Rev. Rul. 58-43

In view of sections 1.105-4(a)(3) and 1.105-4(a)(5) of the Income Tax Regulations, Revenue Ruling 57-76, C.B. 1957-1, 66, and the decision of the Supreme Court of the United States in United States v. Richard W. Tyler , 105 U.S. 244, the Internal Revenue Service has been requested to state its position with respect to the application of section 105(d) of the Internal Revenue Code of 1954 to the retired pay received by (1) military personnel who are under the mandatory retirement age of 62 and who are on the retired list for other than physical disability incurred in active service and (2) military personnel who are on the retired list for physical disability incurred in active service but whose retired pay is not wholly excluded under section 104(a)(4) of the Code by reason of the limitation in section 402(h) of the Career Compensation Act of 1949, 63 Stat. 802, 37 U.S.C. 272.

Subject to certain limitations, section 105(d) of the Code excludes from gross income amounts received by an employee pursuant to the provisions of a wage continuation plan if such amounts constitute wages or payments in lieu of wages for a period during which the employee is absent from work on account of personal injuries or sickness.

Section 1.105-4(a) of the Income Tax Regulations provides, in part, as follows:

(3)(i). Section 105(d) applies only to amounts attributable to periods during which the employee would be at work were it not for a personal injury or sickness. Thus, an employee is not absent from work if he is not expected to work because, for example, he has reached retirement age. If a plan provides that an employee, who is absent from work on account of a personal injury or sickness, will receive a disability pension as long as he is disabled, section 105(d) is applicable to any payments which such an employee receives under this plan before he reaches retirement age, but section 105(d) does not apply to the payments which such an employee receives after he reaches retirement age.

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(5). For the purpose of section 105(d), whether an employee is absent from work depends upon all the circumstances. * * * A member of the Armed Forces, who on a particular day has no assigned duties but to stand ready for duty, is absent from work if he is unable to answer any duty call that may be made upon him. * * *.

Revenue Ruling 57-76, supra , at page 11, states, in part as follows:

It is held that, for the purpose of excluding an employee's disability pension from gross income pursuant to section 1.105-4(a)(3)(i) of the Income Tax Regulations, `retirement age' will be deemed to be

(1) The lowest age specified in the appropriate written * * * plan at which the employee, had he not been disabled and had he continued in such employment, would have had the right to retire without the consent of the employer and receive retirement benefits based on service to date of retirement computed at the full rate set forth in the plan, i.e. , without actuarial or similar reduction because of retirement before some later specified age, * * *.

Section 402 of the Career Compensation Act of 1949, supra, provides for (1) the retirement of a member of the uniformed services found to be unfit to perform the duties of his office, rank, grade, or rating, by reason of physical disability, and (2) the payment of disability retirement pay to such member. The retired pay of such members is computed on the basis of years of active service or percentage of physical disability at the member's election. I.T. 4017, C.B. 1050-2, 12, which was amplified by Revenue Ruling 55-88, C.B. 1955-1, 241, provides that the disability retirement pay, received by members of the `uniformed services,' who retire under section 402(f) of the Career Compensation Act, with an an active service disability of less than 30 percent and who elect under section 402(d) of such Act to have their disability retirement pay computed on the basis of years of active service, is excludable from gross income under section 22(b)(5) of the Internal Revenue Code of 1939 to the extent that such pay does not exceed the amount to which they would have been entitled had it been computed on the basis of percentage of disability; that any excess constitutes taxable income to the recipients.

Section 402 of the Career Compensation Act of 1949, supra , was repealed by the Act of August 10, 1956, Public Law 1028, 84th Cong., 70A Stat. 1, enacted as `Title 10 of the United States Code,' except with respect to the rights that matured before the effective date of the Act, 70A Stat. 641, 680. However, similar retirement provisions are contained in chapter 61 of Title 10, of the United States Code, 70A Stat. 91.

