Rev. Proc. 57-23

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to set forth the policy and procedure of the Internal Revenue Service in connection with claims for refund involving the exclusion from gross income of sickness disability payments under section 22(b)(5) of the Internal Revenue Code of 1939.

SEC. 2. BACKGROUND.

The Supreme Court of the United States has held, in the case of Gordon P. Haynes, et ux v. United States, 353 U. S. 81, Ct. D. 1805, page 499, this Bulletin, that an employee may exclude from his gross income as "health insurance," sickness disability benefits received during 1949 under his employer's plan even though the plan did not contain features present in normal commercial insurance. The payment of premiums in a fixed amount at regular intervals is not a necessary element of insurance, nor is there any necessity for a definite fund to be set aside to meet the insurer's obligations. The legislative history does not indicate that Congress intended to restrict the exemption to conventional modes of insurance and not to include employer disability plans. Thus, amounts received by employees as sickness disability payments under a company "plan" are excludable from gross income as proceeds of health insurance under the provisions of section 22(b)(5) of the Internal Revenue Code of 1939. The court pointed out that in the case of Arnold W. Epmeier v. United States, 199 Fed. (2d) 508, disability payments under a similar plan were held to be not taxable.

SEC. 3. STATEMENT OF POLICY.

.01. The decision of the Supreme Court of the United States in the Haynes case is broad enough to control the characterization as health insurance of payments made under all company "plans" similar to those considered in that case.

.02 It is the position of the Internal Revenue Service that an employee may exclude from his gross income as "health insurance" sickness disability benefits received under his employer's "plan" for such payments even though the "plan" did not contain features present in normal commercial insurance.

.03 A large number of returns filed in such cases involve a deduction claimed for medical expenses under the provisions of section 23(x) of the 1939 Code, the amount of which is dependent upon and controlled by the amount of the adjusted gross income reflected in the return. Thus, any decrease in the amount of the adjusted gross income will, by reason of the application of the five percent limitation required by section 23(x) of the Code, result in an increase in the amount of the allowable medical expense deduction. It is also the position of the Service that, due to the close relationship between the adjusted gross income and the allowable medical expense deduction, that portion of the overassessment resulting from the increase of the allowable medical expense in these situations is covered by implication in any claim for refund based upon the exclusion of sickness disability payments.

SEC. 4. PROCEDURE.

.01 Inasmuch as the period for filing suit might expire in the near future, top priority will be given (1) to requests for the reopening of claims of this type heretofore rejected by the issuance of registered notices of disallowance and (2) to cases where the statutory period has been extended under the provisions of section 3774(b)(2) of the 1939 Code. Section 3772(a)(2) of the 1939 Code provides that any suit or proceeding based upon refund claims must be begun before the expiration of two years from the date of mailing by registered mail by the Commissioner to the taxpayer of a notice of disallowance of the part of the claim to which such suit or proceeding relates.

.02 Certain field offices have designed claim withdrawal forms which have been executed by taxpayers in response to suggestions from such offices, and some claims have been rejected by means other than by the issuance of a registered notice of disallowance. Inasmuch as registered notices of disallowance were not issued in these cases, claims in this category will be regarded by the Revenue Service as original claims and processed without regard to such prior rejection or request for the withdrawal thereof.