Rev. Rul. 58-599

In view of the provisions of Revenue Rulings 58-43, C.B. 1958-1, 45, and 57-178, C.B. 1957-1, 71, advice has been requested with respect to the right to an exclusion, for purposes of section 105(d) of the Internal Revenue Code of 1954, of a member of the Armed Forces on the retired list for physical disability who performs services as an employee of the United States either in the same department or in another department, agency or branch of the United States Government.

Revenue Ruling 58-43, supra, provides, in part, as follows:

The provisions of section 402 of the Career Compensation Act of 1949 * * * and chapter 61 of Title 10 of the United States Code constitute wage continuation plans for the purpose of section 1.105-4(a)(3)(i) of the Income Tax Regulations. The disability retirement pay received by a member on the retired list pursuant to those provisions which is in excess of the amount excluded under section 104(a)(4) of the Code may be excluded from gross income to the extent provided in section 105(d) of the Code if received before the member reaches retirement age. * * *

The last paragraph of Revenue Ruling 57-178, supra , provides, in part, as follows:

* * * an employee who is receiving a disability pension excludable from gross income subject to the limitations provided in section 105(d) of the Code, may be engaged in a gainful occupation as a self-employed individual or as an employee of another employer without affecting the tax treatment of his disability pension. However, such a course of conduct is a factor in determining whether the employee's absence was due to personal injury or sickness, or to some other reason.

Section 1.105-4(a) of the Income Tax Regulations requires that the employee be in fact absent from work on account of personal injury or sickness in order to qualify for the exclusion under section 105(d) of the Code. That section provides, in part, as follows:

(2) (ii) Section 105(d) is applicable if, and only if, the employee is absent from work and such absence is due to a personal injury or sickness. Thus, if an employer has a plan for continuing the wages of employees when they are absent from work, regardless of the cause of the absence from work, section 105(d) is applicable to any payments made under this plan to an employee whose absence from work is in fact due to a personal injury or sickness. * * *

*

(4) A period of absence from work shall commence the moment the employee first becomes absent from work and shall end the moment the employee first returns to work. However, the exclusion provided under section 105(d) is applicable only to payments attributable to a period of absence from work which is due to a personal injury or sickness, * * *

The fact that an employer continues a disability pension in ignorance or disregard of an employee's recovery from injury or sickness is not in itself sufficient to entitle the employee to the exclusion. Despite the terms of a plan, section 105(d) of the Code does not apply to a pension which is paid irrespective of disability. For example, if an employee retires and under a plan receives a so-called disability pension, but in fact the employee is not disabled or has fully recovered from such disability, section 105(d) of the Code will not apply to the so-called disability pension. In this connection, however, a member of the Armed Forces would generally be in a different situation from that of the normal civilian employee since he does not necessarily receive a disability pension because of a physical inability to continue working. Such member may be fully capable of civilian employment but unfit to perform the duties of his office, grade, rank or rating within the meaning of section 402 of the Career Compensation Act of 1949, 37 U.S.C. 272, and chapter 61 of Title 10 of the United States Code, Supp. V.

Accordingly, a member of the Armed Forces on the retired list for physical disability may be engaged in a gainful occupation as a self-employed individual or as an employee of another employer without affecting the tax treatment of his disability pension. Such course of conduct would not be a factor in determining whether his absence was due to a personal injury or sickness, or to some other reason, within the meaning of Revenue Ruling 57-178, supra .

However, section 1.105-4(a)(5) of the regulations provides, in part, as follows:

* * * An employee is not absent from work when he performs any services for his employer at his usual place or places of employment, whether or not the services are the usual services performed by the employee. Furthermore, the employee is not absent from work when he performs substantial services for his employer, even though they are performed at a place other than his usual place of employment. * * *

While the power of appointment with respect to officers and employees in the Government of the United States (other than that specifically reserved to the President by the Constitution) is vested by the Congress in the President, in the courts of law, or in the heads of the departments and independent establishments (Article II, section 2, paragraph 2 of the Constitution; section 169 of the Revised Statutes, as amended, 5 U.S.C. 43), the relationship of employer and employee is between the United States and the individual so appointed. See 24 Comp.Gen. 104, and section 31.3401(d)-1(d) of the Employment Tax Regulations.

Therefore a member of the Armed Forces on the retired list for physical disability is no longer `absent from work,' for purposes of the exclusion provided in section 105 (d) of the Code, when he performs services as an employee of the United States whether such services are performed in the same department or in another department, agency or branch of the United States Government.