Rev. Rul. 69-12

Advice has been requested whether amounts received as a disability annuity by a Federal employee who has not reached normal retirement age, that are in excess of the sick pay exclusion provided by section 105(d) of the Internal Revenue Code of 1954, qualify as retirement income under the provisions of section 37 of the Code.

A taxpayer received an annuity of 650x dollars, of which 520x dollars were excludable as sick pay under section 105(d) of the Code. Thus, there was a remainder of 130x dollars of the annuity that was includable in gross income.

Section 37(a) of the Code provides that, in the case of a retired individual who has received $600 of earned income in each of any ten calendar years before the beginning of the taxable year, there shall be allowed as a credit against his Federal income tax for the taxable year an amount computed according to that section and based upon the individual's retirement income.

Section 37(c)(2) of the Code defines the term "retirement income" in the case of an individual who has not attained the age of 65 before the close of the taxable year, as meaning income from pensions and annuities under a public retirement system to the extent included in gross income without reference to this section, but only to the extent such income does not represent compensation for personal services rendered during the taxable year.

The Civil Service Retirement Act of May 29, 1930, 46 Stat. 468, 5 U.S.C. 8337, as amended, to September 11, 1967, states that an employee who completes 5 years of civilian service and is found by the Civil Service Commission to have become disabled shall be retired on his own application or on application by his agency. The employee shall be entitled to an annuity computed under section 8339 of the Act.

The disability annuity payments received by a Federal employee before normal retirement age under the Civil Service Retirement Act are treated as "wages or payments in lieu of wages" for purposes of section 105(d) of the Code. Rev. Rul. 57-76, C.B. 1957-1, 66, and Rev. Rul. 67-222, C.B. 1967-2, 69.

Section 1.105-4(a)(3)(i)(a) of the Income Tax Regulations provides, in part, that 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 or annuity as long as he is disabled, section 105(d) of the Code is applicable to any payments that such an employee receives under the plan before he reaches retirement age.

Section 1.72-15(b) of the Income Tax Regulations provides the general rule that section 72 of the Code does not apply to any amount received as an accident or health benefit, and the tax treatment of any such amount shall be determined under sections 104 and 105 of the Code.

The disability annuity received by the the instant taxpayer is considered to be wages or payments in lieu of wages when received prior to his normal retirement age and, therefore, is governed by the provisions of section 105(d) of the Code. The provisions of section 72 of the Code, that is, the classification of amounts received as income from pensions or annuities, do not become effective until the taxpayer has reached normal retirement age.

Accordingly, since the amount received by the instant taxpayer who has not reached normal retirement age is not considered an amount received as a pension or annuity, the amount received in excess of the sick pay exclusion provided by section 105(d) of the Code does not qualify as retirement income within the meaning of section 37(c)(2) of the Code.