Rev. Rul. 71-73

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 4005, C.B. 1950-1, 47.

Pursuant to the Disability Benefits Law enacted as Article 9 of the New York Workmen's Compensation Law (sections 200-249 of Book 64, McKinney's Consolidated Laws of New York Annotated (1965)), amounts are deducted from employees' wages and are used to provide funds for the payment of benefits to employees who are unable to work because of injury or sickness not arising out of and in the course of employment. The question presented is whether such amounts are deductible for Federal income tax purposes.

The pertinent provisions of this law read as follows:

Section 201. Definitions As used in this article:

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9. "Disability" during employment means the inability of an employee, as a result of injury or sickness not arising out of and in the course of an employment, to perform the regular duties of his employment or the duties of any other employment which his employer may offer him at his regular wages and which his injury or sickness does not prevent him from performing. "Disability" during unemployment means the inability of an employee, as a result of injury or sickness not arising out of and in the course of an employment, to perform the duties of any employment for which he is reasonably qualified by training and experience.

10. "Benefits" means the money allowances during disability payable to an employee who is eligible to receive such benefits, as provided in this article.

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Section 209. Contribution of Employees for Disability Benefits

1. Every employee in the employment of a covered employer shall, on and after January first, nineteen hundred fifty, contribute to the cost of providing disability benefits under this article, to the extent and in the manner herein provided.

2. The special contribution of each such employee to the accumulation of funds to provide benefits for disabled unemployed shall be as provided in subdivision one of section two hundred fourteen.

3. The contribution of each such employee to the cost of disability benefits provided by this article shall be one-half of one per centum of the employee's wages paid to him on and after July first, nineteen hundred fifty, but not in excess of thirty cents per week.

4. Notwithstanding any other provision of law, the employer is authorized to collect from his employees, except as otherwise provided in any plan or agreement under the provisions of subdivisions four or five of section two hundred eleven, the contribution provided under subdivisions two and three, through payroll deductions. If the employer shall not make deduction for any payroll period he may thereafter, but not later than one month after payment of wages, collect such contribution through payroll deduction.

5. In collecting employee contributions through payroll deductions, the employer shall act as the agent of his employees and shall use the contribuitons only to provide disability benefits as required by this article. * * *

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Section 214. Special Fund for Disability Benefits

There is hereby created a fund which shall be known as the special fund for disability benefits to provide for the payment of disability benefits under sections two hundred seven, two hundred thirteen and attendance fees under subdivision two of section two hundred thirty-two of this article.

1. For the purpose of accumulating funds for payment of benefits to the disabled unemployed, there is hereby assessed a contribution at the rate of two-tenths of one per centum of the wages paid during the period from January first, nineteen hundred fifty to June thirtieth, nineteen hundred fifty inclusive, to employees in the employment of covered employers on or after January first, nineteen hundred fifty, but not in excess of twelve cents per week as to each such employee, of which the employee shall contribute one-tenth of one per centum of his wages but not in excess of six cents per week, and the employer shall make an equal contribution. The contribution of the employee shall be deducted from his wages in the same manner as provided in section two hundred nine. * * *

Section 162(a) of the Internal Revenue Code of 1954 provides, in part, that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

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

It is held that the amounts deducted by an employer from the wages of employees, pursuant to the provisions of Article 9 of the New York Workmen's Compensation Law, are not ordinary and necessary business expenses within the meaning of section 162(a) of the Code. Such contributions are personal expenses of the employees and are not deductible for Federal income tax purposes.

I.T. 4005 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, C.B. 1967-1, 576.