Rev. Rul. 57-566

Advice has been requested whether an amount paid in the current year to a Federal civil service employee in settlement of a claim filed by him for compensation for the periods during which he was erroneously removed from the service or placed in a leave status without pay pending completion of security clearance may be treated as back pay.

In the instant case a Federal employee was suspended (placed on leave without pay) pending completion of his security clearance under the Act of August 26, 1950, Public Law 733, Eighty-first Cong., 64 Stat. 476. Later, he was cleared and filed a claim for retroactive pay for the period of his suspension. The claim was allowed and settled by a lump sum payment.

Section 1303 of the Internal Revenue Code provides that a taxpayer, if the amount of his back pay received or accured during the taxable year exceeds 15 percent of his gross income, may allocate such pay over the years in which it was earned. In order to gain the benefit of this section the amounts received must constitute back pay. Section 1303(b) of the Code, which contains the definition of back pay, provides in part as follows:

(b) * * * For purposes of this section, the term `back pay' means amounts includible in gross income under this subtitle which are one of the following-

(1) Remuneration, including wages, salaries, retirement pay, and other similar compensation, which is received or accrued during the taxable year by an employee for services performed before the taxable year for his employer and which would have been paid before the taxable year except for the intervention of one of the following events:

(A) bankruptcy or receivership of the employer;

(B) dispute as to the liability of the employer to pay such remuneratin, which is determined after the commencement of court proceedings;

(C) if the employer is the United States, a State, a Territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any of the foregoing, lack of funds appropriated to pay such remuneration; or

(D) any other event determined to be similar in nature under regulations prescribed by the Secretary or his delegate.

To meet the primary requirement provided in paragraph (1) of section 1303(b) of the Code a lump sum amount paid retroactively may be considered back pay only if services were performed before the taxable year for an employer. This requirement is considered satisfied as the lump sum payment in the instant case was made in accordance with the Act of June 10, 1948, Public Law 623, 80th Cong., amending section 6 of the Act of August 24, 1912, Public Law 336, 62nd Cong., 37 Stat. 539 at 555, 5 U.S.C. 652(b), which provides in part as follows:

(1) Any person removed or suspended without pay under seubsection (a), who, after filing a written answer to the charges as provided under such subsection or after any further appeal to proper authority after receipt of an adverse decision on the answer, is reinstated or restored to duty on the ground that such removal or suspension was unjustified or unwarranted, shall be paid compensation at the rate received on the date of such removal or suspension, for the period for which he received no compensation with respect to the position from which he was removed or suspended, less any amounts earned by him through other employment, during such period, and shall for all purposes except the accumulation of leave be deemed to have rendered services during such period . (Emphasis added.)

Paragraph (1) of section 1303(b) also requires that the payment be remuneration which would have been paid but for the intervention of one of the events specified therein. Section 39.107-3(b) of Regulations 118, made applicable to section 1303(b) of the 1954 Code pursuant to Treasury Decision 6091, C.B. 1954-2, 47, provides that an event will be considered similar in nature to those specified only if the circumstances are unusual, if they are of the type specified therein, if they operate to defer payment of the remuneration for the services performed and if payment except for such circumstances would have been made prior to the taxable year in which received or accrued.

The use of the expression `similar in nature' in referring to events other than those specified under section 1303(b)(1) and the broad interpretation to which it lends itself, indicates that it was the intention of Congress that liberal discretion should be used in applying its provisions.

In Andrew Dingwall v. Commissioner , 211 Fed.(2d) 921, ct. D. 1768, C.B. 1954-2, 134, it is stated:

The Tax Court relied upon its own decision in Thompson v. Commissioner , 18 T.C. 742 (1952), where it was held that the employment of an attorney under similar circumstances and the pressing of demands for payment, all in good faith, did not constitute an event `similar in nature' to `the commencement of court proceedings.' But the Thompson case was reversed and we agree with the reasoning of the Fourth Circuit, which held that the statute is remedial and should be liberally construed, * * *

See also Thompson et ux v. Commissioner , 203 Fed.(2d) 820.

Clearing the taxpayer's name, as was done in the instant case, one purpose of which was to restore him to his position and collect his back salary is an event similar to a dispute as to an employer's liability to pay salary. As a matter of fact there was a dispute as to the employer's liability to pay the taxpayer inasmuch as he was rightfully suspended, and so long as the suspension was in effect his employer was under a legal disability to pay his salary. The filing of a formal claim in such case or, actually, merely demanding payment was the first step in litigating the liability and just as reasonably will invoke the back pay treatment as merely threaterning or authorizing suit as in the Thompson and Dingwall cases.

Back pay treatment is also justified under section 1303(b)(1)(C) of the Code relating to lack of funds appropriated to pay an employee of the United States, and section 1303(b)(1)(D) equally concerns an event similar in nature to that specified in subsection (C). Compare the Act of August 8, 1946, Public Law 662, Seventy-Ninth Congress, 60 Stat. 908, as amended, 38 U.S.C. 739, with the Act of August 26, 1950, Public Law 733, Eighty-First Congress, 64 Stat. 476. The effect in both instances is to bring about a statutory suspension of the employee's pay. In such case an event similar in nature to that found in section 1303(b)(1)(C) has occurred, for if there is a legal bar to the employment no funds would be appropriated to pay the suspended employee's remuneration.

Accordingly, it is held that the amount paid to a Federal civil service employee in settlement of a claim filed by him for compensation for the periods during which he was erroneously removed from service or placed in leave status without pay pending completion of security clearance constitutes `back pay' as defined in section 1303(b) of the Internal Revenue Code of 1954.