Rev. Rul. 66-34

Advice has been requested whether the payments a taxpayer receives under the social security system of the Federal Republic of Germany are includible in his gross income under section 61 of the Internal Revenue Code of 1954.

The taxpayer, in the instant case, is an individual who has been admitted to the United States for permanent residence. He is receiving benefit payments under the old age insurance program of the social security system of the Federal Republic of Germany.

Section 61(a) of the Code provides that, except as otherwise provided, gross income means all income from whatever source derived.

Section 1.61-11(a) of the Income Tax Regulations provides, in part, as follows:

(a) In general .-Pensions and retirement allowances by the Government or by private persons constitute gross income unless excluded by law. Usually, where the taxpayer did not contribute to the cost of a pension and was not taxable on his employer's contributions, the full amount of the pension is to be included in his gross income. But see sections 72, 402, and 403 and the regulations thereunder. * * *

Paragraph (b) of the same regulation includes the statement that `Amounts received as pensions or annuities under the Social Security Act * * * are excluded from gross income,' and refers to `section 37 and the regulations thereunder' with respect to the `inclusion of pensions in income for the purpose of the retirement income credit.'

Section 37(d)(1) of the Code relates to retirement income and prescribes a maximum dollar amount, to be reduced by, `in the case of any individual, any amount received by the individual, as a pension or annuity,' `under Title II of the Social Security Act,' or `otherwise excluded from gross income.' Section 37(e) of the Code states that subsection (d)(1) shall not apply, among other things, `to any amount excluded from gross income under section 72 (relating to annuities).' This is explained in section 1.37-3(b)(2) of the regulations in the following manner:

(2) Amounts not includible in gross income .-Retirement income may not include any amount not includible in the gross income of the individual for the taxable year. For example, if a portion of an annuity is excluded from gross income under section 72, relating to annuities, that portion of the annuity is not retirement income. * * *

The purpose of the retirement income credit of section 37 of the Code was explained in Senate Report No. 1622, Eighty-third Congress, at page 8, as follows:

Under existing law, benefits payable under social security program and certain other retirement programs of the Federal Government are exempt from income tax. No similar exemption is accorded to persons receiving retirement pensions under other publicly administered programs * * *. In order to adjust this differential tax treatment, the House bill grants an individual * * * a credit against his tax liability * * *.

It is evident, therefore, that in enacting the Internal Revenue Code of 1954 Congress intended the benefit of the retirement income credit to be available with respect to payments like those in the instant case, but not to payments under the U.S. social security system, Congress recognizing that such payments had been specifically held `not subject to the Federal income tax in the hands of the recipients' by the Internal Revenue Service in I.T. 3447, C.B. 1941-1, 191, 192. Accordingly, no basis is known for attributing to Congress a belief that payments under the social security system of the Federal Republic of Germany or any other foreign social security system were not subject to the Federal income tax. Compare Revenue Ruling 62-179, C.B. 1962-2, 20.

The Service has given consideration to the provisions of the Convention between the United States of America and the Federal Republic of Germany , July 22, 1954, 5 UST 2768, C.B. 1955-1, 635. The Convention relates to double taxation and Article XI provides, in part, as follows:

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(b) Wages, salaries and similar compensation and pensions paid by the Federal Republic, Laender or municipalities, or by a public pension fund, to an individual (other than a citizen of the United States and other than an individual who has been admitted to the United States for permanent residence therein) shall be exempt from tax by the United States.

(c) For the purpose of this paragraph the term `pensions' shall be deemed to include annuities paid to a retired civilian government employee.

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(3) The term `pensions', as used in this Article, means periodic payments made in consideration for services rendered or by way of compensation for injuries received.

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Since the payments in question in the instant case are to be made by the Federal Republic of Germany or from a public pension fund thereof, to an individual specifically excluded from the benefits of Article XI, they are not excludable from gross income of the taxpayer by reason of the treaty provision quoted.

Furthermore, section 2 of Article IV of the Treaty of Friendship, Commerce, and Navigation with the Federal Republic of Germany, October 29, 1954, 7 UST 1839, has no pertinence to the instant case although it provides that nationals of either country are to be accorded national treatment in the application of laws and regulations within the other country which establish compensation or other benefits on account of disease or injury from the course or nature of employment or with regard to social security laws or regulations relating to sickness, disability, maternity, old age, death of breadwinner, or unemployment, since the treaty deals with the availability of such payments rather than their taxability.

In view of these circumstances and in the light of the opinion of the Supreme Court of the United States in Commissioner v. Glenshaw Glass Company , 348 U.S. 426 (1954), Ct. D. 1783, C.B. 1955-1, 207, which recognized `a clear legislative attempt to bring the taxing power to bear upon all recipients constitutionally taxable' on the part of Congress, the payments received under the social security system of the Federal Republic of Germany by individuals who are citizens of the United States or have been admitted to the United States for permanent residence are includible in their gross income for Federal income tax purposes, unless excluded by law. Such taxpayers are entitled to recover their cost, if any, in the payments under the rules of section 72 of the Code. They may also be eligible for the retirement income credit provided by section 37 of the Code.

Revenue Ruling 56-135, C.B. 1956-1, 56, held that the Panamanian social security benefit payments received by United States citizens were excludable from their gross income because the benefits were basically similar to the excludable sundry insurance benefit payments made to individuals under the U.S. social security system.

It is now the position of the Service that any similarity between the benefits provided by the social security system of the United States and those provided by the social security system of a foreign nation is not a valid basis for excluding from the gross income of the recipient, under the Federal income tax laws, the benefits paid by a foreign nation.

Pursuant to the authority of section 7805(b) of the Code, and effective with respect to Panamanian social security benefit payments received in taxable years commencing after December 31, 1965, Revenue Ruling 56-135, C.B. 1956-1, 56, is hereby revoked.

Treatment of `interest' portion of amounts repaid into the United States Civil Service Retirement and Disability Fund by reinstated employees. See Rev. Rul. 66-168, below.