Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 59-58

1959-1 C.B. 17

Sec. 61

Sec. 162

Caution: Obsoleted by Rev. Rul. 88-21

Full Text

Rev. Rul. 59-58

Advice has been requested whether the value of a turkey, ham, or other item of merchandise purchased by an employer and distributed generally to each of the employees engaged in his business at Charistmas, or a comparable holiday, constitutes wages subject to income tax withholding or income subject to tax for income tax purposes, and whether the cost of such items is deductible by the employer as an ordinary and necessary business expense.

Section 31.3401(a)-1(b)(10) of the Withholding Tax Regulations provides that, ordinarily, facilities or privileges (such as entertainment, medical services, or so-called `courtesy' discounts on purchases), furnished by an employer to his employees generally, are not considered as wages subject to withholding if such facilities or privileges are of relatively small value and are furnished by the employer merely as a means of promoting the health, good will, contentment, or efficiency of his employees. Similar provisions are contained in the regulations pertaining to the employment taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act (Chapters 21 and 23 of the Internal Revenue Code of 1954). See sections 31.3121(a)-1(f) and 31.3306(b)-1(f) of such regulations.

It is accordingly held that the value of a turkey, ham, or other item of merchandise of similar nominal value, distributed by an employer to an employee at Christmas, or a comparable holiday, as part of a general distribution to employees engaged in the business of the employer as a means of promoting their good will, does not constitute wages subject to income tax withholding or wages for Federal Insurance Contributions Act or Federal Unemployment Tax Act purposes.

In view of the small amounts involved, and since it may reasonably be contended in many cases that such items constitute excludable gifts, it is similarly held that the value of such an item of merchandise need not be treated as taxable income by the employee who receives it.

The foregoing rules will not apply to distributions of cash, gift certificates, and similar items of readily convertible cash value, regardless of the amount involved.

It is further held that the cost to the employer of turkeys, hams, and other merchandise of similar nominal value which are distributed generally to the employees engaged in his business, primarily for the business purpose of promoting good relations with his employees, is deductible by the employer under section 162 of the Code as an ordinary and necessary business expense.