Rev. Rul. 71-343

Advice has been requested whether certain types of payments qualify as "combat pay" and are excludable from gross income under section 112 of the Internal Revenue Code of 1954.

Section 112 of the Code provides, in part, for an exclusion from gross income of compensation received for active service as a member in the Armed Forces of the United States occurring in a month during any part of which such member served in a combat zone. The Code section provides for a total exclusion from gross income with respect to members below the grade of commissioned officer, but in the case of a commissioned officer the exclusion is limited to $500 a month.

The term "combat zone" means any area which the President of the United States by Executive Order designates, for purposes of section 112 of the Code, as an area in which Armed Forces of the United States are or have engaged in combat. Section 112(c)(2) of the Code. However, paragraph (j) of section 1.112-1 of the Income Tax Regulations provides that certain members of the Armed Forces performing military service in an area outside a "combat zone" shall be deemed to have served in such "combat zone" if in direct support of military activities therein and if the military service is performed under conditions which qualify them for Hostile Fire Pay (as authorized under section 9(a) of the Uniformed Service Pay Act of 1963 (37 U.S.C. 310)). On the other hand, paragraph (k)(1) of section 1.112-1 provides that for periods after November 11, 1970, members of the Armed Forces who (i) are present in a combat zone while on leave from a duty station which is located outside a combat zone, or (ii) pass over or through a combat zone during the course of a trip between two points both of which lie outside a combat zone, or (iii) are present in a combat zone solely for their own personal convenience shall not be considered to have "served in a combat zone" within the meaning of paragraph (1) of subsection (a) or (b) of section 112.

Section 1.112-1(b) of the regulations provides, in part, that compensation is subject to the combat pay exclusion whether or not it is received (1) while in a combat zone or (2) in the same year in which the service was rendered for which the compensation is paid. Thus, time and place of payment are irrelevant in considering whether an amount is excludable. On the other hand, a member's entitlement to the particular compensation in question must have fully accrued with respect to a month during which he served in a combat zone for the exclusion to apply.

The exclusion applies to "compensation received for active service" in a combat zone. The following payments, in addition to such active duty pay, are compensation for active service for this purpose under the circumstances described:

(1) Dislocation allowance.

A dislocation allowance is paid to a member of the Armed Forces because of moving his household incident to a permanent change of station with respect to his active service. Accordingly, dislocation allowance payments are part of the compensation for active service excludable from the gross income of the recipient to the extent allowed by section 112 of the Code if the move is commenced or completed in a month during any part of which the member served in a combat zone.

(2) Reenlistment bonus.

Where a member of the Armed Forces voluntarily extends his enlistment or reenlists during a period of active service within the scope of military regulations, any reenlistment bonus received represents pay for active service. If this voluntary extension or reenlistment occurs in a month during any part of which the member serves in a combat zone, any amount to which he becomes entitled as a reenlistment bonus is, to the extent provided by section 112, excludable from gross income when received.

(3) Pay for accrued leave.

Payments attributable to leave earned by a member of the Armed Forces during any month in any part of which the member served in a combat zone are part of the compensation for active service excludable from gross income to the extent allowed by section 112 of the Code.

(4) Compensation for employment in clubs, messes, post and station theaters, and other nonappropriated fund activities.

Duties performed in these activities by a member in the Armed Forces are generally regarded as military duties discharged under the supervision and control of appropriate military authorities. Therefore, amounts paid to members of the Armed Forces for duties performed in nonappropriated fund activities are part of the compensation for active service within the meaning of section 112 of the Code and excludable from gross income to the extent provided therein.

(5) Awards for suggestions, inventions, or scientific achievements.

Under 10 U.S.C. 1124, as implemented by Department of Defense (DOD) Directive 5120.15 of December 3, 1965, and DOD Instruction 5120.16 of March 15, 1966, authority is granted to the Secretaries of the various Military Departments and certain other officials in the Department of Defense to make payments of cash awards to members of the Armed Forces for scientific achievements, inventions, or suggestions submitted that contribute to the efficiency, economy, or other improvement of operations of the Department of Defense or of the United States Government. Where a taxpayer becomes entitled to such an award because of a submission made in a month during which he served as a member of the Armed Forces in a combat zone, the award is a part of compensation for active service within the meaning of section 112 of the Code and excludable from gross income to the extent provided therein.

Remuneration paid for active service as a member of the Armed Forces of the United States (as defined under the rules stated above) performed in a month during any part of which the member served in a combat zone is excepted from wages by section 3401(a)(1) of the Code, and is, therefore, not subject to the withholding of income tax under section 3402 of the Code. (Section 31.3401(a)(1)-1 of the Employment Tax Regulations.) Although, as previously stated, the exclusion granted a commissioned officer is limited to $500 a month, this inapplicability of income tax withholding in the case of a commissioned officer is without limit.