Tax Facts
3639 / Is a contractual death benefit payable to a surviving spouse deductible by an employer?
The employer can deduct the death benefit payments provided they represent reasonable additional compensation for the employee’s services ( Q 3519).1 Payments can be deducted only in the year they are includable in the employee’s income, regardless of the accounting method used by the employer.2 An employer may not deduct a death benefit paid to (or received by) a surviving spouse to the extent that the employee recognized the value of the arrangement for income tax purposes or purchased the contractual right to the death benefit.
Questions as to whether death payments constitute compensation for an employee’s services and, if so, whether the compensation is reasonable typically arise only in connection with payments for stockholder-employees of a close corporation. In several cases it has been held that the payments, even though made under contract, were not compensation but were payments under a plan to provide financial security for the families of the stockholder-employees. Hence, the deductions were disallowed.3 On the other hand, payments were held reasonable and for a substantial business purpose in M. Buten and Sons, Inc. v. Comm.4
An employer who prefunds welfare benefit fund benefits will be subject to limits discussed in Q 4097 and Q 4101. If the funded benefit is considered deferred compensation, the deduction is subject to the rules in Q 3532 or Q 3573.
1. Southern Fruit Distributors v. U.S., 32 AFTR 2d 5598 (M.D. Fla. 1973).
2. IRC § 404(a)(5); Rev. Rul. 55-212, 1955-1 CB 299.
3. Willmark Serv. Sys., Inc. v. Comm., 368 F.2d 359 (2d Cir. 1966); Wallace v. Comm., TC Memo 1967-11; M.S.D. Inc. v. U.S., 611 F. 2d 373 (6th Cir. 1979).
4. TC Memo 1972-44.
Questions as to whether death payments constitute compensation for an employee’s services and, if so, whether the compensation is reasonable typically arise only in connection with payments for stockholder-employees of a close corporation. In several cases it has been held that the payments, even though made under contract, were not compensation but were payments under a plan to provide financial security for the families of the stockholder-employees. Hence, the deductions were disallowed.3 On the other hand, payments were held reasonable and for a substantial business purpose in M. Buten and Sons, Inc. v. Comm.4
An employer who prefunds welfare benefit fund benefits will be subject to limits discussed in Q 4097 and Q 4101. If the funded benefit is considered deferred compensation, the deduction is subject to the rules in Q 3532 or Q 3573.
1. Southern Fruit Distributors v. U.S., 32 AFTR 2d 5598 (M.D. Fla. 1973).
2. IRC § 404(a)(5); Rev. Rul. 55-212, 1955-1 CB 299.
3. Willmark Serv. Sys., Inc. v. Comm., 368 F.2d 359 (2d Cir. 1966); Wallace v. Comm., TC Memo 1967-11; M.S.D. Inc. v. U.S., 611 F. 2d 373 (6th Cir. 1979).
4. TC Memo 1972-44.
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