Rev. Rul. 75-149

The purpose of this Revenue Ruling is to update and restate, under current statute and regulations, the positions set forth in I.T. 3966, 1949-2 C.B. 27 and I.T. 3967, 1949-2 C.B. 33.

The question presented is whether contributions made by employers and employees to the California unemployment fund and to the California unemployment compensation disability fund pursuant to the California Unemployment Insurance Code 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 California law.

The California 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.

The California 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, an individual eligible for disability benefits who is confined in a hospital will receive additional benefits for each day of such confinement. These additional benefits are payable irrespective of actual medical costs incurred or whether such medical costs are covered by private health or hospitalization insurance. Section 2801, et seq., California Unemployment Insurance Code. They are payable only to the individual claimant and cannot be made payable to the hospital rendering the services unless prior consent is given by such individual. Section 2711, California Unemployment Insurance Code.

Employers are required to make contributions to the fund providing unemployment benefits and employees are required to contribute to 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. California Unemployment Insurance Code, Section 986 (1972).

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. California Unemployment Insurance Code, Section 3260 (1972).

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 (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.

Accordingly, amounts paid or accrued in carrying on a trade or business by employers to the California unemployment fund pursuant to Section 976 of the California Unemployment Insurance Code are taxes deductible under section 164(a) of the Code.

Amounts withheld from the wages of employees for contribution to the California disability fund for indemnity coverage under the California Unemployment Insurance Code 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 because they are incurred to provide indemnity coverage for loss of wages due to unemployment resulting from nonoccupational hazards rather than from hazards arising from business contingencies. Therefore, these amounts are not deductible by employees under section 164(a). Such amounts are nondeductible personal expenses under section 262. See Rev. Rul. 71-73, 1971-1 C.B. 52, which held that similar employee contributions under the New York Workman's Compensation Law are nondeductible personal expenses.

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.

Furthermore, both the amounts withheld from the wages of employees for contributions to the California disability fund, which provides indemnity for loss of earnings during disability, including the additional benefits during hospital confinement, 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, and Rev. Rul. 68-451, 1968-2 C.B. 111, which holds that premiums paid on an insurance policy providing payment of a specified amount during hospital confinement are not amounts paid for insurance covering medical care.

I.T. 3966 and I.T. 3967 are superseded, since the positions set forth therein are restated under current law in this Revenue Ruling.

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