Rev. Rul. 71-408

Advice has been requested whether, under the circumstances described below, amounts paid by a company to its former employees, are "wages" for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (Chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954).

A manufacturing company that had been in operation since 1957, terminated its operations and made dismissal payments to its eligible employees whose services were terminated. The company acted pursuant to an agreement with the union representing its hourly employees. Under the agreement, eligible employees were those who were on the active payroll and had five years or more of service with the company at the time their employment was terminated by the discontinuance of operations. The computation of the amount of each employee's award took into account the employee's rate of pay and years of service.

Sections 3121(a) and 3306(b) of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, respectively, define the term "wages," with certain exceptions not material here, as "all remuneration for employment." Section 3401(a) of the Code, relating to the withholding of income tax, contains a similar definition.

Sections 31.3121(a)-1(i), 31.3306(b)-1(i), and 31.3401(a)-1(a)(5) of the Employment Tax Regulations provide that remuneration for employment, unless specifically excepted, constitutes "wages" even though at the time paid the individual is no longer an employee.

Section 31.3401(a)-1(b)(4) of the regulations specifically provides, for purposes of income tax withholding, that all payments made by an employer to an employee on account of dismissal, that is, involuntary separation from the service of the employer, constitute "wages" regardless of whether the employer is legally bound by contract, statute, or otherwise to make the payments.

Although there is no similar provision in the regulations which applies for purposes of the Federal Insurance Contributions Act or the Federal Unemployment Tax Act, the term "wages" for purposes of those Acts for certain years prior to 1950 did not include dismissal payments which the employer was not legally required to make. However, the Social Security Act Amendments of 1950, Public Law 734, Eighty-First Congress, C.B. 1950-2, 217, deleted the exclusion for both Acts. In explaining the deletion for the Federal Insurance Contributions Act, House Report No. 1300, Eighty-First Congress, C.B. 1950-2, 255, 277, stated:

Therefore, a dismissal payment, which is any payment made by an employer on account of involuntary separation of the employee from the service of the employer, will constitute wages * * * irrespective of whether the employer is, or is not, legally required to make such payment.

House Report No. 1300 also referred to the same deletion for purposes of the Federal Unemployment Tax Act at C.B. 1950-2, 255, 300.

In the instant case the dismissal payments were made upon the involuntary separation of the employee from the service of the employer. Accordingly, it is held that the amounts of dismissal payments are "wages" for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages.