Rev. Rul. 86-80

1986-1 C.B. 79, 1986-23 I.R.B. 4.

BUSINESS EXPENSES; INSURANCE; COMMODITIES TRADER; REQUIRED CONTRIBUTIONS

TO COMMODITIES EXCHANGE

Published: June 9, 1986

Section 162.-Trade or Business Expenses 26 CFR 1.162-1: Business expenses.  

(Also Sections 262, 7805: 1.262-1, 301.7805-1.)

  Business expenses; insurance; commodities trader; required contributions to commodities exchange. A commodities trader may not deduct as business expenses funds required by the commodities exchange to be paid to a fund that will pay death benefits to the beneficiary of the trader. Rev. Rul. 70-342 revoked.

ISSUE

  If an individual who is engaged in trade or business as a commodities trader is required to make contributions to a Board of Trade Gratuity Fund (Fund) that will pay death benefits to a Fund participant's beneficiaries or estate, may that individual deduct these contributions as business expenses under section

162(a) of the Internal Revenue Code?

FACTS

  Taxpayer is a commodities trader and as such is required to become a member of a Board of Trade in order to trade on the floor of a commodities exchange. Every Board of Trade member under age 55 is also required to become a member of the Board of Trade Gratuity Fund and to pay assessments levied yearly by the Fund. The taxpayer is under age 55. The purpose is to provide, upon the death of a participant, an amount that is payable to the participant's beneficiaries or estate. Upon the death of a Board of Trade member, trustees of the Fund, pursuant to the specific provisions of the Board of Trade's constitution, pay out designated amounts to the participant's beneficiaries or estate.

LAW AND ANALYSIS

  Section 162 of the Code provides, in part, that there is allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

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

1.262-1(b)(1) of the Income Tax Regulations provides that premiums paid for life insurance by an insured are not deductible.

  In Commissioner v. Treganowan, 183 F.2d 288 (2d Cir. 1950), cert . denied,

340 U.S. 853 (1950), the U.S. Court of Appeals for the Second Circuit held that amounts received from the New York Stock Exchange Gratuity Fund by a widow of a deceased member of the Exchange were 'proceeds of life insurance.' See also Estate of Edmonds v. Commissioner, 16 T.C. 110 (1951), which followed Treganowan.

  In Estate of Moyer v. Commissioner 32 T.C. 515 (1959), acq. in part, 1960-2 C.B. 6, the Tax Court held that (1) the Philadelphia- Baltimore Stock Exchange Gratuity Fund, a fund similar to the New York Stock Exchange Gratuity Fund, was a mutual insurance company, (2) the benefits paid to the beneficiaries of deceased members of the Exchange constituted amounts received under life insurance contracts paid by reason of the death of the insured an were excludable from the gross income of the recipients under section 101(a)(1) of the code, and (3) the payments to the Gratuity Fund constituted 'premiums or other consideration' for insurance within the meaning of section 811(g)(2) of the Internal Revenue Code of 1939. See also Rev. Rul. 72-463, 1972-2 C.B. 93, which holds that mandatory monthly dues and assessments paid by members of a labor union are deductible business expenses under section 162(a) of the Code, except that the portion of the assessments used to provide death benefits is a nondeductible personal expense.

  Rev. Rul. 70-342, 1970-2 C.B. 32, however, reaches a different conclusion concerning payments to the New York Stock Exchange Gratuity Fund, which was maintained for the benefit of families of deceased members of the Exchange. Payments to the Gratuity Fund were mandatory under the Exchange's constitution in order for members to maintain their standing on the Exchange. Upon the death of an Exchange member, trustees of the Gratuity Fund, pursuant to the Exchange constitution, paid designated amounts out of the Gratuity Fund to designated beneficiaries. The ruling holds that payments to the Gratuity Fund by members who are actually engaged in business on the Exchange are deductible business expenses under section 162 of the Code.

  The New York Stock Exchange Gratuity Fund, the Philadelphia- Baltimore Stock Exchange Gratuity Fund and the Fund in the case are similar because members of each exchange are required to pay assessments to the respective funds, each fund is maintained and operated exclusively to provided benefits upon the death of a member and the risk of loss from premature death is shifted from the individual to the group of other members of the exchanges. All three funds provide members of the exchanges with life insurance. Therefore, section 262 disallows any deduction for the 'premiums' paid by the taxpayer-insured to the Board of Trade Gratuity Fund. This conclusion is equally applicable to the situation described in Rev. Rul. 70-342.

HOLDING

  Payments to the Fund by the Board of Trade member are not deductible from gross income under section 162(a) of the Code, but rather are personal expenses under section 262.

PROSPECTIVE APPLICATION

  Under the authority of section 78-5(b) of the Code, the holding of this revenue ruling will not be applied adversely to amounts paid or incurred before June 9, 1986.

EFFECT ON OTHER REVENUE RULINGS

SECTION 262.-PERSONAL,LIVING, AND FAMILY EXPENSES

  Whether contributions made by a commodities trader to a Board of Trade Gratuity Fund that will pay death benefits to a Fund participant's beneficiaries or estate are deductible business expenses or are personal expenses. See Rev. Rul. 86-80, this page.

Rev. Rul. 86-80, 1986-1 C.B. 79, 1986-23 I.R.B. 4.