Rev. Rul. 83-2

1983-1 C.B. 42.

                       Internal Revenue Service
                                 Revenue Ruling

        EMPLOYEE BUSINESS EXPENSES;  CONTRIBUTIONS TO UNION PENSION FUND

                           Published: January 3, 1983

SECTION 162. - -TRADE OR BUSINESS EXPENSES, 26 CFR 1.162-1: Business expenses

(Also Section 262; 1.262-1.)

  Employee business expenses;  contributions to union pension fund.  A union member's contributions to a union pension fund which is not qualified under either sections 401 or 408(c) of the Code are not deductible as business expenses under section 162 of the Code but are treated as the member's investment in the contract under section 72(c).

ISSUE

  Are contributions made by a union member to a pension fund deductible as ordinary and necessary business expenses under section 162 of the Internal Revenue Code under the circumstances described below?

FACTS

  The taxpayer is a member of a local of an international union. The by-laws of the union require that all members contribute monthly to a fund whose sole purpose is to provide the members with a retirement annuity and death benefits.  The fund is not qualified under section 401 or 408(c) of the Code. The amount of a member's benefit is determined by the total amount of the member's contributions to the fund.  Any member who has contributed to the fund becomes entitled to a vested benefit that the member retains even if the member otherwise becomes ineligible to participate in the plan.  A member becomes ineligible to participate only if the member ceases to belong to the union or fails to make the required contributions to the fund.

LAW AND ANALYSIS

  Section 162(a) of the Code allows a deduction for all the ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business.

  Section 262 of the Code provides that, except as otherwise expressly provided by law, no deduction will be allowed for personal, living, or family expenses.

  Rev. Rul. 69-214, 1969-1 C.B. 52, states that payments made by a union member to the member's union are deductible under section 162 of the Code if the payments are a condition of initial or continued membership in the union and if no portion of the payments serves to defray an expense of a personal nature.

  In Davidson v. Commissioner, 42 T.C. 766 (1964), the court held that an employee's contributions to a qualified pension plan were not deductible as business expenses.  The pension plan provided that if the employee terminated employment before retiring, the employee would be entitled to a refund of all the employee's contributions, plus interest.  The court, noting these facts, stated that the employee was making periodic payments toward the purchase of investments that the employee could recover without cost.

  Similarly, in Simenstad v. United States, 325 F.Supp. 1249 (N.D.Cal.1971), the court held that contributions to an association's nonqualified pension plan were not deductible business expenses, even though the taxpayer would not have been able to work profitably at a given trade if he did not contribute to the association's plan.  See also Sims v. Commissioner, 72 T.C. 996 (1979).

  In Kaplan v. Commissioner, T.C.M. 1976-24, the court held that contributions to a union pension fund were not deductible as business expenses.  In Kaplan it was the court's view that the amounts were not paid as union dues, although their payment was prerequisite to union membership, but instead were refundable amounts contributed toward an employee pension plan that were not deductible under any section of the Code.

  In this case, the taxpayer's contributions to the fund are applied to purchase a retirement annuity.  Under the vested benefit provision, the taxpayer will receive a benefit even if the taxpayer becomes ineligible to receive the retirement annuity.  These payments are therefore nondeductible under section 162 of the Code. Under section 72, the contributions constitute the "investment in the contract," or cost, of the annuity, which is recoverable tax-free according to the rules in that section.

HOLDING

  The contributions made by the taxpayer to the pension fund are not deductible as ordinary and necessary business expenses under section 162 of the Code; they are treated as the taxpayer's investment in the contract under section 72.  Under section 72(b), the annuity payments that the taxpayer will receive upon retirement will be partially excludable from gross income.  Amounts not received as an annuity before retirement under the plan will be taxed under the rules of section 72(e).

Rev. Rul. 83-2, 1983-1 C.B. 42.