Internal Revenue Service
Revenue Ruling
Rev. Rul. 77-347
1977-2 C.B. 362
Section 61 -- Gross Income Defined
Section 3121 -- Social Security Definitions
Section 3306 -- FUTA Definitions
Section 3402 -- Income Tax Collected at Source
Caution: Revoked in part by Rev. Rul. 90-72
IRS Headnote
Supplemental unemployment benefits. Benefits paid to former employees of a
company from a trust fund, established pursuant to a supplemental
unemployment compensation benefit plan, are includible in the recipients'
gross income in the year received and are subject to income tax
withholding. Such benefits are not "wages" for purposes of FICA and FUTA.
Rev. Ruls. 56-249 and 58-128 amplified.
Full Text
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.
