ANNOUNCEMENT RELATING TO DECISIONS OF THE TAX COURT OF THE UNITED STATES It is the policy of the Internal Revenue Service to announce in the Internal Revenue Bulletin at the earliest practicable date the deter mination of the Commissioner to acquiesce or not to acquiesce in a decision of the Tax Court of the United States which disallows a de ficiency in tax determined by the Commissioner to be due. Notice that the Commissioner has acquiesced or nonacquiesced in a decision of the Tax Court relates only to the issue or issues decided adversely to the Government. Decisions so acquiesced in should be relied upon by officers and employees of the Internal Revenue Service as precedents in the disposition of other cases. (No announcements are made i the Bulletin with respect to memorandum opinions of the Tax Court.) The Commissioner acquiesces in the following decisions: 1953) Cramer, Emma (June 29, 1953) a. a a Report Docket No. a The page citation of this decision which has not been reported will be published in the Cumulati Bulletin. For ready reference, the date of the decision is shown after the taxpayer's name. Board of Tax Appeals. (1) Nonacquiescence published in Cumulative Bulletin 1952-2, page 6, withdrawn. (2) Acquiescence published in Cumulative Bulletin 1953-1, page 5, withdrawn. PART I-CURRENT RULINGS, DECISIONS, ETC. INTERNAL REVENUE CODE SECTION 22 (b).-GROSS INCOME: EXCLUSIONS REGULATIONS 118, SECTION 39.22 (b) (5): Statu- INTERNAL REVENUE CODE Rev. Rul. 54-1 A self-insured plan established by an employer in compliance with the New York State Disability Benefits Law providing for the payment of nonoccupational disability benefits to employees, under which (1) the benefits paid are closely correlated to regular wages, (2) employees contribute only a part of the cost of the benefits, and (3) there is no separate entity into which the employer pays specified sums in advance and from which employees receive benefits, is not in itself a plan of insurance within the purview of section 22(b) (5) of the Internal Revenue Code. Advice is requested whether nonoccupational disability benefits received by employees under a self-insured plan, established by an employer in compliance with the New York State Disability Benefits Law under which (1) the benefits paid are closely correlated to regular wages, (2) employees contribute only a part of the cost of the benefits, and (3) there is no separate entity into which the employer pays specified sums in advance and from which employees receive benefits, are excludable from the gross income of the recipients as accident or health insurance under section 22(b) (5) of the Internal Revenue Code. In the case under consideration regular salaried and hourly employees who are necessarily absent from work because of illness or accident, other than absences covered by workmen's compensation laws, receive cash benefits which equal regular wages or one-half of regular wages for a stated maximum period. The employer deducts from its employees' regular payroll the amounts authorized under the State law as employee contributions. These amounts are credited on the employer's books to the Employees' Trust Fund for New York State Disability Law, and this account is charged with the amounts paid as disability benefits to employees. The cost of the benefits in excess of employee contributions is paid by the employer. Section 22(b)(5) of the Code provides in part as follows: *(b) EXCLUSIONS FROM GROSS INCOME.-The following items shall not be included in gross income and shall be exempt from taxation under this chapter [chapter 1 of the Code]: (5) COMPENSATION FOR INJURIES OR SICKNESS.-Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 23(x) in any prior taxable year, amounts received, through accident or health insurance * as compensation for personal injuries or sickness * An examination of the facts in the instant case does not reveal the existance of insurance within the meaning of section 22(b) (5), supra. See G. C. M. 23511, C. B. 1943, 86. The fact that a plan complies with State law does not by itself make the plan one of insurance. See I. T. 4107, C. B. 1952-2, 73. The contribution of only a part of the cost of the benefits by the employees does not in itself convert a plan into insurance. In Revenue Ruling 208, I. R. B. 1953-21, 1, the employee contributions covered the entire cost of the benefits paid. Further, the benefits paid under the instant plan are closely correlated to the regular wages of the covered employees and not to the degree of disability. There is no arrangement apart from normal payroll procedure, such as a fund, trust, or association, under which the employer, as well as the employees, contributes specified sums in advance and from which disability benefits will at some future time be paid. Although the books of the employer reflect a credit to a trust fund account, as a matter of fact, the employer has not established an independent entity for the administration of this program. There is nothing to distinguish the benefits received under the instant plan from the continuation of regular compensation in whole or in part during a period of disability. See Rev. Rul. 209, I. R. B. 1953-21, 3. In view of the foregoing, it is held that the plan of the instant employer is not a plan of insurance within the purview of section 22(b) (5) of the Internal Revenue Code. For the extent to which benefits received under such plan are subject to Federal income tax and to withholding, see Rev. Rul. 54–2, page 6, this Bulletin. REGULATIONS 118, SECTION 39.22 (b) (5): Statutory provisions; exclusions from gross income; compensation for injuries or sickness. INTERNAL REVENUE CODE Rev. Rul. 54-2 Nonoccupational disability payments equal to a recipient employee's contributions to a self-insured plan are excludable from the employee's gross income, but the excess is includible in his gross income and subject to withholding of income tax at the source on wages. The Internal Revenue Service invites views, comments, and suggestions regarding method for determining the extent of the recipient employees' contributions to such plans which are not subject to tax. Revenue Ruling 54-1, page 5 of this Bulletin, holds the plan there involved is not a plan of insurance within the purview of section 22(b) (5) of the Internal Revenue Code. Therefore, payments received thereunder are not to be excluded from the gross income of the recipient employee unless they represent a return of his contributions to the plan. The purpose of this Revenue Ruling is to prescribe the extent to which payments from such a plan (1) constitute gross in come to the employees and (2) are subject to withholding of income tax at the source on wages. Ed d, or I the COL 