Rev. Rul. 55-317

Advice has been requested relative to the taxability of interest on employees' contributions transferred from the old retirement system of a city to its newly created supplemental retirement system.

The facts surrounding the transfer are as follows:

Contributions were originally made by employees of the city and held in trust under the city's retirement system (old), established by an ordinance approved August 30, 1944. To permit the employees to qualify under the Social Security Act, 49 Stat. 620, as amended, 42 U.S.C. 418, the above ordinance and subsequent amendatory ordinances thereto were repealed and the system was terminated as of December 6, 1952. The ordinance for the repeal provided that the accumulated contributions of the members be set aside in `Fund A' or transferred to `Fund B' for disbursement on or before June 30, 1953. The employees became covered under the Social Security Act, as amended, on December 20, 1952. Effective December 22, 1952, the city's supplemental retirement system, adopted November 18, 1952, provided for retirement benefits supplemental to the benefits provided under the Social Security Act. Funds A and B were transferred to specified accounts of the supplemental retirement system. Forms A and B were utilized by the employees to direct the disposition of their accumulated contributions under the old retirement system.

By executing Form A, an employee authorizes the transfer and credit to his account in the supplemental retirement system his accumulated contributions in the old retirement system in an amount equal to the contributions that would have been based on the contribution rates provided in the supplemental retirement system less the sum necessary to back date social security to January 1, 1951 or to the date of his employment, whichever period is shorter, the remaining balance, if any, to be refunded to him. By signing Form A, the employee becomes a member of the supplemental retirement system and retains all credits for prior service with the city which were allowable under the old retirement system.

By executing Form B, an employee authorizes the return to him of all his accumulated contributions in the old retirement system after deductions for back dating social security contributions to January 1, 1951, or to the date of his employment, whichever period is shortest. By signing Form B the employee becomes a member of the supplemental retirement system as a new member and forfeits all credits for prior service in the old retirement system earned prior to December 22, 1952. Participating in the supplemental retirement system as a new member and forfeiting all credits for prior service specifically mean that (a) the employee cannot retire and receive an ordinary disability retirement allowance until after he has completed 2 years' service as a member of the supplemental retirement system, (b) the employee's employment with the city before December 22, 1952, cannot be used to compute his retirement allowance if he retires at any time after December 22, 1952, and (c) in the event of his death, his beneficiary will not be eligible for a death benefit from the supplemental retirement system until the employee has completed 1 year of service as a member of that system, and not until he has completed 5 years will the maximum death benefit be payable.

Section 39.42-2 of Regulations 118, promulgated under section 42 of the Internal Revenue Code of 1939, provides in part that income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart although not then actually reduced to possession. To constitute receipt in such a case, the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made and must be made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition.

In view of the provisions of the agreement evidenced by Form A and Form B, it is held that no taxable income is realized by an employee of the city by reason of transferring to the supplemental retirement system his accumulated contributions in the old retirement system and the interest thereon. The aggregate of the employee's accumulated contributions so transferred without regard to the interest credited thereon plus any contributions to the supplemental retirement system subsequent to such transfer will constitute the aggregate premiums or consideration paid for the annuity which will be paid from such system upon his ultimate retirement.

Where an employee receives a refund of his contributions, together with interest, the amount of the interest is includible in gross income in the year of receipt. O.D. 823, C.B. 4, 77 (1921)