required to contribute toward a private plan an amount which is greater than that required to be paid to the State disability benefits fund. New Jersey Statutes Annotated, Title 43, Chapter 21, Section 32 (1962).

Section 164(a) of the Code provides, in addition to the taxes enumerated therein, that there shall be allowed as a deduction State and local, and foreign, taxes which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 of the Code (relating to expenses for the production of income).

Section 262 of the Code provides that, except as otherwise expressly provided, no deduction shall be allowed for personal, living, or family expenses.

The word "taxes" has been defined as an enforced contribution, exacted pursuant to legislative authority in the exercise of the taxing power, and imposed and collected for the purpose of raising revenue to be used for public or governmental purposes. See Rev. Rul. 71-49, 1971-1 C.B. 103. The New Jersey Unemployment Compensation Commission and the Federal and New Jersey courts regard the contributions to the State unemployment compensation fund as taxes. See In re Wm. Akers, Jr., Co., 121 F. 2d 846 (3rd Cir., 1941); Singer Sewing Machine Co. v. New Jersey Unemployment Compensation Commission, 128 N.J.L. 611, 27 A.2d 889 (1942), affirmed, 130 N.J.L. 173, 31 A.2d 818 (1943); Raines v. Unemployment Compensation Commission, 129 N.J.L. 28, 28 A.2d 46 (1942), affirmed, 129 N.J.L. 387, 30 A.2d 31 (1943), cert. denied, 319 U.S. 757 (1943). The New Jersey courts have also held that "contributions" which are paid into the New Jersey temporary disability benefits fund constitute taxes. See State v. Cannarozzi, 77 N.J. Super. 236, 168 A.2d 113 (1962); and State Division of Employment Security v. Pilot Manufacturing Co., 83 N.J. Super. 177, 199 A.2d 78 (1964).

Accordingly, it is held that amounts paid or accrued in carrying on a trade or business by employers to the New Jersey unemployment compensation fund and to the New Jersey temporary disability benefits fund pursuant to chapter 21, title 43 of the Revised Statutes of New Jersey, as amended and supplemented, are taxes deductible under section 164(a) of the Code.

In the case of employees, amounts withheld from their wages for contribution to the New Jersey unemployment compensation fund pursuant to the New Jersey unemployment compensation law providing indemnity coverage for the loss of wages due to unemployment resulting from business contingencies are taxes paid or accrued by the employees in carrying on a trade or business and, therefore, are deductible by the employees under section 164(a) of the Code. However, such amounts are deductible by an employee only if his deductions are itemized in computing taxable income under section 63(a).

Amounts withheld from the wages of employees for contribution to the New Jersey temporary disability benefits fund for indemnity coverage under the New Jersey temporary disability benefits law for loss of wages due to unemployment resulting from non-occupational hazards do not qualify as any of the types of taxes specified in section 164(a) of the Code and are not paid or accrued in carrying on a trade or business. Therefore, these amounts are not deductible by employees under section 164(a). Such amounts are in the nature of non-deductible personal expenses under section 262. See Rev. Rul. 71-73, 1971-1 C.B. 52.

Also, contributions made by employees to private plans of insurance as substitutes for coverage under the State disability benefits law are not taxes within the meaning of section 164(a) of the Code. Such amounts are nondeductible personal expenses under section 262.

It is further held that both the amounts withheld from the wages of employees for making contributions to the New Jersey temporary disability benefit fund, which provides indemnity for loss of earnings during disability, and amounts contributed to private plans as substitutes for coverage under the State disability benefits law, which are attributable to insurance coverage providing indemnity for loss of earnings during disability, are not deductible as medical expenses under section 213 of the Code. See Rev. Rul. 68-212, 1968-1 C.B. 91, which holds that premiums paid for insurance policies providing indemnity for loss of earnings during disability will not be deductible as medical expenses under section 213 for taxable years beginning after December 31, 1966.

I.T. 3970 is superseded, since the position set forth therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.