Rev. Rul. 59-227

Advice has been requested whether an amount received by a railroad employee as consideration for relinquishing all seniority rights with respect to his employment constitutes ordinary income or capital gain.

During the taxable year 1958 the taxpayer, a railroad employee, entered into an agreement with his employer under the terms of which he relinquished all seniority and other rights held by him or arising out of his employment. The relinquished rights had entitled the taxpayer to certain security in his employment and additional pay or recognition for longevity. The agreement also terminated the taxpayer's employment in the position he held; however, he was immediately rehired as a new employee in another position. In consideration of the taxpayer's acceptance of the terms of the agreement, the employer paid him a lump sum of 10x dollars in 1958.

In order for a transaction to result in a capital gain or loss, it must meet the requirements of section 1221 and 1222 of the Internal Revenue Code of 1954, which set forth the meaning of "capital asset" in terms of property and classify gains and losses arising from the sale or exchange of them. Thus, the subject matter of a transaction must first constitute property qualifying as a capital asset under section 1221 and then there must be a sale or exchange of the property under section 1222.

Revenue Ruling 58-301, C.B. 1958-1, 23, holds that lump-sum payment received by an employee as consideration for the cancellation of his employment contract constitutes gross income to the recipient in the taxable year of receipt, that it is not gain from the sale of a capital asset, and that the payment is not subject to withholding for Federal income tax purposes. See also I.T. 1916, C.B. III-1, 82 (1924), and Rev. Rul. 55-520, C.B. 1955-2, 393.

Under the facts of the instant case, it is concluded that the amount received by the taxpayer for relinquishing all seniority and other rights constitutes a lump-sum settlement for the termination of his employment in a particular position within the meaning of Revenue Ruling 58-301, supra.

Accordingly, it is held that a lump-sum payment received by a railroad employee as consideration for relinquishing employment seniority rights, and terminating his employment in a particular position, constitutes ordinary income to the recipient in the taxable year of receipt. However, such amount does not constitute compensation for services rendered for the purposes of sections 3201 and 3221 of the Railroad Retirement Tax Act or for purposes of the Collection of Income Tax at Source on Wages (Chapters 22 and 24, respectively, Subtitle C, Internal Revenue Code of 1954).