Rev. Rul. 58-141

Advice has been requested whether the so-called `tax' imposed on public employees by the State of Iowa under chapter 97B, Volume I, of the Code of Iowa, 1954, relative to the Iowa Public Employees' Retirement System, is an allowable deduction for Federal income tax purposes by such employees.

Section 164(a) of the Internal Revenue Code of 1954 provides, that in computing taxable income, there shall be allowed as a deduction taxes paid or accrued within the taxable year, with certain exceptions not here material.

In a general sense, the terms `tax' and `taxes' include every burden which may be lawfully laid on the citizen by virtue of the taxing power, but their application in constitutional and statutory provisions varies to some extent according to the intention and purpose of the particular provision. The question of whether a particular contribution, charge, or burden is to be regarded as a tax depends on its real nature and, if it is in its nature a tax, it is not material that it may be called by a different name; and, conversely, if it is not in its nature a tax, it is not material that it may have been so called. See I.T. 2796, C.B. XIII-2, 48 (1934).

The nature of a tax was defined in I.T. 2796, supra , as an enforced contribution, exacted pursuant to legislative authority in the exercise of taxing power, and imposed and collected for the purpose of raising revenue to be used for public or governmental purposes, and not as a payment for some special privilege granted or service rendered. Taxes are, therefore, distinguishable from various other contributions and charges imposed for particular purposes under particular powers or functions of the Government.

In the instant case, Chapter 97B of the Code of Iowa, 1954, relating to the Iowa Public Employees' Retirement System states, in part, that the purpose of this chapter is to provide a retirement system which will provide for the payment of annuities to public employees. Section 97B.2, under that chapter there is levied on each employer and employee, respectively, a `tax' equal to three and one-half percent of the wages paid by the employer to the employee for any service performed after June 30, 1953. Section 97B.11. Taxes deducted from the wages of the employee shall be matched by the employer and deposited with the State treasurer to the credit of the Iowa Public Employees' Retirement Fund. Section 97B.14. `Contributions' or `taxes' are defined to mean the payments to the fund by the employer and/or by the members, necessary to provide the benefits of the retirement system. Section 97B.41. Membership is, with certain exceptions, mandatory. Section 97B.42. In the case of an employee who terminates his employment prior to his retirement, other than by death, the accumulated contribution by the member at the date of such termination will be paid to the member unless he elects to receive a retirement allowance as provided in such chapter. Section 97B.53.

In view of the foregoing, it is held that, although the Iowa State statute designates the amount withheld from the employee's wages as a `tax,' the amount deducted is not a tax within the meaning of section 164(a) of the Code but, as indicated by the statute itself, constitutes the employee's cost of the annuity provided for by the Iowa law. Such contributions are not, therefore, deductible by the employees in computing their taxable incomes for Federal income tax purposes. See Treasury Decision 3112, C.B. 4, 76 (1921), which holds that amounts withheld from basic salary paid to employees in the Civil Service of the United States are includible in gross income, for income tax purposes, and that no corresponding deduction can be taken for the amounts withheld, since such amounts are payments made toward the purchase of annuities. See Rev. Rul. 57-326, C.B. 1957-2, 42; Rev. Rul. 56-473, C.B. 1956-2, 22.