Rev. Rul. 58-238

Advice has been requested whether contributions made into a trust fund by an employer for the purpose of defraying the cost of an apprenticeship program are deductible as ordinary and necessary business expense under the provisions of section 162(a) of the Internal Revenue Code of 1954.

A trust fund was established as a result of a collective bargaining agreement between an employer and a local union, involving an apprenticeship program. The bargaining agreement provides, in part, that the employer shall pay monthly the sum of three cents per straight-time hour for all productive labor during the period into an educational and training fund for the purpose of defraying the cost of daytime schooling of apprentices and the employment of a full-time training director.

The fund so created is a trust fund pursuant to the agreement negotiated between the employer and the union. Such trust is to be administered by the board of trustees consisting of six trustees with equal representation divided between the employer and the union. In the event of a deadlock relating to the administration of the trust fund, the matter is to be referred to a disinterested party, the decision being final and binding on the trustees.

The trustees of the trust fund shall (1) see that the three-cent contribution due from the employer is paid into the fund; (2) pay and make the necessary arrangement to pay the apprentices for the time they spend in school; (3) work in coordination with the training director and the joint apprenticeship and training committee; (4) adopt reasonable regulations to provide for payment of necessary administrative expenses; (5) provide for the payment of all or any part of the cost of approved program for the training of journeymen and apprentices; and (6) accumulate such reserve funds as they in their discretion deem necessary or desirable for the proper execution of the trust fund.

Under the trust agreement the joint apprenticeship and training fund is an irrevocable trust. Title to all monies paid therein is vested collectively in and remain exclusively in the trustees of the fund. The contributing employer, any member of the union, or the union itself, has no right, title or interest in or to the trust estate. In the event of the termination of the obligation of the employer to make contributions to the trust fund, the trustees shall apply the trust estate to the continued purposes specified in the trust agreement.

Section 162(a) of the Code provides that in computing taxable income there shall be allowed as a deduction all the ordinary and necessary business expenses.

Under the facts in the instant case, an expense of the nature involved herein relates to the regular conduct of the employer's business, the consideration for which is intended to produce benefits flowing directly to the employer in the form of more efficient and skilled employees. Furthermore, the employer is subject to a legally binding and enforceable agreement to pay fixed and determinable amounts into the trust fund controlled by the trustees, the employer does not have any reversionary interest in the assets comprising the trust fund, and none of the payments made by the employer may be diverted by the trust for any purpose.

In view of the foregoing, it is held that the contributions made by the employer to the joint apprenticeship and training fund, pursuant to a collective bargaining agreement, constitute business expenses deductible from gross income under section 162(a) of the Code in the taxable year in which paid or incurred.