Rev. Rul. 81-191

ISSUE

Are contributions made by employers and employees to the Rhode Island temporary disability insurance benefit fund deductible under section 164(a) of the Internal Revenue Code?

FACTS

Reconsideration has been given to Revenue Ruling 75-148, 1975-1 C.B. 64, relating to the deductibility of contributions made by employers and employees to the Rhode Island temporary disability insurance benefit fund pursuant to the Rhode Island Temporary Disability Insurance Act. Rhode Island General Laws Annotated, sections 28-39-1 through 28-41-33 (1979).

Rev. Rul. 75-148 holds that contributions made by employers to the Rhode Island temporary disability benefit fund are deductible as taxes under section 164(a) of the Code. Rev. Rul. 75-148 also holds that contributions by employees to the Rhode Island fund are neither deductible as taxes under section 164(a) nor as medical expenses under section 213 but are nondeductible personal expenses.

The Rhode Island statute provides weekly disability benefits based upon average weekly wages to eligible individuals, who are totally disabled and unable to perform any work for remuneration as a result of suffering an accident or sickness not compensable under the workmen's compensation law.

Employers are required to make contributions to the fund providing disability benefits. With respect to employee contributions, an employer is required to withhold the amount of such contributions from the employee's wages at the time the wages are paid. If an employer fails to withhold the contributions of any employee within the time period provided by statute, the employer becomes liable alone for such contributions under the statute.

LAW AND ANALYSIS

Section 164(a)(3) of the Code specifically provides for the deduction of state income taxes. In addition to the taxes specifically enumerated in section 164(a), that section provides for the deduction of state taxes that are paid or accrued within the taxable year in carrying on a trade or business.

Principles developed under federal law, not state interpretations or designations, determine whether a payment falls within the meaning of the term "taxes" and "income taxes" as used in federal statutes. See Rev. Rul. 79-180, 1979-1 C.B. 95; Rev. Rul. 76-215, 1976-1 C.B. 194; Rev. Rul. 71-49, 1971-1 C.B. 103; and Rev. Rul. 61-152, 1961-2 C.B. 42.

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 and not as a payment for some special privilege granted or service rendered. See Rev. Rul. 77-29, 1977-1 C.B. 44; Rev. Rul. 71-49; Rev. Rul. 61-152; and Rev. Rul. 58-141, 1958-1 C.B. 101. Further, it is the position of the Service that a tax must be paid to a government levying the tax, to certain public benefit corporations created by that government for a public purpose, or to their agents. See Rev. Rul. 74-525, 1974-2 C.B. 411; Rev. Rul. 74-58, 1974-1 C.B. 180; and Rev. Rul. 71-49.

Both employee and employer contributions to the Rhode Island temporary disability insurance benefit fund meet the above standards and concept of "taxes" because such contributions are exacted pursuant to legislative authority in the exercise of the taxing power of the state, and are imposed and collected by the state for the purpose of raising revenue to be used for a governmental function that serves public purposes.

However, for purposes of determining deductibility under section 164(a) of the Code such contributions must be further characterized as to the specific type of "taxes."

Employee and employer contributions to the Rhode Island temporary disability insurance benefits fund are analogous to the taxes imposed on employees and employers under sections 3101 and 3111 of the Federal Insurance Contributions Act. The Supreme Court of the United States in Helvering v. Davis, 301 U.S. 619, 634-35 (1937), Ct. D. 1235, 1937-1 C.B. 360, said in considering the constitutionality of the Social Security Act of 1935 that it ". . . lays two different types of tax, an 'income tax on employees,' and 'an excise tax on employers.' The income tax on employees is measured by wages paid during the calendar year . . . ." In addition to the tax imposed on the wages of employees under section 3101 expressly being referred to in that section as a tax on their "income," such tax is classified as a federal "income tax" for purposes of section 275 of the Code, which disallows the deduction of certain specific taxes. The tax imposed on employers under section 3111 is expressly stated in that section to be an "excise tax."

HOLDING

Amounts withheld from the wages of employees for contribution to the Rhode Island temporary disability benefit fund qualify as state "income taxes" and, therefore, are deductible by the employees under section 164(a)(3) of the Code. See McGowan v. Commissioner, 67 T.C. 599 (1976), and Trujillo v. Commissioner, 68 T.C. 670 (1977). However, such amounts are deductible by an employee only if the employee's deductions are itemized in computing taxable income under section 63(b).

Amounts paid or accrued by employers to the Rhode Island temporary disability benefit fund being state "excise taxes" do not qualify as any of the types of taxes enumerated in section 164(a) of the Code. However, such amounts are state taxes paid or accrued by the employers in carrying on a trade or business and, therefore, are deductible by the employers under section 164(a).

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 75-148 is superseded.