Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 68-99

1968-1 C.B. 193

Sec. 451

IRS Headnote

A cash method taxpayer entered into an employment contract that provided, in part, for the payment of a pension for life commencing on the termination of his employment under specified conditions. The employer entered into a contract with an insurance company for insurance on the life of the employee to insure that funds will be available to meet his obligation to make the pension payments. Held , the contract between the employer and the insurance company did not result in the receipt of income by the employee at the time the employer entered into the insurance contract since the transaction did not produce a present economic benefit to the employee. The amounts paid by the employer to the employee pursuant to the pension agreement will be includible in the taxpayer's gross income in the taxable year received or otherwise made available.

Full Text

Rev. Rul. 68-99

Advice has been requested regarding the taxable year of inclusion in gross income of compensation for services received by a taxpayer using the cash receipts and disbursement method of accounting under the circumstances described below.

The taxpayer and his employer have executed an employment contract under which the taxpayer, upon his retirement, will receive a specified monthly payment for life, beginning with the first day of the month following his retirement. The contract permits the taxpayer to retire at age 65. However, if the taxpayer continues actively at work after reaching age 65, the payments will be deferred to the actual date of retirement, but in no event will they be deferred beyond age 70. Should the taxpayer become totally disabled or should his employment be terminated by his employer prior to retirement at age 65 for the employer's own convenience and not for cause or unsatisfactory service, the employer is obligated to pay, commencing when the employee reaches age 55, a percentage of the specified monthly amount, depending upon the taxpayer's age at the employment termination date.

Subsequently, the employer entered into a contract with an insurance company for insurance on the life of the employee in order to insure that funds will be available to meet its obligation to make pension payments. All rights to any benefits under the insurance contract are solely the property of the employer and the proceeds of such contract are payable by the insurance company only to the employer.

Section 451(a) of the Internal Revenue Code of 1954 provides that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

An employee is not in receipt of income as a result of his employer's purchase of an insurance contract where the employee does not receive a present economic benefit therefrom.

Accordingly, under the circumstances, in this case the contract between the employer and insurance company did not result in the receipt of income by the employee at the time the employer entered into the insurance contract since the transaction did not produce a present economic benefit to the employee. The amounts paid by the employer to the employee pursuant to the pension agreement will be includible in the taxpayer's gross income in the taxable year received or otherwise made available.