Rev. Rul. 74-70

The purpose of this Revenue Ruling is to supersede Rev. Rul. 70-507, 1970-2 C.B. 104. ¹

Section 461 of the Code provides, in general, that the amount of any deduction or credit allowed shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.

Section 1.461-1(a)(1) of the Income Tax Regulations states, in part, that under the cash receipts and disbursements method of accounting amounts representing allowable deductions shall, as a general rule, be taken into account for the taxable year in which paid. Section 1.461-1(a)(2) of the regulations states, in part, that under the accrual method of accounting an expense is deductible for the taxable year in which all the events have occurred which determine the fact of liability and the amount thereof can be determined with reasonable accuracy.

The tax imposed on every employer by section 3111 of the Federal Insurance Contributions Act with respect to having individuals in his employ is measured by a percentage of the "wages" (exclusive of tips received by employees after 1965) paid for "employment." Liability for the tax imposed on the employer attaches at the time that the wages are actually or constructively paid unless they are deemed to be subsequently paid. See section 31.3121(a)-2 of the Employment Tax Regulations. There is no liability until such payment is made. Not until then can the tax be accrued, whether the payments are made weekly, twice a month, monthly, or on some other basis. Where a taxpayer employs the accrual method of accounting, the excise tax imposed by section 3111 of the Federal Insurance Contributions Act is deductible for the taxable year in which the wages are actually or constructively paid. Where a taxpayer employs the cash receipts and disbursements method of accounting the tax imposed by section 3111 of that Act is deductible only for the taxable year in which the tax is paid.

Section 3301 of the Federal Unemployment Tax Act imposes on every "employer" an excise tax, with respect to individuals in his employ, equal to a certain percentage of the total "wages" paid by him with respect to "employment." Under section 3302 of that Act the taxpayer may be entitled to certain credits against the tax imposed by section 3301 of that Act for any taxable year based on the amount of contributions with respect to employment during the taxable year paid by him for the taxable year with respect to the unemployment compensation law of a State and also based on the amount of contributions that he is relieved from paying to the State under such State law. The total credits allowed to a taxpayer under section 3302 of that Act shall not exceed 90 percent of the tax against which such credits are allowable. For purposes of the credit, the tax imposed by section 3301 of that Act shall be computed at the rate of 3 percent in lieu of the rate provided by section 3301 of the Act. Thus, the aggregate of the credit that is allowable to an employer for any taxable year shall not exceed 2.7 percent of the "wages" paid by the employer during the year.

The rate of tax imposed by section 3301 of that Act for the calendar year 1973 is 3.28 percent. The rate for the calendar years 1970, 1971, and 1972 is 3.2 percent.

Accordingly, for the reasons stated below, it is held that, as to a taxpayer employing the accrual method of accounting, an amount equal to at least 0.58 percent (3.28 percent less 2.7 percent) of the "wages" paid during the calendar year 1973 may be accrued if and when the employer qualifies as an "employer" as defined in section 3306(a) of that Act. Similarly, an amount equal to at least 0.5 percent (3.2 percent less 2.7 percent) of the "wages" paid during the calendar years 1970, 1971, and 1972 may be accrued.

For example, a corporation employing the accrual method of accounting is an "employer" under section 3306(a) of the Federal Unemployment Tax Act for its fiscal year ended June 30, 1973. It has paid "wages" of 5,000x dollars during the first six months of the calendar year 1973 upon which its liability for the tax under section 3301 of the Act (which is, in part, contingent) is ascertained to be 164x dollars (3.28 percent of 5,000x dollars). Its contributions to the State are 135x dollars (2.7 percent of 5,000x dollars). Accordingly, it may accrue 29x dollars (0.58 percent of 5,000x dollars) as a fixed liability deductible for Federal income tax purposes in the fiscal year ended June 30, 1973, since, to that extent its liability is determined and will not be affected by subsequent events.

The remaining 135x dollar liability under section 3301 of the Act (2.7 percent of 5,000x dollars, or 164x dollars less the 29x dollars which is accruable) may not be paid at all. All of the factors essential to the calculation under section 3301 of the Act, considered alone, may be definitely determinable from time to time during the calendar year, but the fact remains that because of the credit provisions of section 3302 of the Act an amount equal to 2.7 percent of the "wages" paid may never become a liability which must be paid to the Federal Government.

As there is a State unemployment compensation law, in this case, it may be properly said that some portion of the 135x dollars (2.7 percent of 5,000x dollars) of the liability to the Federal Government under section 3301 of the Act is cancelled immediately upon its arising by the offsetting credit under section 3302 of the Act except for the fact that such entitlement arises only after the law of the State is "certified" for the taxable year 1973 as provided in section 3304 of the Act. The total remaining liability under section 3301 of the Act thus remains in suspense until action respecting certification, as required by section 3304(c) of the Act, is taken by the Secretary of Labor.

Section 3304(c) of the Act states, in part, as follows:

CERTIFICATION.--On October 31 of each taxable year the Secretary of Labor shall certify to the Secretary [of the Treasury] each State whose law he has previously approved, except that he shall not certify any State which, after reasonable notice and opportunity for hearing to the State agency, the Secretary of Labor finds has amended its law so that it no longer contains the provisions specified in subsection (a) or has with respect to the 12-month period ending on such October 31 failed to comply substantially with any such provision in such subsection * * *.

Sections 3304(a) and 3309 of the Federal Unemployment Tax Act set forth certain standards with which a State law (as written and administered) must comply in order to secure the approval of the Secretary of Labor and be certified on October 31 of each calendar taxable year. It cannot, therefore, be known prior to October 31 in each calendar year whether the particular State law is certified for that year and, as the calendar year is the taxable year, it cannot be known until October 31 of the taxable year whether the taxpayer is entitled to the credit provisions of section 3302 of the Act. Even though it is necessary for the taxpayer to make some provisions in its accounting during the course of the calendar year against the possible incidence of an actual cash liability for this 135x dollar portion of the tax computed under section 3301 of the Act, it is clearly a contingent provision.

Inasmuch as there is a distinct likelihood that, in the example, 135x dollars of the tax calculated under section 3301 of the Act will not be paid (i.e., that it will not survive as a liability which must be paid to the Federal Government) that much of the tax imposed by that section must be classified as a liability contingent upon a specific event, namely, whether the State law is in fact certified by the Secretary of Labor on October 31 of the taxable year. Only in the event that State law is not certified will the entire amount of the liability calculated under section 3301 of the Act constitute a definite and fixed liability to the Federal Government and any definite accrual of the amount of liability in excess of 29x dollars must be postponed until October 31.

For calendar years prior to 1972, however, the certification date was December 31, rather than October 31. Consequently, as to the taxable calendar years 1970 and 1971, any definite accrual of liability in excess of 0.5 percent (3.2 percent less 2.7 percent) of the "wages" paid must be postponed to December 31.

Where a taxpayer employs the cash receipts and disbursements method of accounting any such liability which arises is deductible for the taxable year during which paid.

Rev. Rul. 70-507 is hereby superseded, since the position stated therein is restated under current law in this Revenue Ruling.

¹ Because of the interaction of sections 3301 and 3302, the correct maximum credit allowable shown in Rev. Rul. 70-507 should have been 84.375 percent (2.7% / 3.2% X 100 = 84.375) instead of 90 percent. Therefore, the computations shown in Rev. Rul. 70-507 were incorrect.