Rev. Rul. 77-347

Advice has been requested whether, under the circumstances described below, payments from a trust to former employees of a company 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).

Pursuant to a collective bargaining agreement with a union, a company makes payments into a trust fund, the purpose of which is to pay, under certain circumstances, benefits to employees covered under the agreement. Employees do not contribute to the trust fund. The trust qualifies for exemption from Federal income tax under section 501(c)(17) of the Code as a trust forming part of a plan providing for the payment of supplemental unemployment compensation benefits.

A qualified employee becomes eligible for benefits under the plan when the employee's employment is terminated because of permanent discontinuance of the company's business, or acquisition, merger, or consolidation, and the resulting company does not offer the employee full-time employment. Benefits under the plan do not disqualify the employee for the state's unemployment benefits. Benefits are based upon years of service with the company and the employee's weekly earnings.

Section 3121(a) of the Federal Insurance Contributions Act and section 3306(b) of the Federal Unemployment Tax Act define "wages" to mean all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash.

Rev. Rul. 56-249, 1956-1 C.B. 488, holds that benefits paid to individuals by the trustees of a trust created pursuant to the provisions of a supplemental unemployment benefit plan established as a result of a collective bargaining agreement are not "wages" for purposes of the taxes imposed by the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages. That ruling also holds that such benefits are includible in the gross incomes of the recipients for the taxable year in which received. In Rev. Rul. 56-249 the amount of a weekly benefit payable under the plan is based upon the amount of the weekly benefit payable under the appropriate state unemployment compensation laws, and the amount of other remuneration allowable under such compensation laws.

Revenue Ruling 58-128, 1958-1 C.B. 89, holds that the provisions of Rev. Rul. 56-249 are applicable with respect to supplemental unemployment benefit plans which are similar in all material details to that involved in Rev. Rul. 56-249, except for having been unilaterally instituted by the employer, and which are not union negotiated.

Section 3402(o) of the Code, as added by section 805(g) of the Tax Reform Act of 1969, P.L. 91-172, 1969-3 C.B. 10, extends income tax withholding to any supplemental unemployment compensation benefit paid to an individual. Section 3402(o)(2)(A) defines supplemental unemployment compensation benefit as an amount that is paid to an employee, pursuant to a plan to which the employer is a party, because of an employee's involuntary separation from employment, resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions, but only to the extent such benefits are includible in the employee's gross income.

Since, the supplemental unemployment plan in Rev. Rul. 56-249 and the plan in the instant case are substantially the same, the fact that benefits under the plan are not tied to the State's unemployment benefits is not a material or controlling factor. The payments under both plans are supplemental unemployment compensation benefits as defined in section 3402(o) of the Code.

Accordingly, the payments from the trust received by the former employees are not "wages" for the purposes of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act. Further, the payments are includible in the gross incomes of the recipients for the year in which received, and are subject to the Collection of Income Tax at Source on Wages. The results would be the same if the terms of the plan were the same, except that the plan had been unilaterally instituted by the company and was not union negotiated.

Rev. Rul. 56-249 and Rev. Rul. 58-128 are amplified and modified to reflect the change of the Code made by the Tax Reform Act of 1969 with regard to the Collection of Income Tax at Source on Wages.