Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 71-59

1971-1 C.B. 56

Sec. 162

IRS Headnote

Deductibility of voluntary and required contributions under the Indiana Employment Security Act; I.T. 3013 and I.T. 3650 superseded.

Full Text

Rev. Rul. 71-59 /1/

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the positions set forth in I.T. 3013, C.B. XV-2, 75 (1936) and I.T. 3650, C.B. 1944, 91.

The question presented is whether payments made under the Indiana Employment Security Act, as amended, under the circumstances described below are deductible as a business expense for Federal income tax purposes.

The taxpayer, a domestic corporation doing business in the State of Indiana, is required by State law to make contributions to the Indiana unemployment compensation fund. During the current taxable year the taxpayer made a timely voluntary contribution in excess of the required rate in order to reduce his annual rate of contribution. The taxpayer also set up a contingent reserve on its books for the purpose of meeting any increase required in the contribution rates in subsequent years.

Section 52-1534(e) of the Annotated Indiana Statutes, as amended, provides that under the Employment Security Act any employer may make voluntary payments in addition to the contributions required under this Act, and the same shall be credited to the employer's experience account. However, such voluntary contributions shall not be used in the computation of reduced rates unless such contributions are paid prior to the expiration of 120 days after the beginning of the year for which rates are effective. Also, such payments shall be included in the experience account as of the computation date only if they are made within 30 days following the date upon which the Indiana Employment Security Division mails notice that such payments may be made with respect to a calendar year. Such voluntary payments when accepted from an employer will not be refunded in whole or part.

In electing to pay a higher rate of contribution than that required by the Indiana Employment Security Act, as amended, the taxpayer would, in effect, be electing to pay in the current year amounts payable in future years. Such voluntary contributions in excess of the amounts required to be paid by the Act cannot be recovered at the option of the employer. The question presented is whether these excess voluntary contributions are deductible as business expenses for the year in which they are paid.

It is held that timely voluntary contributions by the taxpayer under the Indiana Employment Security Act are allowed deductions, for Federal income tax purposes, as ordinary and necessary business expenses so long as such contributions effect a reduction in the rate of required contribution. However, where the taxpayer has made sufficient contributions to the State unemployment fund to qualify it for the minimum rate of contribution prescribed by the Act, further voluntary contributions are not deductible as ordinary and necessary business expenses paid or incurred during the taxable year.

Furthermore, regular contributions under the Indiana Act at the required rate are ordinary and necessary business expenses which are deductible, for Federal income tax purposes, for the taxable year in which they are paid or accrued depending upon the taxpayers method of accounting. No deductions are allowable with respect to such contributions if they are capitalized on the books of the taxpayer.

Also, additions to a contingent reserve are not allowable deductions for Federal income tax purposes.

I.T. 3013 and I.T. 3650 are hereby superseded, since the positions stated therein are restated under the current law in this Revenue Ruling.

/1/ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.