3-21. his time to a tal With respect to the taxability of the benefits received under such plan, it is held that benefits equal to all of the recipient employee's contributions to the plan are excludable from gross income as a recovery of capital. To the extent that any benefits received exceed all of the employee recipient's contributions to the cost of the benefits, they are includible in the gross income of the recipient and are subject to withholding of income tax at the source on wages under section 1622 of the Code on and after January 1, 1953, as prescribed in I. T. 4107 or on and after such date an employer has been specifically notified by the Revenue Service to begin withholding, or on and after November 1, 1953, as prescribed in Revenue Ruling 209, I. R. B. 1953-21, 3, whichever is applicable. The employer shall withhold as follows: 1. If records of the contributions of individual employees are maintained by an employer, he shall use the records to determine what part of each disability payment is a return of an employee's contributions and is not subject to withbolding under section 1622 of the Code. The amount of all contributions, whenever made, by an employee to the disability plan of his present employer shall be recovered free from taxation before there is any withholding on any disability payments. 2. In the event that records of individual employee contributions are not maintained by an employer, the employer may consider the total contributions of an a. employee to be the product of the amount authorized by the New York State in Disability Benefits Law, i. e., one-half of 1 percent of wages not to exceed, however, 30 cents per week, 60 cents per 2-week period, and 65 cents per semimonthly payroll period, times the number of such payroll periods during which the plan B. has been in effect up to the date of disability. e or the The above conclusions are not limited to plans covered by the New York State Disability Benefits Law but are applicable as a matter of principle to plans under the laws of other States having comparable provisions. Notice is hereby given that the Internal Revenue Service is giving further study to the method by which the amount of the employee's 4 contribution may be determined for the purpose of excluding such amounts from withholding. The provisions of paragraph numbered 2 above represent a method which the Revenue Service will currently recognize but which is not intended as a substitute for the keeping of accurate records by employers for the future. Before reaching any conclusion as to the requirements to be prescribed, however, the Revenue Service will give consideration to any views, comments, or suggestions received by it as to the method for determining the employee's contribution not subject to tax. Such consideration is expected to include the extent to which previously computed total contributions of an employee should be reduced by nontaxable disability benefits paid to him. Also to be considered is the extent to which emere ployees' contributions should be determined on the basis of the actual O weekly or other payments made by the employee or the period of time re he was actually on the payroll of the employer, rather than the maxihemum amount authorized during the period which the plan was in ns effect. All views, comments or suggestions should be submitted behe fore March 1, 1954, and addressed to the Commissioner of Internal in Revenue, Washington 25, D. C. (Attention: T:R:I). Pending a further issuance of a ruling on this matter, the provisions of this Revenue Ruling shall be taken to reflect the position of the Internal Revenue Service but beginning January 1, 1954, the employer shall keep records of disability benefits paid to individual employees and shall, for purposes of withholding, reduce the previously computed total contributions of an employee by the disability benefits paid to him on or after January 1, 1954, which were not taxable because they constituted a return of the employee's contributions. SECTION 23 (bb).-DEDUCTIONS FROM GROSS REGULATIONS 118, SECTION 39.23 (bb)-1: Circula- INTERNAL REVENUE CODE Rev. Rul. 54-3 Amounts paid by a newspaper publisher to a charitable organization as a result of an offer made in a telephone campaign for additional subscribers that a portion of the price of every subscription received during the campaign would be paid to such organization, plus the amount of the compensation to the contractor in charge of the solicitation, telephone costs, verifications, and other overhead connected with the campaign, constitute expenditures to maintain or increase the circulation of the newspaper and are deductible in full under section 23 (bb) of the Internal Revenue Code. Advice is requested relative to the proper treatment for Federal income tax purposes of certain expenditures incurred by a newspaper publisher in a circulation campaign. In order to meet competition from a rival newspaper in the same city the taxpayer started a telephone campaign for additional subscribers to its daily and Sunday newspaper, offering as an inducement to new subscribers to make a payment of a portion of the subscription price to a charitable organization. The taxpayer entered into an agreement with the charitable organization under the terms of which it agreed that the organization would receive a certain percentage of the subscription price paid in return for the privilege of stating that fact in connection with the solicitation. All soliciting costs, such as telephone charges, mailing of acknowledgements, and the compensation of the contractor engaged to conduct the campaign, were to be paid by the taxpayer. Section 23 (bb) of the Internal Revenue Code provides that in computing net income there shall be allowed as deductions: (bb) CIRCULATION EXPENDITURES.-Notwithstanding section 24(a), all expenditures (other than expenditures for the purchase of land or depreciable property or for the acquisitions of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical) to establish, maintain, or increase the circulation of a newspaper, magazine, or other periodical; It is held that that portion of the price of every subscription received by a newspaper publisher during a telephone campaign for additional subscriptions and paid to a charitable organization as a result of an offer made during the campaign, plus the amount of the compensation to the contractor in charge of solicitation, telephone costs, verifications, and other overhead connected with the campaign, constitute expenditures to maintain or increase the circulation of the newspaper within the meaning of section 23 (bb) of the Internal Revenue Code and are deductible in full in computing net income for Federal income tax purposes. |