Rev. Rul. 55-628

Advice has been requested whether amounts withheld from the taxable retirement pay, pensions, or compensation paid to veterans being furnished hospitalization, institutional, or domiciliary care by the Veterans' Administration should be included in taxable income in the year withheld or whether the lump-sum payment is taxable to the recipient in the year paid.

Under the Act of August 8, 1946, Public Law 662, Seventy-ninth Congress, 60 Stat. 908, as amended, 38 U.S.C. 739, provisions were made for withholding an amount from the retired pay, pensions, or compensation paid to veterans being furnished hospitalization, institutional or domiciliary care by the Veterans' Administration which would limit the amount of such retired pay retained by the Veterans' Administration to $30 or 50 percent of such pay (whichever is greater) and for paying this withheld amount in a lump sum at a later date.

Such Act provides in part as follows:

* * * (A) (1) where any veteran having neither wife, child, nor dependent parent is being furnished hospital treatment, institutional or domiciliary care by the Veterans' Administration, * * * the pension, compensation, or retirement pay, if $30 per month or less, shall continue without reduction, but if greater than $30 per month, the pension, compensation, or retirement pay shall not exceed 50 per centum of the amount otherwise payable or $30 per month, whichever is greater; Provided , That if such veteran is discharged from such treatment or care upon certification by the officer in charge * * * that maximum benefits have been received or that release is approved, he shall be paid in a lump sum such additional amount as would equal the total sum by which his pension, compensation, or retirement pay has been reduced under this section: * * *.

(B) Where any veteran having neither wife, child nor dependent parent is being furnished hospital treatment, institutional or domiciliary care by the Veterans' Administration, and shall be rated by the Veterans' Administration in accordance with regulations as being incompetent by reason of mental illness, the pension, compensation, or retirement pay for such veteran shall be subject to the provisions of subsection (A) of this section: Provided , That no payment of a lump sum herein authorized shall be made until after the expiration of six months following a finding of competency: Provided further , That in any case where the estate of such incompetent veteran derived from any source equals or exceeds $1,500, further payment of such benefits shall not be made until the estate is reduced to $500: * * *.

From the foregoing, it can be seen that the character of the payments to a veteran is not changed by reason of being furnished hospital treatment, institutional or domiciliary care by the Veterans' Administration. Upon certification by the officer in charge, the law authorizes the veteran to receive the same total amount that he would have received if the statutory suspension had not occurred.

Section 42(a) of the Internal Revenue Code of 1939 provides, in part, that the amount of all items of gross income shall be included in gross income for the taxable year in which received by the taxpayer, unless, under other methods of accounting permitted by section 41, any such amounts are to be accounted for as of a different period. Inasmuch as the amounts that are due such veteran are not available to him prior to actual payment, such amounts are not includible in his gross income until the year of actual payment to him. See section 39.42-2 of Regulations 118.

Section 107(d)(1) of the 1939 Code provides in part as follows:

(1) IN GENERAL.-If the amount of the back pay received or accrued by an individual during the taxable year exceeds 15 per centum of the gross income of the individual for such year, the part of the tax attributable to the inclusion of such back pay in gross income for the taxable year shall not be greater than the aggregate of the increases in the taxes which would have resulted from the inclusion of the respective portions of such back pay in gross income for the taxable years to which such portions are respectively attributable, * * *.

Section 107(d)(2) of the Code defines `back pay,' for the purposes of section 107 of the Code, as:

* * * (A) remuneration, including wages, salaries, retirement pay, and other similar compensation, which is received or accrued during the taxable year by an employee for services performed prior to the taxable year for his employer and which would have been paid prior to the taxable year except for the intervention of one of the following events: (i) bankruptcy or receivership of the employer; (ii) dispute as to the liability of the employer to pay such remuneration, which is determined after the commencement of court proceedings; (iii) if the employer is the United States, * * * lack of funds appropriated to pay such remuneration; or (iv) any other event determined to be similar in nature under regulations prescribed by the Commissioner with the approval of the Secretary; * * *.

Section 39.107-3(b) of Regulations 118 provides, in part, that an event will be considered similar in nature to those events specified in section 107(d)(2)(A)(i), (ii), and (iii) only if the circumstances are unusual, if they are of the type specified therein, if they operate to defer payment of the remuneration for the services performed, and if payment, except for such circumstances, would have been made prior to the taxable year in which received or accrued.

The provisions of the Act, supra , indicate that the amounts withheld from compensation due mentally incompetent veterans and paid to them in subsequent years would qualify under section 107(d)(2)(A)(iv) of the Code as `back pay.' The same is true with respect to amounts withheld from compensation due mentally competent veterans under the provisions of that Act.

Accordingly, where pursuant to the provisions of the Act of August 8, 1946, supra , amounts are withheld from the taxable retirement pay, pensions, or compensation paid to veterans being furnished hospitalization, institutional or domiciliary care by the Veterans' Administration, and subsequently a lump-sum payment of the amounts withheld is made to the veteran in accordance with the provisions of such Act, such amount received in the current taxable year as is attributable to a prior taxable year is taxable to the recipient in the year paid. However, such amount constitutes `back pay' within the meaning of section 107(d)(2) of the Internal Revenue Code of 1939 and qualifies for the treatment provided in section 107(d)(1) of the 1939 Code if such `back pay' received during the current taxable year exceeds 15 percent of the recipient's gross income for such year