Chapter 61 of Title 10, supra , provides that, under specific circumstances, the Secretary concerned may retire a member upon a determination that the member is unfit to perform the duties of his office, grade, rank or rating because of physical disability. Sections 1201 and 1204 of Title 10, supra . It also provides that if a member would otherwise qualify for such retirement except for the fact that his disability is not determined to be of a permanent nature, the Secretary shall place the member's name on the temporary disability retired list if he determines that the disability may be of a permanent nature. Sections 1202 and 1205 of Title 10, supra . Each member whose name is on the temporary disability retired list is required to have a physical examination at least once every 18 months to determine whether there has been a change in the disability. If it is determined that the member is physically fit to perform the duties of his office, grade, rank, and rating, he shall, with his consent, be recalled to active duty and reappointed or reenlisted. If he does not consent to such action, his status on the temporary disability retired list and his disability retired pay shall be terminated. If his name is not sooner removed from the temporary disability retired list, a final determination shall be made with respect to the member's physical condition upon the expiration of five years and he shall be retired or separated, depending on the circumstances. Sections 1210 and 1211 of Title 10, supra .

The retired pay of members retired under chapter 61 of Title 10, supra , is computed on the basis of years of active service or percentage of physical disability, at the member's election. The portion of the retired pay computed on the basis of years of service which exceeds the retired pay the member would receive if it were computed on the basis of percentage of disability is not considered a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in the Armed Forces within the meaning of section 104(a)(4) of the Internal Revenue Code of 1954. Section 1403 of Title 10, supra .

Retirement of members of the Armed Forces, including the Army, the Nurses' Corps, the Navy and the Air Force, for reasons other than physical disability is provided for in chapters 63, 65, 365, 367, 571, 573, 865 and 867 of Title 10, supra . (For purposes of this ruling, provisions relating to Navy personnel are cited. However, the conclusions stated herein are applicable with respect to members of other branches of the Armed Forces under similar circumstances.)

Chapters 571 and 573 of Title 10, supra , contain the conditions under which officers and members of the Navy may be retired prior to the mandatory retirement age and the basis of the compensation that will be received under various circumstances. Chapter 575 of Title 10, supra , contains the following provisions relating to recall to active duty:

In time of war or national emergency declared by the President, the Secretary of the Navy may order any retired officer of the Regular Navy to active duty at sea or on shore. At any other time the Secretary may order such retired officer to active duty at sea or on shore only with his consent. Section 6481, Title 10, supra .

In time of war or national emergency the Secretary of the Navy may order to active duty any retired enlisted member of the Regular Navy. Section 6382, Title 10, supra .

To qualify for the exclusion under section 105(d) of the Code the amounts received by an employee must be for `a period of absence from work' and the absence must be `on account of personal injuries or sickness.'

As a result of the special employer-employee relationship between the United States Government and the Service member, he retains a certain measure of that relationship even when retired. In the Tyler case, supra , the Supreme Court held that retired officers are in the military service of the United States in the sense that they are entitled to what is known as `longevity pay.' While such proposition is conceded, it has no bearing upon the question whether the retired Service member is `at work' within the meaning of section 105(d) of the Code while on the retired list.

The retired Service member may be recalled to duty but until such time no service can be required of him. The mere fact that he is subject to the remote contingency of being thus employed cannot be regarded as `work' within the purview of section 105(d) of the Code. By very definition, the retired member is no longer working. A member of the Armed Forces on the retired list is absent from work but, unless the absence is on account of personal injuries or sickness, section 105(d) does not apply.

Accordingly, it is held that a member of the Armed Forces on the retired list for reasons other than physical disability is not absent from work on account of personal injuries or sickness within the meaning of section 105(d) of the Code. No part of the retired pay of such a member may be excluded from gross income under the provisions of that section, even though he is sick or injured and hospitalized as a result thereof.

The provisions of section 402 of the Career Compensation Act of 1949, supra , and Chapter 61 of Title 10 of the United States Code constitute wage continuation plans for the purposes 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. Section 105(d) is not applicable to any disability retirement pay received after the member reaches retirement age.