COURT-AWARDED DAMAGES FOR BACK PAY, UNPAID LIFE AND HEALTH INSURANCE PREMIUMS ARE INCLUDIBLE IN GROSS INCOME

Rev. Rul. 85-44

ISSUE

Are payments made to an individual as court-awarded damages for back pay, including unpaid life insurance premiums and unpaid health insurance premiums, includible in the individual's gross income under the circumstances described below?

FACTS

B was dismissed from a teaching position by city CI's board of education in 1978. B sued CI's board of education claiming that B was illegally dismissed. In 1983, the court held that B had been illegally dismissed and awarded B damages for back pay, including unpaid life and health insurance premiums that would have been paid by CI on behalf of B if B had not been dismissed.

During the years of B's employment with CI and after B's illegal dismissal, CI paid the premiums for group-term life insurance qualifying under section 79 of the Internal Revenue Code for all of its employees. During the same years, CI made contributions on behalf of all of its employees to an accident and health plan described in section 106 of the Code.

LAW AND ANALYSIS

Section 61 of the Code provides that gross income means all income from whatever source derived, unless excluded by law. Section 61(a) specifically includes compensation for services in gross income.

Section 79(a) of the Code provides that the cost of group-term life insurance provided by an employer on the life of an employee for a taxable year is includible in the employee's gross income only to the extent that such cost exceeds the cost of $50,000 of such insurance plus the amount (if any) paid by the employee toward the purchase of such insurance.

Section 1.79-1(a)(3) of the Income Tax Regulations provides in part that life insurance is not group-term life insurance for purposes of section 79 of the Code unless it is provided under a policy carried directly or indirectly by the employer.

Section 106 of the Code provides that the gross income of an employee does not include contributions by the employer to accident or health plans for compensation (through insurance or otherwise) to the employee for personal injuries or sickness.

Section 1.106-1 of the regulations provides that the employer may contribute to an accident or health plan either by paying the premium (or a portion of the premium) on a policy of accident or health insurance covering one or more employees, or by contribution to a separate trust or fund (including a fund referred to in section 105(e)) that provides accident or health benefits directly or through insurance to one or more employees.

Amounts awarded in a settlement or judgement for back pay are includible in the recipient's gross income under section 61 of the Code. See Rev. Rul. 75-64, 1975-1 C.B. 16, Rev. Rul. 72-341, 1972-2 C.B. 32.

If CI had made premium payments on the life and health insurance policies for B, such payments would not have been includible in B's gross income pursuant to sections 79 and 106, respectively. However, since the court-awarded damages allocated to the unpaid life and health insurance premiums were received directly by B, they do not come within the statutory exclusion provided by those sections. See Rev. Rul. 57-33, 1957-1 C.B. 303, and Rev. Rul. 75-241, 1975-1 C.B. 316, which hold that payments made directly to employees to purchase health insurance were includible in the employees' gross income.

The facts of this revenue ruling are distinguishable from those in Rev. Rul. 61-146, 1961-2 C.B. 25, which holds that amounts paid directly to employees in reimbursement of premiums paid by them for health insurance, upon verification that the premiums were actually paid by the employees, are excludable from gross income under section 106 of the Code. In the instant case, there was no reimbursement for amounts actually paid by B, nor did CI verify that insurance was in force and paid for by B. Rather, the amount was determined strictly on the basis of what CI would have paid for the insurance premiums had B not been illegally dismissed. Hence. Rev. Rul. 61-146 is distinguishable.

HOLDING

Payments made to B as court-awarded damages for back pay, including unpaid life insurance premiums and unpaid health insurance premiums, are includible in B's gross income.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 61-146 is distinguished.