Rev. Rul. 58-33

Advice has been requested whether the provisions of section 1303 of the Internal Revenue Code of 1954 apply to retroactive retirement payments received by a reserve officer of the United States Army in the circumstances described below.

An army reserve officer was found eligible for retired pay (not by reason of disability) under the provisions of sections 301 and 302, Title III, Army and Air Vitalization and Retirement Equalization Act of 1948, 62 Stat. 1081, at 1087, 10 U.S.C. 1036, and was placed on the Army of the United States Retired List as of June 30, 1949. However, retirement payments were not made because the officer was receiving pay in excess of $3,000 as a civilian employee of the Federal Government, and the army, in view of section 212 of Part II, Title I, of the Act of June 30, 1932, Public Law 212, 72nd Congress, 47 Stat. 382, at 406, 5 U.S.C. 59(a), as amended, took the position that dual compensation was illegal.

In Paul Tanner et al. v. United States , 125 Fed.Supp. 240, certiorari denied 350 U.S. 842, the court held that an army or air force reserve officer, who is entitled to receive retired pay, may receive such pay even though he is paid $3,000 or more per year as a civilian employee, because the Act of July 1, 1947, Public Law 153, 80th Congress, 1st Session, 61 Stat. 238, 10 U.S.C. 371(b), amending existing laws and as amended, precludes the application of the Act of June 30, 1932, supra , to the retired pay of such officer.

Subsequent to and on the basis of the decision in the Tanner case, the army allowed the claims of the officer in the instant case and he was paid retroactive retirement pay for the period July 1, 1949, through June 30, 1956, in a lump sum. Commencing July 1, 1956, his retirement is payable currently at a fixed monthly rate.

Section 1303 of the Code provides that if an employee receives remuneration, including wages, salaries, retirement pay, or other similar compensation during the taxable year for services performed before the taxable year for his employer and which would have been paid before the taxable year except for one of several events, among which is a dispute as to the liability of the employer to pay such remuneration, which is determined after the commencement of court proceedings, and such remuneration exceeds 15 percent of the gross income of the individual for such year, the part of the tax attributable to the inclusion of such back-pay in gross income for the taxable year shall not be greater than the aggregate of the increases in taxes which would have resulted from the inclusion of the respective portions of such back-pay in gross income for the taxable years to which such portions are respectively attributable.

Section 1303(b)(1)(B) of the Code does not require that the taxpayer be a party to the court proceedings which establish his right to receive retroactive payments and, in the instant case, issues relating to the allowance of retired pay to the army reserve officer are substantially the same as those presented in the Tanner case.

Accordingly, it is held that a taxpayer, whose rights to retroactive pay accrue by virtue of court proceedings in a factually similar case, is not required to commence court proceedings on his own behalf in order to meet the requirements of section 1303(b)(1)(B) of the Code. Thus, if such retroactive pay exceeds 15 percent of the recipient's total gross income for the year in which it is received, it qualifies as back pay and his Federal income tax may be computed thereon in accordance with the provisions of section 1303(a) of the Code. Any interest received on the back pay is taxable at the rates in effect in the year such interest is received.

The provisions of this Revenue Ruling will apply to retired reserve officers of any of the other components of the Armed Forces of the United States who, on the basis of the rationale established in the Tanner case, are now held to be entitled to the retirement pay which had previously been denied them because they were receiving in excess of $3,000 as civilian employees of the Federal Government.