PRORATION FORMULA OF SEC. 692 REGS MUST BE USED TO COMPUTE JOINT TAX LIABILITY FORGIVEN FOR U.S. MILITARY AND CIVILIAN EMPLOYEES WHO DIE FROM TERRORIST OR MILITARY ACTION

Rev. Rul. 85-103

Rev. Rul. 78-1, 1978-1 C.B. 199, holds that the proration formula of section 1692-1(b) of the Income Tax Regulations must be applied, in determining the portion of the joint income tax liability forgiven for an Armed Forces member who died as a result of service in a combat zone, to a joint return filed for an earlier year by the surviving spouse and the executor or administrator after notification of the member's death, whether the return is an original joint return or an amended return filed with respect to a year for which either a joint return was filed or a separate return was filed by the member or the spouse or both.

Pub. L. No. 98-259, 1984-1 C.B. 313, as amended by the Tax Reform Act of 1984, Pub. L. No. 98-369, section 722(g), 98 Stat. 494, 1984-3 C.B. (Vol. 1) 1,482, enacted section 692(c) of the Internal Revenue Code. Section 692(c)(1) of the Code provides that, in the case of any individual who dies while a military or civilian employee of the United States, if such death occurs as a result of wounds or injury incurred outside the United States while in a terroristic or military action, any tax imposed by subtitle A of the Code (income tax) shall not apply with respect to the taxable year in which falls the date of death and with respect to any prior taxable year in the period beginning with the last taxable year ending before the taxable year in which the wound or injury were incurred.

Section 692(c)(2) of the Code defines "terroristic or military action" as any terroristic activity directed against the United States or any of its allies and any military action involving the Armed Forces of the United States and resulting from violence or aggression against the United States or any of its allies.

Consistent with the position on proration expressed in Rev. Rul. 78-1 and the subsequent enactment of section 692(c) of the Internal Revenue Code, the position proration expressed in Rev. Rul. 78-1 is also applicable to military and civilian employees of the United States who die as a result of wounds or injury suffered after November 17, 1978, outside the United States in a terroristic or military action, as defined in section 692(c) of the Code.

EFFECT ON OTHER REVENUE RULING

Rev. Rul. 78-1 is amplified.