Rev. Rul. 56-12

Advice has been requested whether a pension received as a gift from one for whom no personal services have been performed constitutes a pension or annuity to be taken into account in computing the limitation on retirement income under section 37(d) of the Internal Revenue Code of 1954.

A foundation for the advancement of teaching was established for the purpose of paying gratuitous allowances to retired college teachers and their widows. Such allowances were intended as gifts to persons who have performed no services of any kind for the founder and, as gifts, have been held to be excludable from gross income.

Section 37(d) of the Code provides in part that for the purpose of the credit the amount of retirement income shall not exceed $1,200 less-

(1) in the case of an individual, any amount received by the individual as a pension or annuity-

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(C) otherwise excluded from gross income, * * *.

Section 37(e) of the Code provides that the term `otherwise excluded from income' shall not apply to any amount excluded under section 72 (relating to annuities), 101 (relating to life insurance proceeds), 104 (relating to compensation for injuries or sickness), 105 relating to amounts received under accident and health plans), 402 (relating to taxability of beneficiary of employees' trust), or 403 (relating to taxation of employee annuities).

Section 37(d) of the Code does not specify that the meaning of the word pension refers to periodic payments made by or on behalf of a person for whom services have been rendered. In referring to items which serve to reduce the amount of retirement income, section 37(d) specifically includes `any amount received by the individual as a pension or annuity * * * otherwise excluded from gross income.' Although the first test of the qualification for the retirement income credit is that the individual must have received earned income of over $600 in ten calendar years prior to the taxable year, it does not necessarily follow that the same qualification should apply in obtaining the pensions which are required to reduce the retirement income.

In discussing the term `pension' in L.O. 1040, 3 C.B. 120 (1920), it is stated:

The fact that the payments involved in the instant case take the form of pensions and are within the dictionary definition of the term `pension' does not, as seems to have been suggested, take them out of the definition of the term `gift.' The term `pension' and `gift' are not mutually exclusive. The payments may be both pensions and gifts.

In instituting section 37 of the Code, it was the intent of Congress to equalize the tax treatment of all kinds of retirement income. See Report No. 1622 of the Committee on Finance of the United States Senate to accompany H.R. 8300, at pages 8, 165 and 166. The type of pension or annuity referred to in section 37(d)(1)(C) is not specified or limited except insofar as section 37(e) of the Code is applicable.

Accordingly, it is held that for the purpose of determining the income tax credit upon retirement income a pension received as a gift constitutes a pension within the meaning of section 37 of the Internal Revenue Code of 1954. A gift pension does not fall within any of the exceptions of excluded income provided by section 37(e) of the Code in the application of section 37(d)(1) of the Code in determining the limitation on retirement income, and the amount thereof must be used to reduce the retirement income.